Empire Construction & Technologies specializes in putting your house back together after a flood, a fire or when the bathroom pipes spring a leak and you need to replace the soggy kitchen directly underneath the bathroom.
It’s a crowded industry populated by a mix of big professional firms along with 3 man shops run by contractors who tired of working for someone else and wanted to strike out on their own.
Empire falls into the middle ground, started by 2 contractors and gradually growing into a million dollar business with plenty of money in the bank, happy customers and even happier owners. Everything was practically running on autopilot, so the partners decided to purposely grow the business “to the next level”. After a couple years of aggressive growth, Empire indeed found itself with a 3 million dollar annual run rate, but with customers that weren’t as happy as before, and ownership that frequently had to lend the business money to make payroll. How did this happen? And how did ELIV8 help Empire right the ship?
The restoration construction business model is unforgiving. Heavily tied to the insurance industry (as it is usually the insurance company that pays the contractor, not the homeowner), businesses like Empire tie themselves into a network that gives them first shot at remediating homeowner disasters. But that spot at the head of the line comes with various caveats. First, when a new project comes across the network, Empire is literally on the clock to respond. Respond too slowly more than once and Empire could be kicked off the network.
Along with speed, quality counts. If too many projects result in low customer service marks from the homeowner, Empire could find itself on the outside looking in the next time around.
All of this can be overcome with tight processes and a solid workforce. But perhaps the most unforgiving aspect of the restoration business model is how everyone gets paid – something Empire literally has no control over.
Much like an HMO, the insurance industry has a fixed price list. For project “x”, the contractor gets paid “y”. There is no bidding. Margins are locked in. It’s up to the contractor to keep costs down in order to secure a profit.
And finally, the contractor gets paid last – after the work is completed and the homeowner and the insurance adjustor signs off. This means that Empire must spend all the labor and materials costs first and wait to be reimbursed weeks later.
In order to make this model work, contractors must know exactly what their costs are, employ proper project management practices to manage those costs at the individual job level and be astute financial managers so there is always enough in reserve to cover the “float” between costs out and revenue in.
So in a very unintuitive way, the more projects you get, the more money you have to spend. This was the situation Empire Construction found itself in. With every great month, a little more of the reserve was tapped. With no formal systems to track job profitability and no formal project management training, there was no way to know if costs were consistently under the fixed revenue for each job.
Of course with growth comes more overhead. Workers were hired to staff the new jobs, additional vehicles were leased, materials costs increased, new bigger offices were needed. And without a seasoned accountant on staff (and no formal finance training in management), there was no way to forecast the long term affects until one day, the reserve was gone and management was routinely injecting the business with cash to stabilize the cash flow.
It was at this time that ELIV8 was brought in to fix the situation.
After a quick assessment, it was very clear that Empire would need to increase revenue in order to tread water while more permanent measures could be developed to stabilize costs and eventually fix Empire’s cash flow issues without negatively affecting the customer satisfaction results that were key to remaining in the insurance industry’s referral network.
ELIV8 immediately deployed sales pipeline software. Not only did this give Empire’s management project visibility up to 90 days in the future (something it previously never had), it also allowed new compensation plans to be implemented that were heavily revenue based. This required a level of re-training as well as a sea change in attitude from the project managers who were formerly concerned exclusively with project execution. A company sales goal was implemented. If numbers fell short, paychecks would be negatively (but equally) impacted. If numbers were over-achieved, take home pay would increase.
This new “skin in the game” approach also had the side benefit of weeding out those risk-averse employees who were less than 100% committed to Empire’s success. The reduction in headcount had an immediate impact on the bottom line.
The net result was a tripling of the company’s sales pipeline value within 60 days.
With revenue stabilized and increasing, it was time to address business processes, which would lead to accurate measurement of costs. Once costs were identified, they could be reduced.
ELIV8 proceeded to map all major processes in the company, starting with the analysis of a how a typical deal was acquired, the resulting construction project executed and how the funds were collected. At the same time, company overhead was examined. Everything from systems to assets. Key to this effort was the hiring of a competent bookkeeper/accountant to rebuild the company books and establish a coherent accounts payable and receivable policy. Lastly, Empire’s field workforce was examined for effectiveness and quality.
Over the course of next 5 months, the following initiatives were executed with the corresponding results:
Taken together, the holistic approach of looking at operations and technology along with the re-focusing of the project managers on revenue ensured Empire would be profitable month to month. Further, with the added scrutiny of a seasoned bookkeeper, financial discipline was maintained. Ownership could, for the first time, could manage the company out to the quarter rather than the week.
The ultimate goal for Empire is to shift the company away from total reliance on the reactive (and revenue capped) insurance model. To achieve this, more emphasis will have to be placed on prospecting for and closing retail light construction projects. With margins 3-4x higher than current projects, Empire would only have to replace 20% of it’s existing revenue with retail in order for it to begin to grow again without the risks it incurred in the past. The systems and processes are now in place to make that happen in a controlled and measured way. Empire will be required to shift some of its resources towards a formal marketing strategy with investments in its web site to capture new customers as well as an added focus on communicating to and soliciting it’s existing customer base.
Armed with the lessons learned over the course of the 8 month long company re-engineering, Empire’s owners can be confident that new growth will lead to increased revenues and corresponding profits without being buried in additional uncontrolled costs.