The Great Size Debate: What Really Counts in Contracting Business Success

In the contracting world, there's a pervasive myth that bigger always means better. This belief, deeply ingrained in the industry's psyche, suggests that a contracting business's size is a direct measure of its success and stability. However, this misconception can lead entrepreneurs astray, fostering unrealistic expectations and a lack of preparedness for the unique challenges each business size presents.

There are three types of trade contracting businesses:

• Sole Trader ($150,000 - $300,000): This business type serves the local community, working directly with local businesses and individuals or subcontracting to a more prominent contractor like a builder or a business in the same trade.

• Small to Medium Contractor ($2 million - $40 million): The Medium Contractor is characterized not just by turnover but also by its dependence on the owner. The owner's involvement and personality often define the key attributes of this business type.

• Large Contractor ($40 million+): Large Contractors are often spin-offs from other large businesses or may have grown steadily over decades. They have professional management teams that can organize the business for consistent delivery across various departments like Operations, Safety, Tendering/Sales, Delivery, Accounts, IT, Systems, and Recruitment. The critical staff in Large Contractors are specialists, whereas in smaller businesses, they are generalists.

Sole Traders, typically earning $150,000 - $300,000 annually, are focused on their local community or subcontractors. They usually engage in residential and small commercial work, primarily through referrals. Their significant expenses include materials, insurance, and vehicles, with low fixed costs allowing flexibility. However, their capacity limits their work, and they face challenges in balancing job execution and winning new work, with the risk of loneliness and dependency on the key person.

Small Contractors ($2-40 million, 10-50 people) are characterized by owner-dependency. Growth usually necessitates hiring a skilled project manager and/or salesperson/estimator, often from within. These businesses often rely on one key client, with the business owner closely monitoring all details. While there's potential for profit beyond a market-rate salary, the profit is often reinvested into the business. The challenge is maintaining low overheads while ensuring profitability during low-revenue months. It is difficult to operate without systems and support staff, but it is often difficult to afford these.

Large Contractors ($40m +) are often established from larger entities or have experienced steady growth over decades. They have professional management teams overseeing various departments, with key staff being specialists. While they offer stability and have a broader market reach, they may lack the efficiency of smaller businesses with lower margins. Success often depends on a coherent management team that fosters trust and maintains long-term contracts and clients. Scale can be a significant advantage when competing for large projects and long-term contracts.

Each business type has its pros and cons, with Sole Traders enjoying low fixed costs and flexibility but limited by personal capacity. Small Contractors have a supportive team but may struggle with key customer dependency and system affordability. Large Contractors offer stability and professional management but may face efficiency and margin challenges. Understanding these characteristics is crucial for entrepreneurs at different stages.

I often hear: “I need to grow my business.”

This belief probably stems from the notion that “bigger is better” – a larger business is perceived as more successful, stable, and profitable. However, this belief has led to a lack of understanding and appreciation for the unique challenges and opportunities presented at each stage of business growth.

• Sole traders might struggle with limited resources but enjoy closer relationships with their clients and greater flexibility in their operations. A sole trader can earn an excellent income and maintain flexibility and simplicity.

• Medium contractors often bare the weight of increased responsibilities and expectations without the extensive resources and systems available to larger counterparts.

• Large contractors, while enjoying more significant support, projects and profits, must navigate through complex management structures, potential bureaucracy, and the challenge of maintaining a cohesive company culture.

Bigger is not always the best for everyone

Understanding and acknowledging the distinct characteristics, needs, and value propositions of Sole Traders, Medium Contractors, and Large Contractors is crucial. This perspective shift allows for more informed, strategic decision-making and planning for each business owner.

Adopting a New Mindset

Start by objectively assessing your business’s current stage and acknowledging its strengths and limitations. Then, look at what strengths you bring to the business. Your individual ambitions are more important than the market opportunities that are available.

Instead of asking, “What sort of business do I want to build?” try another question:

How do I want to work and live?” What sort of lifestyle you want will influence what sort of business you should build. Then, you can strategically plan for growth by developing the necessary skills, systems, and structures required for the next level while also preparing for the unique challenges it presents.

Choose your own adventure.

Success should be measured by how well the business fits the owner's personal ambitions and lifestyle choices.