As a small contractor, you might be exposed to a higher risk of getting squashed. But then, small firms can change direction, rebrand and find new markets faster than major contractors can hold a board meeting. We report on the five best ways to stay in business
If market is tough for the behemoths of the contracting world, it’s even harder for the little guys, where a client’s delay in paying can mean the difference between staying afloat and going under. But small contractors are finding ways to negotiate the tricky terrain of the marketplace and fight back.
Last month, when Building ran an article by small contractor Alan Danieli lamenting the demise of his sub-£1m turnover company because of £69,000 of bad debts from clients, we were inundated with letters from readers. The respondents echoed Danieli’s sentiments and sympathised, but also suggested ways back from the brink. In other words, there are strategies out there that can ensure a small contractor’s survival – if you talk to the right people. So that’s what Building did.
Strategy one: get tough
Pressure on margins could mean the days of your friendly neighbourhood builder are numbered. Chris Macgee is the managing director of Oxford-based Knowles, a relatively big fish among the minnows with an annual turnover of £15m. Nevertheless, Macgee is no stranger to pressure. As he says, margins have always been tight, but as they sink ever lower, going out of business becomes a clear and present danger.
“The problem is that people don’t want to pay up when you come to the final payment. With margins so slim, you only get a profit when you get the final payment,” he explains. Although Knowles doesn’t stoop to the rock-bottom margins of large contractors, on competitive tenders he will price at about 3-4%. Smaller jobs offer a bit more breathing room. “We put down higher margins because people buy into us because of quality and reliability,” he says.
Alan Danieli’s story struck a chord with Macgee because his former company met the same fate in 1983 – and he’s not about to see history repeat itself. Instead, he’s getting tough: “We come from a family situation where you want to get things done without resorting to legal argy-bargy. But now we’re taking a much harder stance. It’s about getting your point across about what you’re entitled to.”
Macgee says that Knowles’ managers have been swotting up on legal procedures and making staff more aware of the remedies available. However, he cautions that smaller companies may not be able to swallow the costs of legal action.
So it’s no more Mr Nice Guy, then? “People take advantage of the nice guy, while the man in the van gets away with blue murder. If you’re nice and friendly, sometimes people choose you for that, but they don’t want to pay more money for it.”
Strategy two: pick and choose your clients
Macgee says Knowles is more selective when choosing jobs, but other companies have gone even further and retreated from riskier customers altogether. Winning work from one-off clients is a tough slog for rock-bottom margins, and customers have little interest in maintaining a relationship at the end of it.
People take advantage of the nice guy, while the man in the van gets away with blue murder
Chris Macgee, Knowles
Rupert Perkins, contracts director of £2.4m-turnover John Perkins in Bristol, says the company has made a conscious decision to reduce its dependence on one-off private clients and instead get into facilities management under partnerships with larger players who have snaffled private and public sector contracts.
“It takes out the uncertainty,” Perkins says. “If companies like ours want to continue working on these kinds of properties, we’ve got to get in with the big contractors and be part of the supply chain. We’ll do better because we can do negotiated work.”
For example, John Perkins has an annual agreement to supply a man with a van to do routine maintenance on seven buildings for a private firm. The contract is worth £55,000 and payment is negotiated on a cost-plus basis, where John Perkins keeps an open record of its costs and receives a guaranteed, pre-negotiated management fee on top, typically 15% on a medium-sized deal. On the £460,000 refurbishment of a butcher’s shop for an organic farm in Bristol, for example, they agreed a guaranteed management fee of £70,000.
Perkins says the company has even persuaded mistrustful one-off clients to work on an open-book basis, including the client for an ongoing £50,000 domestic project. “Some are more enlightened.
It tends to be the ones who are more in touch with business – if they’ve had a positive experience in their business life, they’ll try it in their personal life.”
Strategy three: rethink your business
As public bodies package up works into larger contracts, securing a spot in the supply chain for major projects is one way for smaller companies to make sure they don’t lose out. But there are contractors that see no reason why they shouldn’t fight for – and win – the work that has traditionally been their bread and butter.
Rochdale-based Wilfrid Lord is one such company. In August 2003 it won a £30m, five-year partnering deal to maintain Oldham council’s homes. Deputy managing director Janet Lord says the contractor has more than doubled its turnover since 2000 to £14m, with an 8% profit margin.
But it’s not been an easy process – the company even hired a change consultant for a year at a cost of £10,000. “We’ve made some big changes trying to stay ahead of the competition. We were a small family business, nose to the grindstone, but he helped us really focus. We knew what we wanted to do, we just needed the tools to achieve it,” says Lord.
One difference in the new look Wilfrid Lord is a much flatter management structure – three contracts directors and the finance director now advise Lord and her brother Andrew, the managing director, on how to steer the business. But Lord also attributes the company’s success to marketing and a £8-10,000 rebranding programme. Though Wilfrid Lord had 25 years’ experience in the social housing sector, it was still seen primarily as a painting contractor.
Most clients do want to retain links to local firms because we’ve got links to local training and supply routes
George Marsh, Chase Norton
“Now we’re very social housing-orientated, and we’re working out what we’re going to do when that bubble bursts,” says Lord. The company has since won contracts with three major housing associations worth £2m a year for 10 years. “We were in the housing market anyway, but changing the company kept the market open, otherwise it would have been closed to us because we couldn’t compete.”
Strategy four: get together
With a turnover of £40m, Midlands contractor Chase Norton is rather larger than the other firms in this article, but it suffers from the same problem of losing its traditional workload to larger firms. Rather than beef itself up to take on its larger competitors or accept a subcontracting role, however, non-executive chairman George Marsh has hit on a third option of forming alliances with similar-sized firms to win contracts.
In particular, Marsh has his eye on the first round of the Building Schools for the Future programme, where a typical agreement over several phases can run to £200m. "This is the sort of work we have done in the past, we've got good relationships with clients and a good skills base."
Marsh's big idea is that an alliance of two or three local firms would together win a deal and work on a partnering basis. Alliances would be set up on a deal-by-deal basis. Marsh says that clients he's spoken to so far have been keen. "Most do want to retain links with the local firms because we've got links to local training and supply routes. It's the same for all small and medium-sized contractors. You either don't compete or you look for ways you can."
Strategy five: set up a construction club
If joining up with your rivals is a bit much to stomach, relationships with local companies whose businesses complement yours can also pay dividends. Back in Bristol, Rupert Perkins has come to an arrangement with four local firms to “make opportunities” for each other – which is how the firm got involved with the refurbishment of the butcher’s shop. The idea is that the group will use the oldest, easiest and perhaps most effective method of marketing: word of mouth.
To complement John Perkins’ construction skills, the group has brought in an architect, a cost consultant, a building services engineer and a structural engineer. “We’ve built very good relationships with key local professionals, so we can work as a team, right through from feasibility to design to buildability.
We all try to recommend the team – it really aids the process, it cuts down on time and is better from a safety point of view.”