Jacob Austin 00:00:00 Hi all Jacob Austin here from QS. And welcome to episode 103 of the Subcontractors Blueprint, the show where subcontractors will learn how to ensure profitability, improve cash flow and grow their business. Today's episode is all about growing your business, and I've decided to do this as part of a mini series. So over the next couple of weeks, I'm going to explore some key signs that you're ready to take on bigger jobs. How to manage risk whilst you're stepping up so that big opportunities don't turn into big disasters. The commercial and contractual boxes to tick for larger work such as insurances, bonds and of course the fabled subcontract handling, staffing, supervision and supply chain. When your little team faces a not so little project and how to avoid some common pitfalls like cashflow crunches, program overruns and promising, you can deliver more than you can with. Of course, a few real world examples thrown in to illustrate the point. So today we're going to hit the first two points. They're deciding when you're ready to take on bigger jobs and how to manage the risk as you step up and on to bigger things.
Jacob Austin 00:01:14 So thanks for joining me today. And as ever, if you're new to the show, then please do subscribe for more user friendly advice on all things subcontracting. So you run a small or medium subcontracting business in the UK and you're thinking about taking on a larger project. Exciting stuff right? Because bigger projects mean bigger contracts, more prestige, and hopefully bigger profits. But and it's a big But they also mean bigger risks and bigger challenges. Today, we're going to explore how SME subcontractors can responsibly and confidently scale up to larger projects without overstretching. And we'll start with the key question how do you know if your subcontracting business is really ready to scale up to larger projects? It's probably easy to be tempted by a big, juicy contract. The big break, but you need to take an honest look at your business's foundation. So here are six pointers that may indicate you're ready to scale up your business. You want to ask yourself these questions and honestly review your business before you look to expand. Item number one consistent performance on current projects.
Jacob Austin 00:02:43 Are you consistently delivering your current jobs on time, on budget, and to the required quality? If small projects are spiraling out of control, obviously that's a red flag. But if you consistently delivering only doing it in a profitable fashion, then that is a good sign. In fact, meeting your internal metrics and having solid financial performance is one great indicator of growth readiness. For example, check if your revenue has been growing steadily and you've been maintaining a healthy cash flow on smaller jobs. The numbers won't lie to you. If they look good, then you're building on solid ground. Item number two how strong is your financial health and your capital? Bigger projects will bring with them higher upfront costs for materials, maybe new equipment, and more labor outlay before you are able to get paid by your main contractor. So you need to ask yourself the honest question do you have enough capital or financing to sustain a larger project? Good practice is to run a forward looking cash flow model. I've suggested this before in a previous episode, but look ahead for 13 weeks or a 90 day forecast to predict if you can handle the outlays and stress test it for the eventuality of the main contractor paying you late.
Jacob Austin 00:04:02 You'll need cash reserves or access to credit for an expected cost. And remember that on bigger jobs, the risks will be bigger, so unforeseen expenses will occur and they'll be bigger than you're used to. You'll need a financial buffer to recover from them. If even a small hiccup is going to leave you penniless, then you might not be ready yet. Because, as a rule of thumb, you need to ensure you're going to have enough cash to cover potential losses on delays before you can commit to a big project. Next question how established is your team and your leadership? If your business is, success so far relies on 1 or 2 key people that perhaps wear multiple hats. Then consider how that's going to scale. Taking on a bigger project means delegating and supervising multiple moving parts. Do you have a solid team of employees or trusted subcontractors that you can rely on? Having the right people in place. People with the skills and experience to handle larger scope is crucial for your expansion. If you can't trust your crew to run part of the project whilst you handle another, then you'll be stretched too thin.
Jacob Austin 00:05:10 So a good indicator is if you've already built a team that can operate kind of independently from you, and you as the owner, can step back to focus on more higher level management rather than micromanaging. Turning every screw. So is your team up to the task next point? Have you got excess capacity or efficient systems? When you finish your current projects? Are your guys sitting idle? Or conversely, are you turning away work because you're maxed out constantly having to turn projects down because you're booked up months in advance may indicate that you're able to take on more complex work. You've got a big demand, and people want what you're selling. Also, if you streamlined your operations so you have good standard procedures, good project management tools, when you've got efficient systems and processes in place, these are a good precursor to scaling your business. Conversely, if your current jobs only succeed by the skin of your teeth and some last minute heroics, then that's a warning sign. Your business needs to be running on your current workload like a well-oiled machine.
Jacob Austin 00:06:16 You wouldn't start turbocharging an engine that's already sputtering, right? But when it's taken over at low revs, you've probably got growing room. Next point is there the market demand and the opportunities. Like I just mentioned, if you're turning work down or perhaps main contractors are wanting to give you a larger package if you had the capacity or you're starting to see tenders for projects that are slightly above your normal range. If opportunities are knocking and you find your services are in demand, then the opportunity is there. You just need to make sure it's sustained and not a one off fluke. So you're not setting up for a single project that's going to leave you high and dry afterwards. And final point is about health and safety and risk. The construction industry is a health and safety led animal. Nobody wants to be responsible for somebody on their job not getting home at night. So your safety regime needs to be top tier. Under UK regulations, even a small subcontractor must plan and manage, work safely with the right skills and the right knowledge, and you need to be on top of your health and safety and site management duties to comply with the law and to comply with the growing demands of the main contractors, because bigger projects are going to bring more scrutiny and more compliance requirements.
Jacob Austin 00:07:32 And those requirements will come down to not just your risk assessments and your method statements, but how professional you are at your general contract admin. Two things like documenting changes, tracking costs, and perceiving and managing risk. So if you can honestly say on the jobs that you're currently working on that yes, you're running a tight ship on safety, quality and paperwork, then that is a green light for potential scaling. As with all building, you want the foundation to be solid and you want your business's foundation to be solid so that you can build on it. Stable finances, a capable team, efficient operations, proven track record, and awareness of how to manage risk and safety. Those are key signs that you're ready to grow. If you're not seeing those signs yet, well that's okay. Better to strengthen those areas now than running into a big contract under prepared. Growth should come out of success. It's not a solution to problems. If you're taking a bigger job out of desperation, or as a means to get turnover that you're not ready for.
Jacob Austin 00:08:40 You could get crushed by it and you want to clearly avoid that. Now, assuming you've seen some positive indicators and you're eager to press on, then the next step is understanding how to manage the risks that come with stepping up. So we're going to discuss that next. Risk comes in many forms financial safety reputation legal risk. So here's another six pointers on how to approach risk management as you're scaling up. Firstly assess the project fit. Evaluate projects carefully. Is it realistically within your capability. Look at scope complexity. Is it the type of work that you're experienced in just larger volume? Or is it introducing new elements that you've never dealt with before, such as new technology, more complex design? It's okay to be out of your comfort zone, but you don't want to be out of your depth. For example, if you're a roofing subcontractor and you've been successfully completing orders of 10 to 15 houses at a time, then taking on a hundred house development might be doable for you if you scale your crew and depending on the program requirements for a single large scale project with a humongous roof and complex fire regulations might be a bridge too far if you've never done that kind of work.
Jacob Austin 00:10:00 In risk management terms, you need to identify what the known challenges are and then find a plan for them. Dealing with just bigger scale is one thing, and if there are 1 or 2 unknowns that you can adequately train your team on beforehand, then you might be able to stretch yourself. But if there are too many big unknowns, then think twice about it. It's better off walking away from a project than one that you've got to wing it and hope for the best, and God knows whether you'll come out the other side in the black or not. Point number two plan and price for risks. A common mistake when moving towards bigger projects is underestimating costs or time. Essentially under pricing the job to win it and then getting burned. The bigger fish might attract many bidders, and you might feel the pressure to keep your price low to compete. But be very careful. Under bidding, is playing roulette with your company's future. A brief analysis of carillons collapse pointed out that Carillion was taking on huge projects with wafer thin margins.
Jacob Austin 00:11:02 We're talking 1.6% profit margin on a major contract. When your margins are that thin, then a single cost overrun can turn the project into a loss. So don't chase turnover for the sake of it. If a project isn't priced to make a reasonable profit, it can actually harm you, not grow your business. And business coaches will warn you that winning contracts at low margins leads to financial instability. Sucking cash flow out of your business, not generating the margin that you need, and leaving little room to reinvest in growth. You need to be targeting a sustainable net margin, one that affords you a cushion that covers the inevitable hiccups that come with the typical project. If you price to lean because it's a big project and it's going to cover your overheads, then you're potentially only one delay or one cost increase from a key supplier away from disaster. So identify risks and put a price contingency on them. Larger projects will have more unknown unknowns. You've got more materials whose price can go up. You've got more work cases where you might encounter delays, you've got more exposure to weather.
Jacob Austin 00:12:11 So you need to do your homework on it. If it's an 18 month project that's going to include two winters. Then weather delays are almost certain, so you need to factor it in. A famous UK case on the Aberdeen bypass infrastructure project had a series of unforeseen events, legal challenges, a harsh winter and it pushed the project up from £550 million to around 850 $850 million. None of the contractors did anything wrong. Technically, it was just reality happening. The post-mortem lesson was that bits needed to account for invisible and unexpected risks. As a subcontractor, you might not have much flexibility in your bid since the main contractor will likely press you on price, but you can at least include sensible contingencies or clarify assumptions in your quote. If the main contractor wants to negotiate risk allowances out, then you can have a conversation sensibly about sharing those risks rather than blindly cutting them out of your price at your detriment, and cover yourself for the risks that you can see. Next item you need to do your due diligence on your client and the contract.
Jacob Austin 00:13:22 When you're moving up to a bigger scale project, you're often dealing with larger organizations, which can be a blessing or a curse. So do your homework on who you'll be working for. A huge risk that you need to manage is getting paid. We'll talk about cash flow later, but this ties into this risk. If the main contractor or client has poor payment reputations or they're financially unstable, a big project could bankrupt you again in the demise of Carillion. Around 30,000 SMEs were owed money and many never saw it. Nobody thought that a name such as Carillion, whose ultimate client was the government, wouldn't be as safe as houses. Perhaps they didn't do their full financial diligence. Perhaps it was difficult to do that due diligence because of poor accounting. But the painful lesson is that no one is too big to fail, and a big name main contractor going bust can drag down lots of little guys with it. So before signing on the dotted line, consider your client's health. You can run credit checks. You can ask around the industry.
Jacob Austin 00:14:27 You can also seek industry information on how regularly companies pay on time. If something smells off. Then proceed with extreme caution or ask for better payment terms to protect yourself. Likewise, read the contract you'll be signing or get a construction lawyer or knowledgeable us to review it. Big projects come with hefty contracts, sometimes often with heavy amendments to standard forms like GCT and NEC. Read them and understand them. You need to know exactly what you're getting into before you agree to doing it. Even unamended forms are not without their risk under the standard JCT subcontract. For instance, if you finish late and it causes the main contractor to finish late, then you can be liable to pay the main contractor for all the losses they incur. That includes their site set up. It includes any liquidated damages they might have with the client, so that could far exceed any profit that you're making on a job. Now, I'm not saying this to scare you off big contracts, but just to underscore the importance of reviewing the contract terms so that you're walking into it with your eyes open.
Jacob Austin 00:15:34 You may or may not succeed, but without knowing what you're signing up for. You don't know what risk you have to manage. Point four. Develop a project plan for delivery and a realistic program. You need to be able to manage a bigger project proactively. That means having a detailed program and a plan of resources. A small job might be able to be run out of somebody's head, but a big job can't identify your critical path. What milestones and tasks absolutely cannot slip without delaying your operation and therefore the whole project? These are the areas that you need to monitor like a hawk. Ideally, in your program, you need to build in some float or time buffer where you can. Being overly optimistic about program is a common pitfall, and this leads to paying over time or potentially getting hit with delay penalties. To avoid this, you need to be realistic from day one About how long things truly are going to take you and what possible delays you could encounter. The main contractor might have an aggressive program, and that might be fine if you've got the resource to match it, but if there's little wiggle room, then small events can have big impacts.
Jacob Austin 00:16:47 It's better to set a realistic program up front than agree to a fantasy program and fail. Have in mind when planning what key checkpoints you're going to set to review progress frequently enough so that you can catch small slippages and what backup plans you can put in place if something falls behind. It's an expect the best, but plan for the worst scenario. Don't forget to inform your clients early about risks to time. Communicating risks can save everybody pain. If, say, bad weather or a design holdup threatens your program, then raise it immediately and work with the main contractor to try and mitigate it. Not only does it manage your risk, but it also preserves your reputation as a proactive and honest subcontractor that's working towards solutions instead of hiding issues until it's too late to do anything. Point number five is about safety and compliance. Larger projects will have more stringent safety requirements. This might mean more frequent audits, more detailed review of your risk assessments, and method statements with critique that potentially introduces cost to help mitigate safety issues.
Jacob Austin 00:17:58 Having a safety advisor when you're working for a big main contractor is an absolute must, and you need somebody competent to manage your safety when that person isn't on site. Main contractors also expect things like 100% compliance on CSCS cards and other competency schemes. If you're carrying out specialist work or you're working at height. Compliance also extends to things like environmental rules such as disposal of waste and the control of noise and dust. Bigger sites are more likely to get neighbor complaints and possibly things like social value commitments. Now, not all of those might fall on you as a subcontractor, but you should be aware of them. So essentially, when it comes to compliance, you need to scale up your professionalism to match the project. If you show up to a £5 million project operating like it's a 50 grand job with little paperwork and ad hoc safety, you're going to get into trouble quickly. So you need to do it right from the start point. Number six financial risk mitigation. This essentially comes down to insurance and bonding.
Jacob Austin 00:19:04 We'll cover this in more detail later. But it's worth noting here as a risk tool. Make sure you have appropriate insurances in place for the bigger job. As we've mentioned, the risks are bigger, so more than likely your cover needs to be bigger. Two main contractors will require you to hold certain minimum levels of insurance. For example, 5 or £10 million worth of public liability. If design is involved, then pie cover. They'll want you to demonstrate employers liability insurance, and they will do this by asking for your insurance certificates to check the indemnity limits. If yours are too low or they expire. Then the main contractor is likely to stop payment. In some cases. For big projects, your client might require a performance bond from you as a subcontractor, especially if the contract is substantial value to you. Performance funds are usually a guarantee, often 10% of the contract value that an insurer or bank provides, which the client can claim if you fail to perform. It's a way for them to mitigate the risk of you going bust or not finishing the job, but for you, it means potentially tying up some credit.
Jacob Austin 00:20:15 Your insurer will typically require some indemnity or collateral from you. So you need to know early if a bond is going to be required, and if so, make sure you can obtain one. You don't want to wait until the last second, only to find out you can't secure one. That could torpedo your opportunity after the hard work that you've put into it. Obtaining a bond requires you demonstrating to your surety, your financial ability and your stability. And that circles back to being financially ready to take on bigger work. One other thought that didn't quite make the list is professional advice. If you're in doubt, then spend a bit on consulting someone. It might be a lawyer for the contract terms or an independent SHS to run your estimates by. It might be a health and safety consultant for a specific safety plan for your job. Think about this on a job worth half £1 million, spending a few thousand on proper advice could save you tens of thousands or even more by avoiding mistakes. It's not quite an insurance policy, but it may be just as good as big contractors have whole departments for this kind of thing.
Jacob Austin 00:21:26 And as a growing subcontractor, you can outsource a lot of that expertise until you're big enough to have it on your own. You need to be risk aware, not fully risk averse. You can absolutely take on bigger projects successfully if you go into them with your eyes open and with plans in place for risks. Price them in and have strategies in place to manage them. That way, when the inevitable happens and something goes awry because in construction it finds a way to, you won't be caught like the rabbit in the headlights. You'll have plan B and potentially even plan C ready to go. So now that we've covered risks, I'm going to call it there for this week's episode, but we'll pick up next week to talk about the nuts and bolts of the commercial and contractual considerations that are unique to larger projects. The fine print side of scaling your subcontract business up. so I hope we've taken something useful away from today's show. And I hope you again will join me next week for another installment on growing your subcontract business.
Jacob Austin 00:22:29 My mission with the podcast here is to help the million SME subcontractors working out there in our industry. If you've taken some value away from today's show, I'd love it if you'd share the show and pass that value on somebody else who'd benefit from hearing it. And of course, subscribe yourself if you haven't already. Thanks for tuning in. Please do find us www.QS.Zone if you want to learn more. We're also on all your favorite socials again at @QS.zone, and I'll see you next week for the next installment. Thanks again! I've been Jacob Austin and you've been awesome.
