Many successful small businesses eventually decide to expand their operations by either purchasing, leasing, or building a new facility. In some instances, the business in question relocates its entire operation in the new facility. In other cases, the business may use the new facility to house excess inventory, maintain equipment, relieve office overcrowding, or open a new store.
For those companies that decide to expand via new construction, the experience can be an unsettling one, full of uncertainties. In fact, relatively few startup businesses choose construction as their mode of entry due to the higher costs associated with it and the greater length of time involved from the breaking ground stage to the day when the establishment opens its doors for business. Small- and mid-sized businesses, however, are far more likely to have the financial wherewithal to launch a new construction project. Such firms have a proven track record—which can help them with financing—and already-productive operations that bring in revenue that can be used to defray the costs of construction.
Owners of these businesses, however, should fully weigh the advantages and disadvantages of construction before moving forward. As the J.K. Lasser Institute indicated in How to Run a Small Business, "Building has the advantage of giving you the space and arrangements which meet your needs, providing you know specifically and objectively what the needs are. The obvious disadvantages are the delay in occupancy while land acquisition, design work, and building are going on, and the cost of overruns and mistakes caused by forecasting errors and planning oversights."
Certainly, there are risks associated with construction. But for small- and mid-sized business owners that choose this method of expansion and/or growth—and plan wisely both before, during, and after the construction phase—it can also mark the beginning of a bright new chapter in the company's history. As Dave Pelland stated in Risk Management, "Constructing or renovating a corporate facility can mark an important crossroads in the development of a growing company. Constructed properly, the new facility can allow the company to generate additional revenue, reduce expenses, or increase efficiency."
SECURING A BUILDING CONTRACTOR
Some sources of potential building contractors include professional association databases, referrals from architects or fellow small business owners, and a competitive bidding process. "It is important to find a contractor that can build in your specific industry, whether it's a restaurant, health care facility, industrial plant, or technology center," Amanda Strickland wrote in the Dallas Business Journal. "Contractors tend to have niches."
Pelland noted that small business owners seeking to secure a good building contractor should concentrate on three factors:
- The contractor's reputation in the community.
- The financial condition of the contractor.
- The status of currently uncompleted jobs by the contractor.
Warning signs can take many forms when examining the above issues. Is the contractor known for subcontracting out large percentages of the total construction work? Does the contractor have a history of clashes with subcontractors? How long has the contractor done business in the area? What percentage of jobs does he complete on schedule? Does his previous work experience adequately match the sort of renovation or construction that your company needs? Does the contractor have a backlog of projects that could hurt his ability to match your timetable? What sort of references can he provide? The answers to all of these questions can be either reassuring or cause for further investigation. In either case, the key is to make sure that you ask them.
Pelland and other analysts note that one way in which small business owners can learn the answers to some of these questions is by requiring bidding contractors to submit a surety bond, which is basically a three-party contract between the contractor, the project owner, and the underwriting surety company. Surety companies, noted Pelland, will make an extensive review of the construction company before issuing such a bond. In addition, if the contractor signs the bond, he is basically guaranteeing his ability to complete the project on which he is bidding.
MONITORING THE CONSTRUCTION PROCESS
"After the bidding process is completed," said Pelland, "the successful contractor should be asked to provide a performance bond, which guarantees that the project's contractual provisions will be carried out, and a payment bond, which certifies that suppliers and subcontractors will be paid." Ensuring that the contractor and all of his subcontractors have adequate insurance (workers' compensation, general and umbrella liability, equipment, builders' risk, etc.) to address problems is another key to attaining piece of mind for the small business owner. Finally, the project owner needs to make sure that he or she continuously monitors the performance of the contractor.
FURTHER READING:
J.K. Lasser Institute. How to Run a Small Business. 7th ed. New York: McGraw-Hill, 1994.
Lorenz, Daniel E. "Reduce Construction Risk with Management Systems." Memphis Business Journal. October 20, 2000.
Malpas, William. "Management: Minimizing Construction Risks." Progressive Architecture. June 1990.
Pelland, Dave. "Creating Buildings, Not Problems: Managing Construction Risk Effectively." Risk Management. November 1996.
Strickland, Amanda. "Choosing the Right Contractor for Your Project." Dallas Business Journal. April 7, 2000.
