Balancing Risk and Reward in Construction Projects

January 25, 2010 — 1,159 views  

When determining what types of jobs you will take on, the first thing you must do is determine where you are making the most profit-and the results may surprise you. When I first started my construction company I targeted large remodels because I was drawn to the large dollar figure. After all, doing ONE $20,000 job is better than 10 $2,000 jobs, right?

In my case... wrong.

The numbers looked good, but for my skill level and staffing, I would have been much better off taking the 10 small jobs. At all times you need to balance risk and reward.

Risk vs. Reward

For every job you take you need to do a risk analysis to see if the job is worth taking. In economics the general rule is: the higher the risk, the higher the reward. But in construction that does not always hold true. Take my experience above as an example.

For the remodel lets say I had a contract price of $20,000. Not bad. After you factor in all my costs (such as payroll, materials, overhead, and salary) I stand to make a 20% profit margin-about $4,000.

The other option was to stick to the smaller jobs that ran around $2,000. Each job would make me the same 20%--maybe higher if I can knock them out quickly. Which is better for me? Let's do a risk analysis on four factors: Time, Cash, Unforeseen Problems, and Scheduling.

Consider all of the risk factors for the remodel:
Time: The job will take 4 weeks. That means that I'll have to put off other customers for at least that long. The risk is that I will not have the time to market to other customers and fill my sales funnel, and that if I do find a customer it they will not want to wait.

Cash: During that time I will have deposits coming in, but only enough cash to keep me afloat. I may even have to front some of the material costs out of pocket. The reality is that I will not see my profit until the last check, so the risk is that my cash flow will be tight for the month.

Unforeseen Problems: In any remodel there are problems that occur. The risk is that any problems will slow the job and delay payments.

Scheduling: A lot of coordination will have to occur. I will have to interact with agencies completely out of my control-like permit officials. Waiting on inspections and/or permits could cost me money due to scheduling conflicts.

Now consider the risk factors for the small jobs:

Time: Each $2,000 job will take about three days. That means in-and-out on every job and I can schedule efficiently for every job.

Cash: Smaller jobs mean smaller material costs. And because each job is small and quick, I should never cross a pay period with an unfinished job.

Unforeseen Problems: Small jobs mean smaller risk...

Scheduling: Easy scheduling means that I can accurately predict when I can get to a customer... That means more referrals and higher customer satisfaction.

The Summary:

Remodel: High risk, relatively low reward and I have to wait 30 or more days for the profit.

Small Jobs: Low risk, but I can do a ton of the jobs and get paid right away.

Conclusion: I should stick to the small jobs-it's not as glamorous, but I'll make more money and have less stress over the long run.

Now this may not apply to you. You may have a company structure that makes you effective at the large remodeling jobs or house construction, or whatever. Don't get wrapped up in the details of my example.

The point is, that you should weigh the risks of every job to see if it is something you can handle and you're not just chasing the "big bucks." Consider all factors to realistically see if you can do the job profitably.

Steve Sellers owns a construction company in Lumberton, New Jersey and is the president of the Professional Contracting Association, which provides business and online marketing resources to the independent contractor. You work hard... So should your website.

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Steve Sellers