Have you ever searched for something, not knowing what you were looking for, and found it? No? Me neither.
That would be a silly question to a lot of people, but not contractors. For, unfortunately, most contractors have their team aiming for an unidentified target - expecting them to hit it, without first setting clear expectations of what the target is.
How about your team members? Do they know, and better yet understand the targets you set in order to achieve your goals? Or, are you allowing them to just do the best they can?
If it’s the latter, you have a problem. It’s also a fairly common one.
A contractor recently asked me if I would help him design an incentive plan for his team. I agreed and the first thing I asked was what his total sales goal for the year was. He answered around $10M per year. My next question was around his gross and net profit goals - he had no clue as to an answer. In fact, his response was, “If I could figure that out, I could tell my people what I expect. However, I just don’t know what I want. What should a construction company earn as a net profit?”
That might be the problem, right?
I continued by probing into what his net profit is currently. “We really work on tight margins. I think it’s somewhere around 1%,” he replied. I went on to explain that construction companies doing under $100M in sales per year average around 2.5% NP, which I don’t believe is enough. Then I asked him why any of us would risk everything we have - year in, year out - for that or less?
I could see from his expression that my points were starting to sink in.
I told him I could relate to his situation. As in all honesty, his situation sounded a lot like my own several years ago. I would cheer my people on, telling them we just need to do the best we can do. And, guess what? They gave me about 1% NP on average, just like he was getting now.
Luckily for me, I hired a consultant back then who asked me some very similar questions. I explained to him that I never knew my NP goals, but struggled and between all of the companies I ran, I generally earned around 1%. “Aren’t meager earnings okay when you are growing as fast as I am?” I exclaimed in excitement.
“Really, growth with little to no margins is what you’re looking for? Why would you risk everything you have year in and year out, for virtually no return?” the consultant explained. After thinking long and hard about it, I decided I would no longer do that.
Later that year, I hired that same consultant to facilitate our annual retreat. What I came away with was nothing short of astounding. Instead of only setting total annual sales goals (without taking gross and net profit into the equation), I drew a line in the sand.
I explained to my team that no manager in any of our companies would be allowed to set total sales goals without tying them to a 6% NP minimum. The gross profit goal would also be set at the percentage it took to hit the net profit goal. The bottom line I explained, was that from then on each of our companies must earn 6% NP per year, or we would have to change management or strongly consider shutting the company down.
Sounds easy enough, right? Wrong.
After the retreat, I found that I had frustrated some of the managers with such a high target compared to what we were used to. In fact, the general manager of one of my companies came to me and asked why I was requiring his division to deliver 6% NP, when I had a couple companies that were actually losing money. I told him that all companies are now required to hit 6% or face changes, as I can’t risk everything I have for such narrow margins anymore.
I could sense his continued frustration, but remained true to my recent convictions. Guess what happened next?
The next year (and the first time in the five year history of that division) his company was pushing up against 6% NP and has averaged over 6% NP since. As for the companies that he was referring to that were losing money? Well, two of them were shut down when they didn’t hit the new 6% threshold. And the other two companies just got better, both averaging over 6% NP over the last few years.
It’s amazing what happened psychologically to my team when they knew exactly what the target was they were expected to hit. They changed bidding strategies, they changed delivery methods and they changed their expectations of their own reports in order to hit the desired target. They lived and breathed by the expectations that had been placed upon them.
So, what are your expectations?
Decide, and set your target now! And more importantly, ensure your people know what the target is. With a target to aim for, and expectations set to hit it, you’ll be surprised at how much your team can achieve.
Damian Lang owns and operates several companies in Ohio. He is the inventor of the Grout Hog-Grout Delivery System, Mud Hog mortar mixers, Hog Leg wall-bracing system, and several other labor-saving devices used in the construction industry. He is the author of the book called “RACE—Rewarding And Challenging Employees for Profits in Masonry.” He writes for Masonry Magazine each month and consults with many of the leading contractors in the country.