How to Handle Higher Project Volume Without Overextending the Business

Higher project volume—whether it’s more projects of the same size or the same number of projects at an increased size—can place stress on any contractor. The starting point for handling that stress is the business plan, which should be prepared and continually updated. Accordingly, contractors that decide to increase project volume should only consider doing so after careful planning.

Keep in mind, the business plan for well-run organizations incorporates the five Ms: money, machine, material, manpower and methodology. 

Money
As contractors grow in volume, cash flow becomes increasingly important. The business plan should include monthly (if
not weekly) cash flow projections, which will help determine the projected excess cash balances as well as the need for additional cash. The amount of cash needed will help determine the requirements for additional capitalization from stakeholders or borrowing from lending institutions. 

Well-run contractors maintain positive relationships and partner with their lending institutions. Accordingly, share the business plan with the company’s lending institution when trying to obtain the required financing, such as a working line of credit.

Machine
The goal of a well-run contractor is to maintain just enough equipment to execute its work without resulting in too much idle equipment which, of course, results in excess overhead costs. The business plan should include revenue and cost (including equipment) projections to help determine the forecasted “machine” required. 

As business volume grows, contractors should consider the various options available to increase their equipment fleet (if needed), including outright purchasing, leasing, lease-to-own or a combination of these, and the resulting impact on their balance sheet, income statement and cash flow.

Material
The business plan should include cost projections, including materials and, for these purposes, subcontracted work. Well-run contractors maintain good relationships with their vendors and subcontractors with the goal of not only obtaining favorable payment terms, but also partnering with them to assist in receiving priority delivery time for materials and high-quality subcontract crews. 

One way to bolster top-line volume is to increase the amount generally subcontracted. Obviously, contractors should enjoy a favorable relationship with their subcontractors and secure their exposure by at least bonding the subcontractors critical to the performance of the project.

Manpower
The business plan should include labor cost projections covering all categories: field labor, project management, superintendents, estimators, and accounting, information technology, administrative and executive staff. In the current environment, maintaining competent and adequate manpower in all categories is one of the industry’s greatest challenges. 

As volume increases, contractors should consider their staff’s experience handling larger projects, multiple projects, various owners, etc. As volume grows, more stress will be placed on manpower (including subcontractors). Ultimately, manpower could be the driver of the amount by which the company can grow.  

Methodology
Well-run contractors design and embrace systems and procedures to positively impact their bottom line. Methodology includes the organization plan, checks and balances, estimating, scheduling, project management, cost, financial systems and reporting. As volume grows, there will be a greater dependency on accurate and relevant reports to assist with profitability management, as well as meet potential requirements from various project owners that may not have been previously experienced.  

Finally, the business plan should address business continuity not only from a financial perspective (usually involving life insurance), but also from an operational perspective. The plan should be developed on a rolling five-year basis and continually updated as conditions change. Remember, proper prior planning prevents poor performance. 

Carl Castellano is vice president of contract surety for Philadelphia Insurance Companies. For more information, email carl.castellano@phly.com.