Braden Black CEO
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Wednesday, February 10, 2010
Expanding Into Unfamiliar Territory
When you go on vacation with your family, where do you choose to eat dinner? Do you like to sample all of the popular local restaurants in the area, or do you opt for the familiar chain restaurants, where you know you can get something that you’re going to like? Change is scary to many, and we all know that a Happy Meal will taste the same whether we’re in Boston, Seattle, Miami or San Francisco.
As a business owner, you also may find change difficult to deal with. But with the industry floundering in the midst of the worst recession in a lifetime, construction companies increasingly are facing a daunting choice: try to ride out the storm by cutting staff, marketing budgets and profits to the bone or cast a wider net to land projects outside their comfort zones.
“[F]aced with the choice of retrenchment or expansion, it seems that a fair proportion of construction companies are choosing the latter. Almost four out of ten respondents say they’ve continued to develop regionally or globally, while only 12 percent have actually contracted their activity,” according to KPMG’s Navigating the storm Charting a path to recovery? Global Construction Survey 2009.
Horizontal integration – expanding to heretofore unexplored locales or taking on public works jobs when their experience and proficiency lies in negotiated private work – opens builders to risks that are only exacerbated by the current economic woes. Construction defect claims as contractors step outside their areas of expertise or are tempted to cut corners to make up for paper-thin profit margins, unforeseen difficulties stemming from working with unfamiliar owners and developers, new site conditions as companies move into new states or foreign countries, and unanticipated labor troubles all lie in the weeds ready to ambush unwary contractors seeking greener pastures, Jack Gibson, president of International Risk Management Institute told Business Insurance.com. Thankfully, contractors can take advantage of familiar resources to help them navigate the stormy seas when leaving the relatively safe harbor of their home territory.
Risk Management
Before you consider extending yourself beyond your comfort zone, take steps to mitigate as much risk as possible. You can do this by keeping as many variables as possible as constant as possible. Think about expanding into similar locales or market niches. For a contractor based in Ohio, a move into Pennsylvania probably won’t be as trying in terms of logistics and site analysis as seeking work in Florida or British Columbia. If you’ve built a dozen high schools in Texas, bidding on a school in Kansas may not be as much of a stretch as taking on an Indian casino in Arizona.
Insurer Rolf A. Neuschaefer writes that it may help to look at your potential integration in the same way a bonding agent might assess the risks:
• Assess your portfolio’s value and makeup.
• Explore financing options. “If the sewer contractor, for example, has to wait for the sale of bonds before he can receive a contract award, he may have a low bid outstanding for some time which ties-up his bonding line,” Newschaefer notes.
• Note the location risks, including the legal and political environment, local customs (especially in foreign countries), travel, office rental, the state of the infrastructure, etc.
Vendor relationships
Contractors can mitigate their risks by doing their homework when it comes to the people they do business with. Suppliers and subcontractors often are identified with their partners and therefore are as much the “face” of your company as your project manager and superintendent. Seek out vendors and partners whose business practices, acumen and customer service attitude are as impeccable as your own. You must trust your vendors to fulfill areas, be they labor supply, jobsite security, permitting, etc., that are not among your own core competencies, Rick Kuharik, director of risk services at Westfield Insurance, explained to Smart Business online. Frequent, open communication, visits to the vendor’s place of business and full documentation of expectations, remuneration, and all parties’ obligations will help create a strong, lasting partnership, Kuharik said.
Professional associations can be a contractor’s best friend when developing vendor relationships. The Associated Builders and Contractors and the Independent Electrical Contractors boast chapters nationwide. The members of both exhibit exemplary professionalism and chapter staff can provide recommendations based on your particular project. These associations are fonts of knowledge and insights into their local political and regulatory arenas. Rely on them to help you avoid pitfalls.
Labor Issues
Do you have qualified supervisory staff to oversee the job? Are they willing to relocate for the project’s duration? Are you willing to compensate them for that inconvenience? Is the local labor, subcontractor and material supply sufficient in number and competency to make the job run smoothly? The last thing you want when taking on a far-flung project is to lose money, and most of these disasters stem from inadequate estimates for the labor time required to complete the work or misjudging the productivity of the available work force, Kuharik said.
If you find that you are struggling to build or maintain your revenues in your market, now is the time to get out of your comfort zone and explore the possibilities in other markets. And don’t forget to visit the local restaurants!
As a business owner, you also may find change difficult to deal with. But with the industry floundering in the midst of the worst recession in a lifetime, construction companies increasingly are facing a daunting choice: try to ride out the storm by cutting staff, marketing budgets and profits to the bone or cast a wider net to land projects outside their comfort zones.
“[F]aced with the choice of retrenchment or expansion, it seems that a fair proportion of construction companies are choosing the latter. Almost four out of ten respondents say they’ve continued to develop regionally or globally, while only 12 percent have actually contracted their activity,” according to KPMG’s Navigating the storm Charting a path to recovery? Global Construction Survey 2009.
Horizontal integration – expanding to heretofore unexplored locales or taking on public works jobs when their experience and proficiency lies in negotiated private work – opens builders to risks that are only exacerbated by the current economic woes. Construction defect claims as contractors step outside their areas of expertise or are tempted to cut corners to make up for paper-thin profit margins, unforeseen difficulties stemming from working with unfamiliar owners and developers, new site conditions as companies move into new states or foreign countries, and unanticipated labor troubles all lie in the weeds ready to ambush unwary contractors seeking greener pastures, Jack Gibson, president of International Risk Management Institute told Business Insurance.com. Thankfully, contractors can take advantage of familiar resources to help them navigate the stormy seas when leaving the relatively safe harbor of their home territory.
Risk Management
Before you consider extending yourself beyond your comfort zone, take steps to mitigate as much risk as possible. You can do this by keeping as many variables as possible as constant as possible. Think about expanding into similar locales or market niches. For a contractor based in Ohio, a move into Pennsylvania probably won’t be as trying in terms of logistics and site analysis as seeking work in Florida or British Columbia. If you’ve built a dozen high schools in Texas, bidding on a school in Kansas may not be as much of a stretch as taking on an Indian casino in Arizona.
Insurer Rolf A. Neuschaefer writes that it may help to look at your potential integration in the same way a bonding agent might assess the risks:
• Assess your portfolio’s value and makeup.
• Explore financing options. “If the sewer contractor, for example, has to wait for the sale of bonds before he can receive a contract award, he may have a low bid outstanding for some time which ties-up his bonding line,” Newschaefer notes.
• Note the location risks, including the legal and political environment, local customs (especially in foreign countries), travel, office rental, the state of the infrastructure, etc.
Vendor relationships
Contractors can mitigate their risks by doing their homework when it comes to the people they do business with. Suppliers and subcontractors often are identified with their partners and therefore are as much the “face” of your company as your project manager and superintendent. Seek out vendors and partners whose business practices, acumen and customer service attitude are as impeccable as your own. You must trust your vendors to fulfill areas, be they labor supply, jobsite security, permitting, etc., that are not among your own core competencies, Rick Kuharik, director of risk services at Westfield Insurance, explained to Smart Business online. Frequent, open communication, visits to the vendor’s place of business and full documentation of expectations, remuneration, and all parties’ obligations will help create a strong, lasting partnership, Kuharik said.
Professional associations can be a contractor’s best friend when developing vendor relationships. The Associated Builders and Contractors and the Independent Electrical Contractors boast chapters nationwide. The members of both exhibit exemplary professionalism and chapter staff can provide recommendations based on your particular project. These associations are fonts of knowledge and insights into their local political and regulatory arenas. Rely on them to help you avoid pitfalls.
Labor Issues
Do you have qualified supervisory staff to oversee the job? Are they willing to relocate for the project’s duration? Are you willing to compensate them for that inconvenience? Is the local labor, subcontractor and material supply sufficient in number and competency to make the job run smoothly? The last thing you want when taking on a far-flung project is to lose money, and most of these disasters stem from inadequate estimates for the labor time required to complete the work or misjudging the productivity of the available work force, Kuharik said.
If you find that you are struggling to build or maintain your revenues in your market, now is the time to get out of your comfort zone and explore the possibilities in other markets. And don’t forget to visit the local restaurants!
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