More Volume Does Not Mean More Profit

The DBIA, in a publication titled “ Design Build Done Right”  , define project delivery as “a comprehensive process including planning, design and construction required to execute and complete a building facility or other type of project.” Choosing a project delivery method is one of the fundamental decisions owners make while developing their acquisition strategy.

They go on to outline the various project delivery systems, procurement and contract types and give a simple, clear outline of understanding.

When we meet with a new company we take time to get to know not only their annual volume, but how their business is structured. What type of projects, what delivery systems, contract types and how their buy-out and decision making is structured. We ask them many questions about the past, present and future to help us find the candidates that fit best not only culturally from a personality stand-point, but from experience with working within those systems or the ability to learn those systems. We also ask these questions to determine and learn what their typical margins are and if the leaders understand sustainable growth or are they one wrong decision away from a major lay off.

There is a big difference between a construction company with $100 million in signed contracts and a 100 million dollar construction company. Just last week we interviewed a former owner of a sub-contracting firm that had $40 million in signed contracts on 6 major projects with 6 different general contractors.   A myriad of typical delays due to design changes took place which delayed the schedule and skyrocketed his overhead costs. Due to what he didn’t have in his contracts to protect himself the company had to close. Last month we interviewed the former owner of a General Contracting firm. He was telling us how he owned a 50 million dollar company. I looked at the dates on his resume and it was for 7 years. Through conversation we determined he was in front of us due to he had $50 million at one time under construction, but all his work was with one client that ended up taking their business elsewhere due to their growth and needed a more sophisticated business structure from their supporting General Contractor.

The value of your company is determined by Enterprise Multiple as explained in this Investopedia article:

Many construction companies strive to increase volume when they should be seeking to increase earnings and the value of their company.

The sister article to this one titled “Big Company, Big Project vs The Majority” goes into the different delivery methods of construction and provides an example of a company doing less volume making more profit than a company double their size.

If you own and operate a business it is important for you to have a knowledgeable advisor in regards to EBITA, ( Earnings Before Interest, Taxes, Depreciation and Amortization). Most construction owners are not familiar with this term and are only concerned with cash flow.

Labor burden costs often play a major role in eating up the profitability of a company. The right people in the right seats at the right time with the right knowledge can help you avoid pitfalls and increase profitability. We are “Industry Matchmakers” and can help you find those people to help you build a sustainable business. We look forward to helping you surround yourself with those right people.

Suzanne on behalf of the FLCC Team!


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