The construction industry is so strong in Texas some have said the state bird should be a Crane. Demand for contractors will always be heavily dependent on Texas new construction. Fortunately the state's pro-business policies have kept the Texas building economy in as good or better condition than the rest of the nation, making the region attractive for all types of contractors.
Commercial and residential contracting is a fragmented industry consisting of a few large contractors and many local general contracting firms who are in turn supported by a great number of sub-contractors. Approximately 75% of the commercial contracting industry is in this category. Major types sub-contracting include concrete and masonry contracting, plumbing and HVAC contracting and electrical contractors.
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General Commercial Contracting
The General contractor maintains close ties with real estate developers, architects, engineering firms, and project information databases to acquire new business. Projects are generally awarded in one of 3 forms, which very the burden of risk between the purchaser and general contractor:
Guaranteed Maximum Cost - The purchaser pays all costs up to a defined point where the general contractor assumes all cost responsibility. If costs are below the maximum, both share in the savings.
Fixed Pricing - The contractor is given a fixed price and assumes all costs above that and keeps as profit all savings below it.
Cost plus Fee - The purchaser pays for all project costs including a negotiated fee for the general contractor's project management services.
In all cases, there is frequently some form of penalty for under performance.
Because competitive forces thin profit margins, estimating and project management are of paramount importance. One bad project can have devastating effects on the
business.
Concrete Contracting
With the exception of specialized applications, concrete contracting has been considered a commodity business with price the most important factor. Larger concrete contractors do not really have an advantage over smaller ones. About two-thirds of the business is residential which will depend heavily on new housing starts. Alternative markets can be found in highways, parking areas, sidewalks, streets, bridges, and specialized architecture.
Masonry Contracting
Masonry contractors are primarily building walls. There are very few applications for walls other than to build buildings, which make masonry contractors extremely dependent on real estate. Their projects are generally a part of a larger real estate development where they are engaged by a general contractor.
Plumbing and HVAC Contracting
Plumbing and HVAC contractor revenues are almost evenly split between commercial and residential work with larger companies generally working commercial and smaller contractors doing residential. Many Plumbing and HVAC contractors supplement revenues with sheet metal operations for the duct work. Commercial Plumbing and HVAC contractors split their work between installation and maintenance, while residential contractors are primarily maintenance. Profitability is heavily dependent upon sales volume. Technicians are all regulated by state certification boards.
Electrical Contracting
Electricians are often the most highly paid contractors at a construction site, making an national average of about $22/hour. Electrical contractors are highly skilled and may maintain several types of certifications, especially if they work in the computer and networking fields. The generally prefer fixed price contracts assuming both material and labor risk in exchange for higher gross margins. Repeat business is very important with 44% of industry work coming from existing customers. There has been some movement toward consolidation among electrical contractors because facility managers prefer working with contractors who can serve multiple markets.
Industry Benchmarks
Reasonable expense profiles as a percentage of sales for a commercial contracting business opportunity are:
Cost of Goods Sold: 45%
Labor Costs: 20%
Occupancy Costs: 15%
Pretax Profit: 20%
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