Sound Investment Practices for Contractors
Although the economy is improving and electrical contractors are experiencing more work, be it residential, commercial, and industrial projects, the recent economic downturn has provided good lessons for owners and management to better plan investments for expansion and equipment purchases.
When is it best to purchase new equipment, buy a new building or expand an existing facility, and how can one improve purchasing systems for wiring, essential materials, and tools? Should one risk borrowing money on business projections that can change on a dime?
Gordon Stewart, general manager of Joe Swartz Electric Company Houston office (the Houston office has 75 employees and its Dallas office 30) stresses how the company, which specializes in installing electrical systems in new homes, does not borrow for business investments.
“We have a policy that we don’t want any debt,” he says. “We don’t buy something unless we can pay for it. In our market, with the ups and downs, if you bought your vehicles on credit and then you have a downturn, all of a sudden you could have 60 vehicles and only enough work for 40 of them and you are still paying for those other 20 vehicles. We’ve experienced downturns and we had to park trucks at our facility in the 1980s when the oil crunch hit Houston terribly.”
The firm has nearly 60 vehicles – and each one is replaced every six years. Funds are set aside for their replacement, and the same is true for other equipment.
“The system has worked out well for us and our bottom-line profit compared to other companies like us, is pretty good,” said Stewart.
Joe Swartz Electric will soon invest around $55,000 to upgrade its IT systems in order to continue to receive essential information from clients, be it for scheduling via computers, receiving blueprints, or ordering materials.
“Last year we did around 3,000 new homes and have done as many as 7,000 in our heyday,” he says. “We need to provide precise copies of the blueprints to our electricians. We need the programs that will allow us to communicate with the builders’ software.”
Having a more efficient inventory control system is an investment that Joe Swartz Electric takes seriously because it saves money in the long-term. The firm provides material orders that print out exactly which parts an electrician needs for a job.
“A few years back we had some wire theft going on inside our building,” says Stewart, “and now, based on our material order system, every day I know exactly how much wire should have gone out and it’s inventoried every day to make sure that it balances.”
He learned through experience that buying copper wiring cables should not be done via long-term contracts. This occurred when the price was really fluctuating.
“We made a six-month commitment to buy one million pounds of cable and the price of copper went up, so it was a good deal,” he says. “I did it a second time and copper went down, and was stuck buying this cable at a higher price than my competitors were.”
Because the housing market in Texas has often been based on rapid growth spurts, Joe Swartz Electric cannot afford to be caught in downturns.
“We had a 50 percent increase in 2012 over 2011 (going from 2,000 to 3,000 new homes) and that made for a severe manpower shortage,” says Stewart. “We just couldn’t find enough people to help out. We got through it, but it took a great deal of planning and juggling of resources. It’s times like these when having a positive attitude, even when it seems like the world is coming down on you, is crucial. It was a challenge, but it was a lot better than looking for work.”
Stewart would have preferred a smaller increase in volume, but says that the company got through due to good purchasing systems and having “tons of good people working for us.”
Robert Spellman, owner of the small, New Jersey-based Ranch River Electrical Services, LLC, believes contractors should carefully determine which investments are absolutely necessary in periods when the economy is down.
“I would love to invest in real estate,” he says, “but times are too tight. For me, major purchases that are essential are for vehicles. It is better to upgrade while there is still a value to your equipment. In this way you have fewer repairs and unforeseen breakdowns.”
Ranch River Electric operates three trucks and employs three full-time electricians, bringing on help when needed. The firm purchases new trucks about every seven years, similar to Stewart’s company.
Spellman uses a combination of loans and funds set aside for investments.
“It is better to save up for improvements such as computer equipment, hydraulic benders, and wire puller sets,” he says, “but I still take loans out because I cannot afford big dollar items without them – the threshold for me is $5,000. In many cases, a loan is better than a lease because having that piece of equipment could generate more business.”
One constant for Spellman is securing signed contracts. “The biggest mistake is, even if you have good experiences with a customer, always get a signed contract,” he says, “because when it comes to money, they will always try to get one over on you. This way there are no disputes.”
Bruce Seilhammer, group manager for SECCO’s electrical construction division, fully understands the issues facing small, medium, and large contractors in their investment determinations.
The Camp Hill, Pennsylvania, based firm with 100 employees (38 in electrical construction), recently made a significant investment to purchase wire pulling equipment that is “much more efficient” for set up and tear down and is safer to operate. Seilhammer stresses that equipment purchases can be necessary and that initial high costs can be recovered rapidly with labor savings.
“We’ll buy the large pulling rope component from the same company to make the potential efficiency complete,” says Seilhammer. “We have a large amount of big feeder pulls coming up this summer and we saw this on display at the IEC National Convention in Fort Worth.”
He also leads the discussion with the company’s core group to decide on a plan to expand the electrical construction division over a three-to-five-year period so SECCO can work on projects outside their traditional base.
For firms in a position to borrow money, Seilhammer explains that this an excellent time to do so, but that it also depends on the reasons behind the investment.
“Currently, smart money says to use the bank’s resources because interest rates are so low and to hang onto your own cash and preserve it for other expenditures that may arise,” he says, noting that 15-year mortgages are one option for a lower rate, while 30-year mortgages are also good because they allow you to “preserve cash and make lower payments and still pay it off early with no penalty if you choose.”
On vehicle life spans, Seilhammer is “confident that we can easily get 150,000 miles or more on a gas engine. After that we start to put them through the replacement cycle.”
For IT upgrades, he stresses contractors should do some research when choosing a platform that will sustain a system for many years.
It is also recommended to pay attention to economic indicators and economists that have a proven track record so that, “You can make those smart business ventures when the timing is right - I’d rather plan my destiny then wait for it to happen,” says Seilhammer. He believes that every business decision should be undertaken on “sustainability so that the company will be around for a long time. It is truly about making smart decisions and positioning yourself well.”
Grant Shmelzer, executive director of IEC Chesapeake, has been following investment trends by members and points out that some, due to the depressed real estate market, have used the opportunity to purchase new buildings in the last six months. This is possible, he says, because contractors with ready cash and access to low interest loans can take advantage of the situation.
But he notes that the biggest investment by far is for the training of current and new employees. This is being done to create a more productive workforce. For every dollar that a contractor devotes to training, there will be a return that greatly exceeds the original cost of training investment.
“There are also investments in different methods of increasing productivity, whether it be for prefabrication or for various types of equipment that are now available,” says Shmelzer.
Because the industry is experiencing the beginning of the retirement of baby boomers, contractors are struggling to keep their workforce and have enough people to facilitate jobs, Shmelzer explains.“Contractors are also reaching out to more software-oriented packages and recruiting different types of employees than what I have seen in the last 17 years – more in engineering, those with computer skills and people who can look at jobs differently.”
The decision to borrow more money for business investment depends on the status and situation of the company, but, “the big issue is what the interest rates are and working with different industry sectors for their funding,” says Shmelzer. “For many, taking out a loan is a difficult proposition because the economy is very uncertain, jobs get delayed, and contractors need to be more cognitive of what they have in their backlog,” he concludes.
There is no clear-cut answer when it comes to investing in your business, especially in the current, unstable economy. What may work for one contractor might not work as well for the other. That is why diligence, research, and listening to sound economic advice is highly encouraged before making a big investment.
Irwin Rapoport is a freelance writer based in Montreal, Canada. He has covered a variety of topics from architecture to recycling, and has dealt with many business and technical oriented issues.