Tips For Contractors Entering New Markets

LOOKING FOR GREENER PASTURES? Get the Facts Before You Commit

Most contractors prefer to stay within their “comfort zone,” but with the ongoing industry slowdown, many are now considering moves they might not have contemplated in the past. One of these is to expand into a new geographic market.  A new market can offer fresh opportunities to keep crews working, especially if your own market has been particularly hard hit, but any geographic expansion entails risk. What’s more, the risks are multiplied when the expansion involves crossing state lines or working in new jurisdictions. There are many factors to consider before making the move into a brand new market.

WORKERS, WEATHER AND OTHER ISSUES

When entering a new market, you often must take on laborers, craftsmen and administrative personnel who have no training in the methods you use. You can expect to incur higher training and labor costs than you normally encounter in your home market. On the other hand, if you bring many of your own people with you, you will need to consider temporary housing costs and other relocation expenses. This additional overhead will need to be covered when bidding jobs in the new market.  If the new market is some distance from your home turf, you might also encounter different weather patterns, which could affect your ability to schedule and manage jobs efficiently. Even if you manage to avoid incurring direct contract penalties for missed deadlines, the indirect costs of crew downtime and weather-related scheduling problems can erode your profit.

Every market has its own unique administrative climate as well. Expect to encounter some new permitting and inspection issues, and remember that you will not have the benefit of those familiar faces at the local building department who can help you cut through the red tape. Even something as simple as scheduling an inspection might involve unfamiliar and cumbersome procedures.

Each of these challenges is further exacerbated by your reduced ability to directly monitor project management. One company recently won a contract in a new market and hired a local project manager to handle the job. By the time the owner realized the project manager was not up to the task, the modest profit he had projected for the job was all but wiped out.
Such a problem would have been caught much earlier if it had occurred in the company’s home market, where the owner could directly observe how jobs were being managed.

MAKING THE CALL

Before taking on a job in a new market, especially if it’s out-of-state, take time to think through all the angles. Here are some key questions to consider:

• Do you have a solid rationale for pursuing work in the new market?
• What do you bring to the market that local contractors don’t?
• Is there a connection to the new region that makes sense for you to pursue or a market niche you can fill?
• Have you formed a plan to enter the market?
• Do you have the personnel and processes in place to handle work in multiple markets?
• Have you researched the local subcontractor market?
• Would it be advisable to involve a local joint venture partner who knows the ropes and has local connections?
• Can your company survive unforeseen risks you will almost certainly encounter?
• Can you build enough profit margin and contingency into your bid to cover the mistakes you could make on your first couple of jobs?
• Have you considered the tax consequences? (See the accompanying sidebar.)

A PLAN FOR EXPANSION

After considering the risks, if you determine that the potential reward of a new market outweighs the possible downside, work out a careful and methodical expansion plan. Begin by making sure you have a strong infrastructure in place, including project management depth. At the very least, expect to upgrade your internal accounting controls. Then take it slowly. Don’t expand into more than one new region at a time, and stick to what you know. Limit your project scope in new markets to those skills that are within your core competency. If possible, integrate your project team to include some long-standing employees you bring with you, along with newly hired employees from the new market. In the same way, use a blend of some of your existing subcontractor relationships with the newer firms you will encounter. Ideally, you will be working with a repeat client who has expanded to the new market. If not, be sure to check out all new clients or project owners to assure yourself they are fair and equitable, with proven credit and a good reputation for prompt payment.

Our firm can help you evaluate new opportunities and plan your strategy for pursuing them. Give us a call to discuss the possibilities -  contact us here.