Some seasoned contractors and industry observers believe the risks involved in starting a construction company are no greater in 2007 than in earlier times. Failure always is a possibility, but the accumulated experience of successful contractors can help guide a new entrepreneur around common hazards.
While the failure rate of U.S. businesses in general is not precisely known, an often-used benchmark is that 90 percent of start-up companies fail in the first year. However, that statistic has come to be dismissed as an urban legend. Other surveys show that as many as half of all new companies continue to operate for at least four years, by which time they have gained solid footing in the marketplace.
Several years of record-level construction industry losses since 2000 — as compiled by the Surety Association of America — illustrate the hovering threat of economic pressures on contractors today. Those pressures can be daunting for an experienced employee who wants to strike out on his own.
It helps that risk of failure is lessened when entrepreneurs enter the world of contracting with hands-on knowledge of the industry and specialty skills honed in apprenticeship. On the other hand, start-up heavy construction companies carry on their books the equipment by which the work gets done, and that is pretty heavy baggage for a new firm.
A Start-Up’s Advantage
Yet start-up contractors always start with an advantage over more established players in the industry, said Thomas C. Schleifer, a faculty associate at Arizona State University.
“The major advantage start-up companies have is lower overhead,” said Schleifer, who teaches continuing education courses for professionals at the university’s Del E. Webb School of Construction, which is part of the ASU engineering program.
“The start-ups usually work out of their house, and then a small shop. Consequently, they enjoy low overhead and competitive advantage. They don’t have retirement plans and follow-on expenses. They aren’t a large bureaucracy with layers of management, and generally they are pretty efficient because the founder directs the work. As they grow as a company, of course, they absorb all the difficulties and costs of growth.”
That pattern of growth is typical for many construction companies, Schleifer noted.
“If you look at the large contractors and road builders, in the lion’s share of cases, the name of a company is a person. They talk about a grandfather or a great-grandfather who started the company with horse-drawn plows. Others came back after World War II and grew fast in the 1950s and ’60s. They were just hard-working individuals.
“It might be a little harder today,” he said, but starting up a company remains a plausible option for ambitious young people working in construction. In fact, Schleifer calls 2007 “a perfect opportunity. This could be the best time I’ve seen in 10 years. There is tons of work out there, pretty much nationwide.”
Almost by accident, Schleifer became an expert on successful companies by stepping in when firms went belly up. For the first half of his working life, he was a building contractor in the Whippany, N.J., area — and then he found his calling in the industry.
“It was in the early 1970s and things were very slow,” he recalled. “Our business was getting smaller, actually, and I looked around for opportunities.”
What he saw were bankruptcies, with projects here and there in the New Jersey area coming to a halt because construction companies had failed financially. Surety companies were assuming responsibility for the stalled projects and were looking for contractors to complete them. Schleifer’s company began to take on these contracts.
“Almost by dumb luck, I started a business that completed projects for bonding companies,” he said. “I was in the right place at the right time.”
The specialty contracting business grew across the country until Schleifer had to establish regional offices in Dallas, Chicago, San Francisco and Atlanta. He even completed some projects outside of the country before cashing in the company and retiring to Arizona.
Schleifer doesn’t credit himself with being a smarter contractor than those whose failures gave his company new life.
“I was Monday-morning quarterbacking,” he said of his follow-up work. “The companies usually started out OK and then somewhere in the second or third generations of management, things changed. I simply observed what caused the companies to underperform.”
His observations were distilled into a book that has become something of an industry standard — The Construction Contractors’ Survival Guide, first published in 1990. What he learned from cleaning up after failed companies was that the failures stemmed from one or more of 10 common misjudgments. In the book, Schleifer individually examines and illustrates the 10 failings and then lays out ways for contractors to avoid them.
The company situations that repeatedly produce fatal miscalculations are the following:
• Taking on a job in an unfamiliar location
• Signing on for a larger project than previously contracted
• Contracting a new kind of project, or moving between public and private sectors of the industry
• Losing a key company person in estimating and sales, construction operations or administration and accounting
• Expanding operations without management skills in place for expansion
• Poorly evaluating a project’s profitability
• Inadequately keeping books that inform executive decision-making
• Not having a cost control mechanism for equipment
• Not having an adequate billing and collection system
• Fumbling the transition from manual bookkeeping to computerized accounting
This is particularly pertinent information for a start-up company because it is more apt to be victimized by one of those situations. Yet the recurring miscalculations can ruin a company of any size or age, with a track record of success sometimes masking weaknesses until it is too late to correct them without suffering financial reversal.
It is not surprising, perhaps, that Schleifer counsels start-up contractors to resist the temptation to grow and grow. “If I was giving advice,” he said, “I would say, ’start small and stay small’.”
In fact, he said he believes middle-sized contractors are the most endangered in today’s building environment. They are threatened from above by merged mega-companies that can win the biggest, most profitable contracts and from below by small companies that can remain profitable working relatively small contracts that don’t produce enough revenue for a mid-sized builder.
“Mid- and large-sized contractors generally don’t want to bother with small jobs. They will bid on them if they are forced, but they are not really competitive. But those small jobs are the bread and butter for small contractors. A small town has no problem getting bids to build a subdivision, for example, but for curb repair jobs and more modest paving projects, a big contractor has limited interest in doing the work. The small guy can almost price it where he wants.”
The 64-year-old turnaround expert also recommends that beginning contractors target public contracts, where bidding is more regulated and open to new companies without much experience. Private projects have a more selective bidding process that tends to exclude new companies.
Finally, Schleifer said starting a construction company is no job for a slacker. “Unless you are willing to work around the clock, don’t do it,” he said. “A start-up must understand that it is not a five-day-a-week business. That is a key piece of advice.”
Small in Las Vegas
Staying relatively small is what Linda and Frank Harris have done since launching their commercial general contracting firm in 1991 in southern Nevada. LF Harris and Company had business volume in “the low millions” of dollars for the first several years, and now operates in the $15 million-a-year range.
Linda Harris said construction industry employees wanting to start their own companies in 2007 shouldn’t hesitate because of risk.
“I would say now is a much better time than in 1991,” Harris said from her office on Cheyenne Avenue in Las Vegas. She is company president and CEO. “It [was] a long time ago, but we probably were criticized when we started. If you go back to that time, interest rates were crazy, gas prices were high, but we started anyway. We kept the company very small, and it has only done better.”
The Harrises met while working for another construction company in Nevada. Linda Harris had moved to the flamboyant desert city in 1977 from Ontario, Canada, where she had begun her career as a secretary in the office of a commercial and residential developer and became a specialist in estimating project costs. In Nevada, she worked for Martin-Harris Construction Co., one of the 10 largest contractors in the region.
At LF Harris, she continues to bid and manage projects and oversees company finances, while her husband, a Las Vegas native with equivalent years in the industry, is the company’s general supervisor of projects. Just two years after its start-up, the husband-and-wife-owned company was honored when Harris was named Contractor of The Year by the Las Vegas chapter of the Associated General Contractors. Five years later, she was elected chapter president.
Las Vegas has nurtured new contractors for two decades, according to Steve Holloway, executive director of AGC’s Las Vegas chapter. The glow has dimmed somewhat in the last year, he said, with residential construction off 40 percent from last year, light commercial construction activity down 30 percent and contract work in both areas still headed south.
“It would not be a good time to start up a company in either of those areas,” he advised. “Having said that, work on The Strip is at an all-time high. We will have $32 billion under construction shortly.”
So the boom in Vegas still invites building entrepreneurs to start their own companies, just as it did the Harrises 16 years ago. Linda Harris recommends that anyone ready to do so now first win the backing of financial institutions.
“For a start-up company, the first thing that comes to my mind is developing rapport with your bankers, bonding agents, insurance people — that kind of thing,” she said.
While that is the first order of business, not far behind in Harris’ listing of necessary relationships is “being extremely involved in your business community.”
She is an active member in several organizations besides the Las Vegas chapter of the AGC. They include Commercial Real Estate Women (CREW), the National Association of Women in Construction (NAWIC) and Women’s Business Enterprise National Council.
Harris said that a new company will find value in AGC’s mentoring, training and safety programs — some of them put on jointly with the Nevada State Contractors Board. She also regularly taps into CREW and NAWIC networking and education programs.
“Whenever I am mentoring other start-ups,” Harris said, “particularly women involved in getting a business going, I really attempt to get them involved in the networking and education. They need to develop that old boy-girl network within the industry.”
Harris is familiar with people starting new contracting firms for another reason: Some of them are her former employees. That is the downside to having capable people working for you, she said, yet her in-house education and skills-development programs continue. “I was trained well and I will continue to train.”
Harris is philosophical about the risk of business failure.
“Things happen,” she said, “on projects, or with clients, or with subcontractors. Initially you make those great decisions going into a contract, and sometimes it works, and sometimes it doesn’t. You learn from every contract.
“You can’t get rid of all the issues. If there weren’t issues, you wouldn’t need a general contractor.”
Experience and Education
Mark Kemp’s facet of construction — masonry — is a relatively easy entry point for a new contractor. All you need to get started, said the president of Superior Masonry Builders, are a wheelbarrow and a mixer. But, he added, “education helps.”
“You see start-up masonry companies a lot in residential construction. They stay residential, then expand into small commercial before deciding which way they want to go,” Kemp said from his office in Butler, Wis. “The residential market has been a great market for new companies.”
The low overhead of a new masonry company is appealing to entrepreneurs, but Kemp said masons have come up against some new competition in the last dozen years.
“Even up until the ’90s, we didn’t have the competition that we do now — including precast products and steel studs. That has cut into the work we used to do, work that used to be primarily mason products. So now you have to be more efficient to be competitive,” he said.
Consequently, Kemp, who is a regional vice president of the Mason Contractors Association of America, stresses that masons need trade education, something the association is promoting through a certification program.
“We feel it is good for the industry for masons to be more knowledgeable, to put out a better product so that they will be more respected and be used more by architects,” Kemp said.
Kemp also counsels anyone considering starting his own masonry company to “make sure you know what you are doing, to know your forte and to stick with it until you are ready for that next expansion.”
Kevin Spellman has a similar take on the value of technical skills and education. He says that knowing how to build a quality product isn’t enough for a new company to succeed.
Spellman was born in England and worked for his father’s construction company before moving to Oregon in 1977. He didn’t start his own firm, but worked his way to the top of one — Emerick Construction Company, one of the top general contractors in the Portland area. He retired last year and now is a consultant, also teaching part time in the construction and engineering departments of Portland Community College and Oregon State University.
The 57-year-old Spellman says there are three facets of running a construction business: getting the work, doing the work and “the business side of things — making the money and making sure you have enough of it.” Spellman contends that most people getting into construction know only how to build.
“The ability to do the work is not usually the challenge,” Spellman said. “The challenge is the other two. Do they have the relationships in place to develop opportunities, and do they know how to estimate? Do they know how to bid strategically, or how to negotiate? Probably the most common shortfall is in the latter part. New entrants tend to minimize the business side of things.
“Rather than charge ahead and assume you’ll learn the business side as you go along, everyone starting out needs to have a critical self-evaluation and determine which of those areas they are competent in and in which ones they need help,” he said.
Spellman said he believes the economy in the Northwest in 2007 will support new construction companies. “For the right skill set, this is certainly a decent time to start a company. There certainly are opportunities here and, like any time, there are risks out there as well.”
He added that probably the biggest single risk factor for a start-up contractor is “a lack of capital. Most people underestimate what kind of capital is needed.”
Larry Weller knows how much capital is needed — he is in the business of lending it. Weller is vice president of commercial real estate in the Tampa Bay, Fla., office of Fifth Third Bank.
Florida construction activity has been “on fire” for some time, Weller said, especially residential building. But homebuilding has cooled over the last 18 months and along with it loan applications for start-up homebuilders.
“If you had a homebuilders’ license and a pickup truck, you could be a homebuilder,” Weller said. “Because of the boom, there were jobs to be had. You couldn’t get a subcontractor to show up, so it made it very easy to gain entry into the homebuilding market as a contractor.”
The same start-up ease was not there for other would-be construction contractors — drywall, paving, concrete forming. The loan threshold is higher for those entrepreneurs, said Weller; consequently, few general contractors are starting up, at least in that part of Florida.
“The problem with the asphalt type of contractor is that the work takes a fair amount of capital for trucks and other equipment, for crews and so on,” he said. “It is difficult to gain an entry level loan for that kind of contractor unless he already knows someone in a related line of business who is backing him. To come in and say, ’I am going to start from scratch and be an asphalt paver,’ that is difficult for any bank.”
But it is not impossible. Weller, who has been in banking for three decades, said the following are necessary in a loan application by a start-up businessperson:
• Workplace experience and probable contract work in hand. “You want to see someone, say, who is working for a larger firm and wants to break out on his own, someone who has ties with builders and has been told by one of them, ’Hey, I’ll give you a shot on my next job.’”
• Financial resources. “You want someone who has, hopefully, a little personal capital. You want collateral for the loan — a personal residence or other real estate — but you also want to make sure the individual has liquidity, either cash or some investment that can be converted to cash. A bank knows that it is not at all unusual that if a contractor doesn’t do a job well, he might not get paid. If something goes wrong with a contract, the bank wants to know if it will bankrupt the contractor or if he has enough to carry him through.”
In short, banks try to avoid risk and, by definition, new companies are risky.
“Any bank in the country has difficulty with a start-up company, with a company that doesn’t have workplace history to work off of. You really don’t know what they can do,” Weller said. The foremost goal for a banker in evaluating a start-up loan application, he said, is to “ensure that the bank will come out whole.” CEG