In the current economic climate, many construction firms are eager to explore new business strategies. Some expand their range of services and project types to existing clients. Others capitalize on their market reputation to add new clients in familiar settings. Still others look to expand into new territories both here and abroad. Of the three, geographic expansion carries the most risk. While entering new markets has its challenges, there are a number of things construction companies can do to mitigate their risk.
Challenges in Market Entry
Successful firms have deep local knowledge and connections. They know their local economy, business practices, politics, regulatory environment, unions, labor markets, subcontractors, suppliers, and competitors. They’re prominent members of the communities they serve. However, once outside their territorial comfort zones, it’s a whole new ballgame.
When factored into the planning process, the technical aspects of the expansion can be addressed with relative ease. Before venturing into new territory, your company must be diligent in gaining a thorough understanding of the regional and local building codes, prevailing safety standards, labor and wage laws, and sales and use tax law.
It’s the people side of the equation that can get messy.
Outside firms do not have the benefit of experience with local subcontractors. They don’t know which employ sound business practices or possess the internal standards and financial strength to produce quality work on time and within budget. They don’t have established processes to ensure a smooth working relationship and address issues as they arise. They don’t have a shared history of mutually beneficial work to motivate “walking the extra mile” when the situation demands it. Given the current shortages in skilled labor, they may be pressed to take on less experienced workers which increases project risk.
The firm’s internal resources may find themselves stretched thin to accommodate the expansion. Seasoned employees may be asked to take temporary assignments away from home to manage the local expansion while instituting the firm’s culture and business practices in the new environment. “Home office” employees may find themselves working extra hours to establish relationships with new suppliers and build the operating infrastructure to support the remote work teams.
If the planned expansion extends beyond the U.S. borders, all of the foregoing challenges become all the more acute. Navigating time zones, language barriers and currency exchange adds further risk.
And yet, where there’s a will and a clear profit potential, there’s a way.
Market Entry Strategies to Mitigate Risk
Conduct Due Diligence
Take stock of all the factors that have influenced your success in familiar markets: economic and political trends, client behaviors and buying habits, competitive forces, workforce dynamics, and the regulatory environment (building codes, labor laws, sales and use tax laws, working conditions, environmental protection). If operating outside the U.S., consider regional stability as well as in-country rules regarding foreign investment, taxation, and restrictions or penalties associated with transferring profits to the U.S. Fill knowledge gaps with local experts. In other words: Look before you leap!
Make Provisions for Staffing
Identify the people who will serve as the leadership team for the new business venture. If they will be expected to relocate temporarily or permanently, establish appropriate policies for compensation and expenses that can be leveraged in future engagements. Consider how you’ll fill their current roles and responsibilities, and get a handle on the local labor markets to assess your prospects for securing skilled, experienced labor. If it’s likely that you’ll draw upon less seasoned talent, factor in the extra time and expense for training and supervision.
Know Your Cost Structure
Assign labor costs consistent with the staffing decisions noted above. Engage your procurement team to explore options for providing materials and equipment. Warning: Costs may differ widely by location! Discuss coverage and rates with insurance and surety companies that operate in the target area. If operating outside the U.S., investigate currency conversion rates. Make sure your development team understands how these inputs affect the bidding process.
Consider Options for Market Entry
Look for ways to put your “toe in the water” and gain experience in the new territory before committing to a permanent presence. A business development team could spend time investigating the market and its potential before committing resources to enter it. A temporary assignment for seasoned employees could provide an income stream while building expertise in the local market. A joint venture with a reputable partner might make sense if you share a common framework with respect to workforce management, quality, safety, and risk.
Bring your current employees up to speed on your plans and the rationale behind your decisions. Be open to their feedback, which could save you time and money later on. Let them know how the extra demands placed upon them contribute to a long-term vision in which they can reap their due measure of reward and job satisfaction.
Business expansion is the natural outgrowth of a successful firm, whether it includes adding new clients, expanding services to existing clients, or entering new markets. With an appropriate amount of planning and discernment, it can elevate the firm’s market presence, reputation and financial strength to the benefit of the owners, employees, clients and communities it serves.
Meet the Author
Joe Schneid, CPA, CCIFP®
Aldrich CPAs + Advisors LLP
Joe Schneid has more than 30 years of experience in the built industry providing transaction planning, tax planning and compliance services. Joe works with businesses, ranging from architects through operating real estate entities. Architects, engineers, contractors, developers and real estate holding companies have all benefited from relationships with Joe. He works across the country assisting with…
- Business succession planning
- Strategic tax planning and compliance
- Certified Construction Industry Financial Professional
- Certified Public Accountant