In the quest of drilling down, and find a service to specialize in, most will contemplate whether they should take a few large projects or many smaller projects. Most contractors will naturally gravitate towards the larger scale projects.
There’s more money, it gives you work for long periods at a time, you get to optimize for efficiency at one location and it’s less hassle.
A window and glass company doing a multi-million dollar project for a new commercial building, can essentially camp out there. Possibly they might have a temporary office on site. At minimum they’ll have a superintendent and many general laborers onsite there at all times to keep things going efficiently.
For many these large projects also come with a sense of ‘pride’ or achievement. There’s a bit of an ego stroking knowing that you’ve earned a multi-million dollar contract. If you ask a lot of contractors out there, they’ll tell you that working on smaller budget projects are a waste of time, they don’t think that there’s much profit, and they walk away in search of a bigger project.
However, I feel different. Think about it for a minute.
If the same window and glass contractor turns away one $7,500 project, it might not seem like a big deal. Turn away 30 of those projects in a year? Now, you’re looking at $225,000 in missed revenue and the opportunity to have 30 customers. Shaded by a large topline number the smaller projects, often have higher margin as well.
If you’re a contractor who turns away smaller projects, you should reconsider.
Here’s why.
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Smaller Projects Are Less Hassle.
When people spend more, they expect more. There’s more decision makers, more opinions, more egos, and just more things to deal with on a daily basis. When you work on smaller projects, you’re usually working with a residential homeowner. They’re much easier to communicate with, they’re more relatable, and the experience is often better.
You also have fewer employees to manage, fewer meetings to call, and fewer fires to put out due to mistakes that your employees make.
And then there’s insurance. Large projects usually require specific insurance policies, riders, or bonds. All of which require your attention (or upper level management).
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Smaller Projects Have Higher Margin.
The large scale projects often have a high top end number, but that doesn’t mean it flows right to your wallet. These projects are generally bid out to the max, and the hiring decision makers generally go with the cheapest.
There’s a saying that sticks in my head “whoever overlooks the most details gets the projects”. Here’s the thing in most cases, competing bidders just throw out a number to catch it. They don’t review it spec for spec and provide a reflective price. Ultimately this leads to problems down the road.
I experienced this first hand when I was bidding a project for condo balconies and handrails on a high rise building renovation. All 5 of General Contractor’s bidding contacted my company for a bid. Some of them forwarded over the 120 page bid packet for me to flesh out the details with the instructions to “bid what we can do”. Clearly they hadn’t even looked at the packet themselves. On the other hand, 2 of the other bidders had made a digestible trade specific packet specifically outlining what they wanted me to bid, indicating they were well organized and detail oriented.
On the same project had a direct line to a board member who was able to give me insight into the process. The 2 companies that had made the trade specific packets, were the highest bidder. They were around double the price of the lowest bidder. What happened? The low bidder got the project, and then went on to cause headache after headache for the client. Ultimately they got the boot and the project costed more than budgeted.
In other words, the large scale project massage the numbers into ‘going under’.
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Larger Projects Have Higher Price Sensitivity.
When a project has a high price, the more consideration is given to getting the best price. Consider a project estimated at $50,000 which would be a large chunk to most consumers. A 10% discount in price would result in $5,000 savings a material price difference. That $5,000 savings looks rather appealing despite levels of quality or specifications which may change. On a small project of $3,000, a 10% discount is only $300 and not likely to be a consideration.
For that reason large projects generally go out to bid, and most time is invested in hunting for the lowest bidder and they usually go to the lowest bidder
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Smaller Projects Will Exist Even If There is A Slowdown.
For the last few years the building marketing has been hot. That will slow down. We can’t build for ever and the large scale commercial projects will dry up, as will your customer base. Smaller projects will slow down, but not nearly as much, and if you’ve been specializing in smaller projects, you’ll have the nice built up and customer base carved out.
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Customers Expect More That What Is Contracted For (on larger projects).
When customers are spending a large chunk of money with you, they have expectations beyond the original scope of work (particularly residential customers). It doesn’t matter if you spell out the exact scope of work and manage expectations precisely, all customers will expect you to ‘throw in’ something extra. Granted all customers feel like they are spending a large chunk of money with you, but on smaller projects with higher margin, this isn’t really a problem. You can afford to do it, and chalk it up to ‘social capital’. On a large project with a slim margins, these freebies, can put you right into the red.
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Cashflow.
Imagine you have $3 million dollars in annual revenue coming from 4 projects. You’re operating with a 10% margin. One client doesn’t make their final payment of 50%. You’re now upside down. You’re feeling the pain. You’re losing sleep. With smaller projects you don’t have this to worry about. You’re spreading your bets over a larger basket. If one doesn’t pay you, there really isn’t much to sweat. Even if they do pay you, the larger clients like squeeze every penny they can out of you, and make you jump through hoops to get it.
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Bigger Teams Are More Inefficient
Jeff Bezos, the founder of Amazon, has a rule.
He calls it the two pizza rule.
With the two pizza rule, Jeff Bezos believes that the size of any team working on a project shouldn’t be any bigger than a group that can be fed with two pizzas. If you have a group that can’t be fed with two pizzas, you’re likely to start running into inefficiencies.
As you start scaling projects, you’re likely to run into three common problems:
- The Coordination Cost: Harvard psychologist J. Richard Hackman once famously said that “Big teams usually wind up just wasting everybody’s time. What really interested him about this is the amount of connections that one has to maintain when working with a big team on a big project. As you add more and more people to a team, you have an increased amount of connection points to maintain. With more connection points to maintain, you increase the likelihood of mismanagement, miscommunication, and misunderstandings.
- Motivation Cost: As you increase the size of your projects, you’ll need to increase the size of your teams. When you increase the size of your teams, you run the risk of employees experiencing the social loafing phenomenon. The idea behind social loafing is that, as group sizes grow, people feel less social pressure and less responsibility because it becomes more difficult for their performance to be measured due to the group size. Because of this, you’ll find that some employees may become completely disengaged with their work.
- Relational Loss: In addition to feeling like they can blend in more, your employees also likely experience a relational loss in larger teams as well. As teams and projects get bigger and bigger, employees start feeling like they’re getting less and less support. Because they don’t know who to reach out to for help, don’t feel that their team members are committed to the project, and that nobody has time to help, their performance begins to suffer.
Because of problems like these, I’ve found that keeping both my projects and my teams smaller often leads to increased productivity, fewer headaches on my end, and bigger profits. I’m able to communicate with my employees, they know who they can go to for support, and the teams are small enough that other people get annoyed if someone is slacking off. I’m able to work with customers that are respectable and loyal.
Asking The Group
I asked our private FB Group the question would you rather have ten $3,000 projects, or one $30,000 project?
One of the responses really stuck out:
10 Jobs @3k for sure. It’s easier to make 10 individual people feel like they got 4K of great service, trust, and care than it is to make one person feel like they got even close to 30K of the same things on a larger project.
That relates to another point, with the smaller projects you’ll get more and better reviews… which leads to more customers.
For me the answer is clear. Smaller projects in the $3,000 – $10,000 range are the target. Margins are higher, and customers are happier! What is better?
What has your experience been as a business owner? Have you worked on bigger budget projects? Do you find that smaller projects are easier to manage and complete successfully?
Let me know your thoughts in the comments section below!