Is the Grass Greener on the Commercial Side of the Fence?
The first of two articles about diversifying into commercial construction.
If you’re considering diversifying into commercial construction or have already done so, you should be asking yourself, “Why?”
If you don’t understand the need to diversify this way, you probably shouldn’t attempt it. The grass is not always greener in the commercial yard. Yes, commercial construction offers many opportunities — but only if you’re prepared for them.
I can’t promise you a commercial rose garden, but the information that follows will cover the issues you must address to ensure you can be successful in commercial construction.
Tactical Differences That Require Adjustments
First, residential and commercial construction are significantly different in the trenches.
In commercial construction, there are architects, engineers, bonding requirements, liquidated damages, new regulations and different codes, shop drawing submittals, various bidding processes and a different protocol overall. None of these are exactly daunting, but they do create an environment that can require a period of adjustment.
The Client Dictates the Rules: The most significant tactical change is probably the client. Generally, in residential construction you deal with individual consumers, who frequently allow the home builder to dictate the rules. By contrast, commercial construction involves a business-to-business relationship in which the client tends to dictate the rules.
Operate Like a Business: The first requirement for becoming a commercial contractor is to look and operate like a business.
This means you will need a dedicated fax line, an e-mail address other than Yahoo or hotmail, proposals that are typed and generally conform to the CSI’s (Construction Specification Institute) 48 divisions commonly used on most commercial projects, a business office, a Web site, scheduling software and formalized safety procedures, to name a few.
Though many home builders already have these basic elements in place, those that don’t will find the transition more complicated.
Although most quality home builders adapt relatively easily to the tactical changes inherent with commercial construction, the real challenges occur at the strategic level. Both commercial and residential construction involve addressing strategic issues, but commercial construction’s strategies are more complex. Before we explore these strategic issues, let’s examine diversification.
Diversity — Don’t Stretch Yourself Too Thin
As Coke and Pepsi have illustrated, diversity for the sake of diversifying is not always a good idea. Pepsi is the larger company, yet Coke is the more profitable. Pepsi is diverse; Coke is not. Coke is only a beverage company, while Pepsi has diversified into restaurants.
In part, the reason why Pepsi isn’t as profitable is because by diversifying it spread it resources too thin and was unable to take advantage of the opportunities in the beverage industry with the same vigor that Coke did.
The moral of the story is that if your diversity stretches you too far, it might actually result in a loss of earnings instead of a gain. In essence, it’s better to be an “A” player in a single niche than to be a “B” or “C” player in multiple niches.
Take Advantage of Timing and Skills: Since the construction industry is cyclical, there are certainly strong arguments for diversity. However, it’s critical that contractors uncover the right opportunity at the right time — preferably on a different cycle than that of their residential business.
It’s also important to seek opportunities that take advantage of the skills that have made a builder successful to begin with.
Since successful production builders usually have great coordination skills, they should consider choosing commercial projects where these coordination skills would provide a competitive advantage.
Most home builders understand this concept when they consider other areas within the residential industry. But too many seem to forget that it also applies to commercial work. Contractors who make the wrong strategic choices risk sacrificing potential earnings.
Strategic Issues — Commercial Construction Has More Options, Choose Wisely
The home builder has many strategic choices to make, such as what type of homes to build — production, semi-custom, custom, luxury or multifamily. It’s important to remember these significant differences between home types make it difficult for most home builders to thrive in all segments of the industry.
Not surprisingly, in commercial construction, the number of options is significantly greater, so it’s absolutely essential for commercial contractors to understand their options and make the right strategic choices.
Should we diversify into this particular area of commercial construction?
Answering this question honestly will significantly improve your chances of succeeding.
The most successful companies have learned they must focus on more than just their own needs. They have learned to think from a strategic perspective, focusing on the needs of their customers and employees as well as their own company. In commercial construction, this strategic perspective should include the needs of your subcontractors.
Next week: How to develop effective strategies to stand up to your competition.
Ted Garrison is president of Garrison Associates and author of Strategic Planning for Contractors. As a consultant, author and speaker, he works with businesses in the construction industry to grow their business by improving profit margins and increasing productivity. For more information, e-mail Garrison.
This article was excerpted from Commercial Builder magazine.