The purpose of this chapter is to outline the steps for starting a contracting business and taking it up to a company with twenty or so employees. When you are successfully running a twenty man company, you will be in a position to decide how large and in what direction your company will grow from that point on.
I have written these steps out as if you are just starting up as a contractor, but if you are already in business, start reading through these steps until you spot which step your company is on right now. Once you have located where your company seems to be, you can go back over the earlier steps to see that they have been fully done. And if you discover that your company has missed one or has not done one completely, you can make use of the information in this chapter to fix it.
The point is that it is not how big your company is or how long it has been in business that matters here. The important thing is that, wherever your business is on these steps, it needs to have completed the earlier steps fully and correctly. If you are intending to build up your contracting business, you will need to make sure that it is built on a solid foundation. Only when each earlier step is fully completed should you go on to the next step.
1. KNOW THE BASICS OF YOUR TRADE
Before you start your own contracting business you must know enough about the work that you do a good job. This is something that you must have learned before you start your business. You can always learn more about the line of work that you are in as you gain more experience, and you will automatically do this as you encounter each new job.
But, from the moment that you do your first job as a contractor, you must be sufficiently skilled in your trade to do a quality job which results in a happy customer. Customers will be paying you money because you have represented yourself as a professional, and they will expect professional quality work from you. If you expect to make a good living as a contractor, you must make sure that you are able to deliver a quality job to every customer that you accept money from.
Once you start your contracting business, you will have enough to keep you busy without the extra problem of not knowing how to do the work that you are being paid to do. So, be sure to know the basics of your trade.
2. DO IT LEGALLY
There are legal requirements that you will need to observe if you want to operate as a legitimate business. If you expect to do well as a contractor, you must know what these legal requirements are and set your business up legally.
3. BE HONEST
If you are not an honest person, you will never do really well as a contractor. If you think that the best way to operate a business is to take the most that you can from someone and give them back as little as you can, then this book is not for you.
Fortunately, the type of person who would be interested in reading this book is someone who wants to improve his ability as a contractor. People like this are basically honest. So, if you bought this book, you’re basically an honest person, right? Good for you. Now, don’t let anyone ever convince you that you can do really well in business if you are not honest. In the long run, the ONLY way that you are going to build up a successful contracting business is to BE HONEST.
4. QUALITY BEFORE QUANTITY
Work for only high quality customers. Hire only high quality employees. Do only high quality work. Demand the best from yourself. A high quality one man company will make you a lot more money than a poor quality twenty man company.
With every decision that you make as a contractor, you will have a choice between better or poorer quality. Better quality isn’t always the easiest choice, but it is almost always the best choice.
You can buy a poor quality hammer that costs you only half of what a high quality hammer would cost. But the poor quality hammer breaks after a week of use, and the high quality hammer lasts for twenty years. So, which was the better buy, the low quality hammer or the high quality hammer?
You might need to pay a poor quality employee only half as much as you would pay a high quality employee. But, because of his unethical conduct and unreliability, the lower paid employee looses you money, while the higher paid, higher quality employee makes you money and also gets you repeat customers. Which employee should you hire?
A high quality customer has a one thousand dollar job, and a poor quality customer has a ten thousand dollar job. You make two hundred dollars profit on the quality customer’s job. Because of various problems, you end up loosing money on the poor quality customer’s job.
Whether you are just starting up or have been operating for a while, before you expand further, make sure that every aspect of your current company is of high quality. An expanding company is only going to be as good as the foundation on which it is built. Make sure your company is built on a quality foundation.
5. START CONTRACTING PART-TIME
Congratulations! You are ready to start your career as a contractor. You are honest and you have decided you want a quality company, you have a knowledge of your trade, and you are all set up legally as a contractor. Now you are ready to get down to business and start making money!
What should you do first? Let’s review the basic actions that you will need to take to make money:
1. FIND A CUSTOMER
2. FIND OUT WHAT WORK THE CUSTOMER NEEDS AND WANTS
3. AGREE WITH THE CUSTOMER THAT YOU CAN DO THE JOB
4. AGREE ON HOW MUCH MONEY YOU WILL GET FOR THE JOB
5. DO THE JOB
6. COLLECT THE MONEY
7. MAKE A PROFIT
O.K. so the first thing that you need to do is FIND A CUSTOMER. There is a chapter in this book devoted to this subject. Which form of promotion should you choose? Should you call up general contractors or architects? Put an ad in the newspaper? Send out some fliers?
Of course, you will need to have some money to pay for the advertising, and it will generally take some time before the customers get your promotion and respond to it. So, do you have the money saved up to pay for the advertising and your living expenses while you wait for the first customers to call you? If you don’t, you have two options:
1. Save up a bunch of money.
2. Continue working for someone else until you have built up a small business that will pay your basic expenses.
Option number one will work, but, as a general rule of thumb, you should plan on needing a minimum of three times the amount of money that you originally think you need. In the contracting business, things have a way of taking more time and costing more than you originally plan.
For someone just starting up a business, the second option, working for someone else while getting the business going has advantages. By continuing to work for an employer the beginning contractor can gradually build up his own company without having to depend on it as a source of income.
There will come a time, however, when the amount of time you need to spend servicing the customers of your own company will begin to conflict with the work schedule of your regular job. At this point, you will need to be especially creative and figure out how to keep all of your agreements with your employer, while at the same time not neglecting or breaking any agreements with the new customers in your own business. You might be able to make an arrangement with your employer to work fewer hours for him.
During this time, it is important to always remember two things:
1. If you are going to have your own contracting business, sooner or later you are going to have to quit your present job. So, your future obligation is to your own company. Don’t neglect your own company in favor of your current employer.
2. You should never break an agreement that you have already made with your present employer. This means that even though you should give your own company first priority, you should never break any agreements with the company that you currently work for.
As an example, if one of your own customers wants you to do a job and your current employer also wants you to do a job, then, as a general rule, you should service your own customers first, providing that you will not be breaking agreements with your current employer by doing this.
Once you have built up your own business to the point where you are doing more work on your own than you are with your employer, but before you have enough of your own customers to keep you busy full-time, you might consider working for your current employer or another contractor as a subcontractor.
This may work out well, or not, depending on your own particular situation and the legal situation in your work area. If this would make sense for you, you can find a contractor to work for by using the method outlined in the chapter, FIND A CUSTOMER, in the section called GENERAL CONTRACTORS.
7. KEEP YOUR PRICES LOW AT FIRST
When you are working for an employer, you are not getting paid all of the money that the customer will pay your employer. This makes sense, as it is left up to your employer to pay all of the bills that relate to the job and still end up with a profit. As a general rule, your employer will need to charge the customer for labor about double what he pays you.
When you first go out on your own, you will not need to charge as much as your former employer did to make the same amount of profit. Your expenses for doing the job will not be as high.
The advantage to you is, at first, you can keep your prices low and still make a good profit. Because of this happy fact, once you make the break from being an employee to becoming a full-time contractor running your own business, you will have a decided advantage over the bigger contractors when bidding jobs. Because your operating expenses are lower, you can charge the customer less than big contractors and make the same profit.
8. WORK FULL-TIME
All other things being equal, the lower your price, the more likely it is that you will get the job. Since your expenses will be lower as a new contractor and you can charge less, if you promote your company in some way or another, you will soon find yourself with lots of work. What you need to do now is just continue doing what you did to get lots of work, so that you will continue to have lots of work.
9. RAISE YOUR PRICES
Once you get to the point where you are sure that you will continue to have more customers than you can handle by yourself, you are ready for your next step. You have several options. You can:
1. Turn down the work.
2. Work longer and longer hours.
3. Hire someone to help you do the work.
4. Raise your prices.
The option to take, at this stage of your business, is Number Four, Raise your prices.
Obviously, turning down work is not the way to expand your business. Working longer hours is only a temporary solution at best. Hiring someone to help you do the work is a good idea and is necessary as your business grows, but not quite yet. First, you need to raise your prices.
The reason for this is that you will need to make more money from each job when you do have employees. As soon as you have employees, your office expenses are going to go up. So, the time to raise your prices is before you get employees.
Let’s look at the situation you are in at this point. You have built up your company to where you have more customers wanting you to do work than you have time for.
Lets say that you are figuring your labor at a rate of twenty five dollars an hour. What would happen if you raised your rates to thirty dollars an hour? Chances are that you would still have all the work that you could handle. It is even possible that you would still have more work than you could handle. But, the customers that did go away would be those who LEAST WANTED TO PAY YOU MORE MONEY.
So, by raising your prices, you not only make more money, but you end up with the better customers! This is pretty good, but it gets even better. Once you have raised your prices, and you again find yourself with an unending supply of more customers than you can handle, raise your prices again. From thirty to thirty-five, from thirty-five to forty, and again from forty to forty-five. And each time you raise your prices, you will also raise the quality of customer that you are dealing with.
10. STOP RAISING PRICES
Stop raising your prices when they are the same or slightly lower than the prices of your competitors. It is very important to understand that by competitors, I am not referring to all the other contractors of your trade, but ONLY those contractors who compete against you.
As an example, let’s say that you have a large ad in a local phone book. There may be one hundred contractors of your trade in your area, but only six of them have a large ad. If a customer calls you from that phone book ad, and assuming that the customer wants to get more than one bid on his job, it is often the case that the only contractors who will end up bidding on the job will be the ones who have the other large ads in the same phone directory.
So, it isn’t important what most of the other contractors in your trade might charge for the job. It is only important what the other contractors who are likely to end up bidding the job will charge.
If you follow this program of raising your prices each time you have more work than you can handle until your prices are the same or slightly less than your competitors, then you will be ready for the next step.
11. HIRE EMPLOYEES
When you have reached the point of charging your customers the same or slightly less than your competitors and you still have more work than you can personally handle, it is time to think about hiring employees.
Now is when you are going to appreciate the fact that you have been charging customers more money than you were charging them when you first started up. As soon as you hire employees, your company’s overhead is going to go up. By overhead, I mean the operating expenses of your business — for insurance, phone, advertising, office supplies, secretarial help, etc.
Assuming that you can run your business efficiently, you should be able to make about a twenty percent profit while paying your employee exactly half the amount of money that you charge the customer for labor. Another way of looking at this is that you need to charge the customer twice as much money for the labor of your employee as you pay the employee. If you do this, your company should make about twenty percent profit.
This calculation does not take into account material costs. We are just talking here about labor costs. If you have been marking-up the price of materials, you can keep that mark-up the same.
This is why you had to raise your prices until they were about the same as your competitors. Now that you are going to hire one or more employees and your prices will need to be higher, you have already established a base of customers who are willing to pay you the amount of money necessary for the additional costs of your new employees. So, you won’t have to worry about loosing your customers because of higher prices. By the time you are ready to hire your first employee, you should already be charging your customers the amount of money that you will need to pay the extra costs of having employees and still have more work than you can personally do.