Why and How Construction Companies Should Add a Recurring Revenue Business Model
“I have too many streams of income,” said no one ever. When we think of construction companies and contractors, we know that they’re only as good as their next contract. And while things have been generally busy for the last few years, any contractor with more than a few years in the industry slow-downs can be brutal.
We’re talking close-the-doors, shut-off-the-lights brutal.
Like most of construction’s biggest challenges, this isn’t really an industry-specific problem. Many other industries have to worry about booms and busts. But some industries have learned to keep things balanced with subscription, service, and recurring revenue—and many experts think the construction industry should do the same.
Here’s why and how construction companies should add a recurring revenue business model.
Why Recurring Revenue is Important
Most contractors are chasing the next big job. It likely hasn’t occurred to them that there’s a lot of value in having a stable base of smaller jobs in the form of a subscription service or repair division. Here are a few reasons why.
Cash Flow Stability
Most construction pros would agree that there’s no such thing as too much available cash. Branching out into service- or subscription-based models can help keep cash on hand.
In general, these businesses cash flow well. There are generally less materials to purchase and service hour rates are easier to calculate accurately. And, since service-based projects are generally much, much smaller, cash will roll in more often (albeit in smaller amounts).
Mike Trammell, an accounting expert at Forvis, says private equity investors are looking for this stability. According to Mike, “On the subscription and the service line, that’s why private equity is getting into the construction field. They can take heavy service companies, whether it be again, mechanical or electrical maintenance on pressure vessels. Private equity won’t say long stream of revenue. They’re getting into construction not because they love construction risk, but because they want recurring revenue.”
Seasonal slowdowns are tough to deal with. Sure, they give the crew time to handle some maintenance and repairs on equipment, but after those repairs wrap, layoffs and seasonal downsizing are common. But, with the right service-based business, companies can keep more employees working and producing recurring revenue.
Client Relationship Management
One of the best ways for construction companies to find recurring revenue customers is to turn to the customers they already have. Serving companies and clients whom they’ve already worked for is a great way to further build those relationships so the contractor is top-of-mind when the customer wants to take on a larger project again.
The same applies for new customers. If they appreciate the work and attention to detail they receive through their subscription services, they’ll remember the contractor when it’s time to start their next endeavor.
Better Resource Utilization
There is an aspect of starting an additional service that just makes sense: the equipment and personnel are already in place. The tools, machines, operators, and tradespeople are available. It makes sense to use them to offer more services that provide cash flow and stability. If the endeavor requires additional equipment purchases or other expenditures, it doesn’t make quite as much sense (though it may still be a smart move).
Business models with recurring revenue streams are usually far more exciting for potential investors than those without. These businesses show stability, better cash flow, and owners with higher business acumen. These companies are generally seen as having lower risks and higher rewards—a major benefit when it comes to getting a loan, when looking for investors in a difficult market, or even when it’s time to exit.
Nick Grandy, a financial consulting manager at RSM, says, “If you don’t want to go an ESOP route, can you sell to private equity? Private equity values a couple of different things a little bit greater than others. So they value that recurring service model.”
How Companies Can Create Recurring Revenue Divisions
Whether it's for the cash flow or the valuation, expanding into recurring revenue platforms makes sense. But it might not seem easy to get started. Here are some examples of how contractors can add recurring revenue streams or simply expand their business to new customers.
An easy way for contractors to add a recurring revenue branch is to offer repair services for previous clients. This works best for homebuilders and renovation companies. They can contact customers they completed work for five or so years ago and sell repair services to fix the things that have broken since the build.
These prior customers’ homes likely experienced some sort of damage in the last few years. Since they know and trust the company, they might hire them straight away without even shopping for quotes. As this branch of the company grows, it can take on new clients and continue to focus on recurring revenue.
According to Mike Trammell, “About the opportunity to enter more of the service side of things . . . private equity tends to place a greater value on that because that’s recurring billing. You probably don’t need to work very hard to win that client and win that work, and there probably isn’t a huge amount of risk. So that work tends to be more favorable.”
Other sensible services that construction contractors can offer when things are slow are season services like snow removal and salting. Submitting bids to local commercial businesses could lead to some relatively lucrative contracts. These pros can get paid to clear the parking lots and even move the piles of snow when they get too high, and they likely have the equipment required (though they might have to add a plow or two).
Disaster restoration can be a great business to get into. Floods, fires, and other disasters can put people out of their homes, and restoration contractors help put the pieces back together. Contractors that go this route will have to become comfortable working with insurance companies, but the learning curve isn’t steep and there is certainly money to be made.
Consider taking a page from the electrical or plumbing industries’ books. These industries install electrical or plumbing systems, but they also respond to emergencies like generator failures and plumbing stoppages. Survey your strengths to determine which types of emergencies your crew can handle and which licenses you’ll need, but adding emergency services is a great way to keep money rolling in, especially since they pay very well.
Another point to consider here is offering emergency services as a subscription of sorts. Companies can pay a set amount each month to guarantee emergency response services. This can be very lucrative on a large scale, as most companies will only need the company once or twice a year.
Home inspections are another great way to add some revenue to the company’s bottom line. Home inspectors need to attend classes and shadow experienced inspectors at first, but maintaining a few licenses on the staff should be fairly easy and allows the company to branch out. If repairs are needed, homeowners are likely to remember the company and give it a call.
Customization, Renovations, and Upgrades
There is a lot of money to be made by simply improving someone’s current living situation. Offering upgrade services to existing customers such as millwork installation, flooring, or exterior structures can bring in extra cash. Renovating spaces and constructing additions, garages, and other home improvements might not be big projects, but they’re often quite profitable.
Residential and Rental Divisions
Many commercial contractors stick to commercial and industrial projects. But, in some cases, adding a residential-only arm could provide some stability, providing building services for a portion of the population the firm hasn’t tapped yet.
Another opportunity could be property holding and rental branches. Depending on the circumstances, some construction companies may choose to purchase, renovate, and rent buildings. In many cases, this requires forming a holding company separate from the majority of the construction company, but can provide stable, reliable income throughout the year.
Eco-Friendly and Home Tech Services
There is a keener eye on eco-friendly homes and people are turning to technology to help them achieve it. As such, contractors that offer eco-friendly tech installation and integration could stand to make a lot of money. These pros would connect smart thermostats, digital voice assistants, alarm systems, entertainment technology, and other cutting-edge technology as an additional recurring revenue stream.
Property Maintenance Subscriptions
Property maintenance subscriptions are a great way to create recurring revenue that’s generally very safe. Under this model, the contractor pays a set amount at the beginning of the month, and throughout the month, the contractor performs property maintenance tasks like clean-ups and grass cutting.
If the weather is wet or the grass isn’t growing, the contractor still gets paid regardless of how many (or few) times they actually performed the work. This is similar to a retainer, but the contractor outlines all of the work they’re willing to do for the subscription amount. This prevents the contractor from being taken advantage of and sets expectations from the start.
Recurring Revenue Could Be a Key To Success in 2024
It’s hard to argue that diversifying income isn’t becoming increasingly important. The stability that a recurring revenue stream can provide not only keeps the lights on but also indicates to investors that your company is worth the risk. Whether it’s a repair division, a remodeling division, or a property maintenance subscription, offering additional services allows companies to take advantage of resources they already have to make more money, assuring success in 2024 and beyond.