Commercial Construction Business Plan



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Commercial Construction Business Plan Hard Hats Construction Executive Summary Hard Hats Construction (HHC) is a medium-sized commercial construction company with offices in Seattle, Portland, San Francisco, and Los Angeles. HHC has been fortunate to be awarded some initial sizable contracts for several projects among its four locations. Local contacts and competitive pricing have propelled rapid growth of this new company. 1.1 Mission Hard Hats Construction aims to provide high quality craftsmanship in the commercial construction industry at a very competitive cost. It is the goal of the company to achieve a greater reputation for quality and on-time delivery than the current competitors in the Pacific Northwest region. HHC is committed to delivering on-time completion. HHC maintains high integrity on all promised timelines and quality assurances. 1.2 Keys to Success HHC's keys to success are comprised of the following factors:  Many relationships among the commercial real estate community.  Impeccable and unique workmanship.  Retaining high-quality, on-site management.  Ensuring estimates on price and completion dates are as accurate as possible.  Track the progress of each construction project to insure the scope cost and schedule of each is maintained. Company Summary Hard Hats Construction is a start-up managed by two partners who have 30 years of combined experience in the commercial construction business. With the extensive contacts that the two partners have in the commercial real estate business, it is estimated that the company will have a significant number of contracts within the first three years. These two partners represent sales/management, and finance/administration areas, respectively. The company will be seeking a $4.2 million Small Business Association (SBA) loan to cover the purchase of long-term assets, office setup, and cash requirements. 2.1 Company Ownership Hard Hats Construction will exist as an equal partnership between the principles: Jack Daniels and Hank Foreman. As one of the company's goals is to focus on high quality workmanship, retaining as much talent as possible is crucial. Therefore, the company plans to add more partners to the firm as opportunities arise. 2.2 Company Background Jack Daniels and Hank Foreman have known each other for many years. Mr. Daniels began working in the construction business immediately out of high school, and has proved himself as a equipment operator, construction foreman, and project manager. Mr. Foreman, after graduating from college with a degree in civil engineering, began work in the construction business with the North Carolina state highway system. After moving to San Francisco, Mr. Foreman received an MBA and worked for several construction firms in Oregon and Northern California as a general manager and financial analyst. Over the years, both individuals realized that the Pacific Northwest lacked a commercial construction company that could consistently provide high quality work and on-time delivery. With this in mind, and wishing to capitalize on this opportunity, the two investors have formed Hard Hats Construction. 2.3 Start-up Summary The following chart and table show projected initial start-up costs for the firm. Start-up Requirements Start-up Expenses Legal Office Setup Rent Insurance Utilities Other Total Start-up Expenses Start-up Assets Cash Required Other Current Assets Long-term Assets Total Assets Total Requirements $5,000 $500,000 $12,000 $5,000 $1,200 $1,000 $524,200 $1,500,000 $100,000 $2,500,000 $4,100,000 $4,624,200 Start-up Funding Start-up Expenses to Fund Start-up Assets to Fund Total Funding Required Assets Non-cash Assets from Start-up Cash Requirements from Start-up Additional Cash Raised Cash Balance on Starting Date Total Assets Liabilities and Capital Liabilities Current Borrowing Long-term Liabilities Accounts Payable (Outstanding Bills) Other Current Liabilities (interest-free) Total Liabilities Capital Planned Investment Investor 1 Investor 2 Other Additional Investment Requirement Total Planned Investment Loss at Start-up (Start-up Expenses) Total Capital Total Capital and Liabilities Total Funding Services $524,200 $4,100,000 $4,624,200 $2,600,000 $1,500,000 $0 $1,500,000 $4,100,000 $0 $4,233,200 $1,000 $0 $4,234,200 $360,000 $30,000 $0 $0 $390,000 ($524,200) ($134,200) $4,100,000 $4,624,200 HHC provides commercial construction services, with a primary focus on large urban structure development. This includes the following types of construction:        Office buildings Strip malls Commercial parking lots and garages Apartment complexes Restaurants Schools Government contracts HHC will provide the installation of all required business/operation systems such as electrical, lighting, refrigeration, heating, data information systems, etc. HHC will also provide wrecking services as a part of building re-construction projects. HHC has been awarded a few government contracts since its inception and hopes to increase this market segment. Market Analysis Summary The total market demand in the U.S. commercial construction industry sector is huge. It is estimated that the total demand was $173 billion for fiscal year 1999. For the California, Washington, and Oregon area, the total demand is $24.6 billion. Even with HHC's expected large-scale growth due to its contacts and reputation, the market is so large that, by the end of 2003, HHC's projected market share for the Pacific Northwest will only be one quarter of one percent. HHC has a focus on meeting the development demand for urban located properties. HHC will hope to bid on government projects as resources permit. The Market Analysis chart and table show the estimated total number of potential customers in the three states HHC will be operating in. The majority of the company's revenue lies on commercial contracts. This market sector provides significant growth and ample projects for the future. Market Analysis Year 1 Year 2 Year 3 Year 4 Year 5 Potential Customers Growth CAGR Commercial Buildings 9% 12,000 13,080 14,257 15,540 16,939 9.00% Government Contracts 5% 5,500 5,775 6,064 6,367 6,685 5.00% Other 0% 0 0 0 0 0 0.00% Total 7.79% 17,500 18,855 20,321 21,907 23,624 7.79% 4.1 Market Segmentation HHC will focus on two market sub-segments of the commercial construction industry segment. The first will be the urban projects segment and the second will be the local, state, and federal government contracts segments. Urban Projects HHC focuses on construction and wreckage/re-construction projects within urban locations. Large office buildings make up a majority of these projects. HHC desires to establish and maintain long-term relationships with clients to develop a referral network and future repeated business. Recent industry trends seem to suggest that this segment will retain a relatively high growth rate for the foreseeable future. Government Contract Projects Government contract projects make up approximately 15% of revenues. High visibility and competitive bids are critical to capture this segment of the market. One of the reasons why this segment is attractive is its relative stability. Contracts from these sources are not dependent on the current market conditions and will provide revenue even during an economic downturn. 4.2 Target Market Segment Strategy HHC will focus on its target market, the large urban areas, by maintaining and increasing its relationship base with commercial real estate clientele. By offering a unique and impeccable level of workmanship along with competitive costs, HHC will be able to procure and maintain a healthy level of market share. 4.3 Market Needs As companies located in downtown urban areas are continually modernizing and growing, the demand for commercial construction services has steadily increased over the past 20 years. Currently this growth stands at nine percent. The need for uniquely-savvy commercial construction services is significant, as companies seek to maintain a professional image. 4.4 Service Business Analysis The construction industry is a capital-intensive field that requires large investments in longterm assets such as bulldozers, cranes, cement mixers, etc. In addition, variable material costs such as I-beams, roofing tiles, paint, etc., are also very high. This means that for the commercial construction segment, which focuses on large scope projects, that entry/exit into the industry is quite difficult. The industry is fragmented with a vast number of very small companies. Most do not employ more than 40 individuals. HHC will be employing a significantly larger number beyond its first year in operation, and will therefore have the ability to bid for the largest and most profitable contracts. Due to such large number of companies and the intense competition, margins are relatively low for the construction business as a whole. For the commercial segment, the margins are somewhat higher due to the high cost of construction. Because each building is a unique product, the costs are very high relative to other assets, and the clients need such assets at a specific time, the company's reputation in quality, ontime delivery, and cost are the crucial elements used in assessing a contractor. The construction business is also seasonal, with the largest number of contracts arising in the spring and summer. The number starts to decrease in the early fall, and the drop continues through the winter months of December through February, which are the low point during any year. In the Pacific Northwest, the major competitors in the commercial segment are Cree Construction, Kirtley-Cole, and Wilder Construction. Each of these companies focuses on the same type of clientele as HHC. However, HHC offers more services, such as paving, road/highway construction, and environmental construction. With the exception of KirtleyCole, each of these competitors has such a broad range of customers that a more focused company, such as HHC, will be able to defeat the competition through more attention to client needs. 4.5 Competition and Buying Patterns There are over 550 commercial contractors nationwide. HHC will primarily compete on the basis of its level of workmanship and relationships among the commercial real estate community. Large competitors are providers of services to a broad range of commercial, industrial, utility, and institutional customers, typically through principal operating subsidiaries and joint ventures. The specialties of our competitors are:       Design, installation, integration, start-up, operation, and maintenance of distribution systems for electrical power. Lighting systems. Low-voltage systems, such as fire alarm, security, communications and process control systems. Voice and data communications systems. Heating, ventilation, air conditioning, refrigeration and clean-room process ventilation systems. Plumbing, process, and high-purity piping systems. Some competitors also provide services needed to support the operation of customers' facilities. These services include:     Site-based operations and maintenance. Mobile maintenance and service. Mall modification and retrofit projects. Consulting, program development, and management for energy systems and the maintenance of facilities. Facilities services are being provided to a wide range of commercial, industrial, utility, and institutional facilities, often including those at which construction services have been provided, and others at which construction services were provided by other contractors. Facilities services are frequently combined to provide integrated service packages, which include mechanical and electrical services. Mechanical and electrical construction services and facilities services are typically offered directly to corporations, municipalities, and other governmental entities, owners/developers and tenants of buildings. Companies are also providing these services indirectly by acting as subcontractors to construction managers, general contractors, systems suppliers and other subcontractors. While the facilities services business is also highly fragmented, a number of large corporations, such as Johnson Controls, Inc. and the Fluor Corporation, are engaged in this field, and there are other companies seeking to consolidate facilities services businesses. Strategy and Implementation Summary HHC will succeed by providing high quality craftsmanship at a competitive cost, within initially promised timelines. To implement this strategy, HHC will seek to create a highly efficient, rapidly responsive project implementation and tracking department within each office. By forming close, long-term ties with its suppliers, this will create sourcing efficiencies that will minimize supply delays. It is planned that each of the four offices will be provided with equipment, maintenance, design, and infrastructure so as to make them each self sufficient profit centers. A bonus and profit sharing system, with the benefits clearly defined for everyone, will be used to promote the company's goals at all levels. Finally, the company will seek to institute an ongoing training program to promote the most promising people in the company and to retain a standard of excellence in workmanship. 5.1 Competitive Edge HHC's competitive edges are its book of contacts which make up a healthy referral network, and its competitive cost on projects. 5.2 Sales Strategy As the table shows, HHC plans to deliver contract revenue of approximately $40 million in the first year, $51 million in the second year, and $65 million in the third year of the plan. Sales Forecast Year 1 Unit Sales Commercial Buildings Government Contracts Other Total Unit Sales Unit Prices Commercial Buildings Government Contracts Other Sales Commercial Buildings Government Contracts Other Total Sales Direct Unit Costs Commercial Buildings Government Contracts Other Direct Cost of Sales Commercial Buildings Government Contracts Other Subtotal Direct Cost of Sales 19 6 0 25 Year 1 $2,000,000.00 $500,000.00 $0.00 $37,484,763 $3,050,000 $0 $40,534,763 Year 1 $900,000.00 $250,000.00 $0.00 $16,868,143 $1,525,000 $0 $18,393,143 Year 2 22 7 0 29 Year 2 $2,200,000.00 $550,000.00 $0.00 $47,418,225 $3,850,000 $0 $51,268,225 Year 2 $945,000.00 $262,500.00 $0.00 $20,368,283 $1,837,500 $0 $22,205,783 Year 3 25 9 0 34 Year 3 $2,420,000.00 $605,000.00 $0.00 $59,984,054 $5,445,000 $0 $65,429,054 Year 3 $992,250.00 $275,625.00 $0.00 $24,594,702 $2,480,625 $0 $27,075,327 Management Summary Jack Daniels, president, and Hank Foreman, vice president and CFO have 30 combined years of experience at all levels within the commercial construction industry. Both have extensive experience as Lead Foreman, and have been participants in many major commercial projects of varying types. 6.1 Personnel Plan As the personnel plan shows, HHC expects to make gradual investments in construction crew personnel. We intend to grow gradually, to reduce the chance of becoming too large too quick. The company will expand the crew as contracts require. The crew of Hard Hats Construction is formulated of individuals with a talent for craftsmanship. The company prides itself on only hiring experienced tradespersons for its crews. The quality assurance guarantees are provided, not only by the company, but by each individual working on the project. Personnel Plan Owners Office personnel Foremen Crew Workers Other Total People Total Payroll Year 1 $120,000 $1,399,800 $240,000 $1,800,000 $0 100 $3,559,800 Year 2 $126,000 $1,469,790 $252,000 $1,890,000 $0 113 $3,737,790 Year 3 $132,300 $1,543,280 $264,600 $1,984,500 $0 127 $3,924,680 Financial Plan HHC expects to raise $390,000 as its own capital, and to borrow $4.2 million guaranteed by the SBA as a ten-year loan. This provides the bulk of the current financing required for company growth. 7.1 Break-even Analysis HHC's break-even analysis is based on the average of the first-year figures for total sales by project, and by operating expenses. These are presented as per-project revenue, perproject cost, and fixed costs. These conservative assumptions make for a more accurate estimate of real risk. Break-even Analysis Monthly Units Break-even Monthly Revenue Break-even Assumptions: Average Per-Unit Revenue Average Per-Unit Variable Cost Estimated Monthly Fixed Cost 1 $1,966,721 $1,621,390.50 $735,725.73 $1,074,298 Pro Forma Balance Sheet Year 1 Assets Current Assets Cash Other Current Assets Total Current Assets Long-term Assets Long-term Assets Accumulated Depreciation Total Long-term Assets Total Assets Liabilities and Capital Current Liabilities Accounts Payable Current Borrowing Year 2 Year 3 $6,817,122 $100,000 $6,917,122 $4,600,000 $300,000 $4,300,000 $11,217,122 Year 1 $1,167,159 $0 $18,293,084 $100,000 $18,393,084 $8,200,000 $1,400,000 $6,800,000 $25,193,084 Year 2 $2,766,028 $0 $33,561,391 $100,000 $33,661,391 $13,500,000 $3,000,000 $10,500,000 $44,161,391 Year 3 $3,364,481 $0 Other Current Liabilities Subtotal Current Liabilities Long-term Liabilities Total Liabilities Paid-in Capital Retained Earnings Earnings Total Capital Total Liabilities and Capital Net Worth $0 $1,167,159 $4,233,200 $5,400,359 $390,000 ($1,193,284) $6,620,047 $5,816,763 $11,217,122 $5,816,763 $0 $2,766,028 $3,833,200 $6,599,228 $390,000 $5,426,763 $12,777,092 $18,593,855 $25,193,084 $18,593,855 $0 $3,364,481 $3,233,200 $6,597,681 $390,000 $18,203,855 $18,969,854 $37,563,710 $44,161,391 $37,563,710 7.3 Projected Profit and Loss As the Highlights chart shows below, HHC's sales are expected to increase by $10,000,000 each year, with a net gain of $6,000,000 per year. The following Profit and Loss table demonstrates HHC's expectation of continuing steady growth over the next three years of operation. Pro Forma Profit and Loss Sales Direct Cost of Sales Other Total Cost of Sales Gross Margin Gross Margin % Expenses Payroll Sales and Marketing and Other Expenses Depreciation Utilities Payroll Taxes Other Total Operating Expenses Profit Before Interest and Taxes EBITDA Year 1 $40,534,763 $18,393,143 $0 $18,393,143 $22,141,619 54.62% $3,559,800 $8,489,400 $300,000 $8,400 $533,970 $0 $12,891,570 $9,250,049 $9,550,049 Year 2 $51,268,225 $22,205,783 $0 $22,205,783 $29,062,442 56.69% $3,737,790 $6,215,720 $1,100,000 $8,820 $560,669 $0 $11,622,999 $17,439,443 $18,539,443 Year 3 $65,429,054 $27,075,327 $0 $27,075,327 $38,353,728 58.62% $3,924,680 $6,584,626 $1,600,000 $9,261 $588,702 $0 $12,707,268 $25,646,459 $27,246,459 Interest Expense Taxes Incurred Net Profit Net Profit/Sales $423,320 $2,206,682 $6,620,047 16.33% $403,320 $4,259,031 $12,777,092 24.92% $353,320 $6,323,285 $18,969,854 28.99% 7.4 Projected Cash Flow The cash flow projection shows that provisions for ongoing expenses are adequate to meet HHC's needs as the business generates sufficient cash flow to support operations. As the construction business is seasonal, the company will build up cash reserves during the busy summer months to cover cash flow decreases during the slower winter months. It is estimated that the company will aggressively seek to pay off it's SBA loan sooner than the required ten-year period. This is reflected in the higher principle payments in year 20022003. Pro Forma Cash Flow Year 1 Cash Received Cash from Operations Cash Sales Subtotal Cash from Operations Additional Cash Received Sales Tax, VAT, HST/GST Received New Current Borrowing New Other Liabilities (interest-free) New Long-term Liabilities Sales of Other Current Assets Sales of Long-term Assets New Investment Received Subtotal Cash Received Expenditures Expenditures from Operations Cash Spending Bill Payments Subtotal Spent on Operations Additional Cash Spent Sales Tax, VAT, HST/GST Paid Year 2 Year 3 $40,534,763 $40,534,763 $51,268,225 $51,268,225 $65,429,054 $65,429,054 $0 $0 $0 $0 $0 $0 $0 $40,534,763 Year 1 $3,559,800 $28,888,757 $32,448,557 $0 $0 $0 $0 $0 $0 $0 $0 $51,268,225 Year 2 $3,737,790 $32,054,473 $35,792,263 $0 $0 $0 $0 $0 $0 $0 $0 $65,429,054 Year 3 $3,924,680 $40,336,067 $44,260,747 $0 Out Principal Repayment of Current Borrowing Other Liabilities Principal Repayment Long-term Liabilities Principal Repayment Purchase Other Current Assets Purchase Long-term Assets Dividends Subtotal Cash Spent Net Cash Flow Cash Balance $0 $0 $0 $0 $2,100,000 $669,084 $35,217,641 $5,317,122 $6,817,122 $0 $0 $400,000 $0 $3,600,000 $0 $39,792,263 $11,475,962 $18,293,084 $0 $0 $600,000 $0 $5,300,000 $0 $50,160,747 $15,268,307 $33,561,391 7.5 Business Ratios The following table presents important ratios from the construction industry, as determined by the Standard Industry Classification (SIC) Index #1542, Non-residential Construction. Ratio Analysis Sales Growth Percent of Total Assets Other Current Assets Total Current Assets Long-term Assets Total Assets Current Liabilities Long-term Liabilities Total Liabilities Net Worth Percent of Sales Sales Gross Margin Selling, General & Administrative Expenses Advertising Expenses Profit Before Interest and Taxes Main Ratios Current Quick Total Debt to Total Assets Pre-tax Return on Net Worth Pre-tax Return on Assets Additional Ratios Net Profit Margin Return on Equity Activity Ratios Accounts Payable Turnover Payment Days Total Asset Turnover Debt Ratios Debt to Net Worth Current Liab. to Liab. Liquidity Ratios Net Working Capital Year 1 0.00% 0.89% 61.67% 38.33% 100.00% 10.41% 37.74% 48.14% 51.86% 100.00% 54.62% 38.29% 0.15% 22.82% 5.93 5.93 48.14% 151.75% 78.69% Year 1 16.33% 113.81% 25.75 27 3.61 0.93 0.22 $5,749,963 Year 2 26.48% 0.40% 73.01% 26.99% 100.00% 10.98% 15.22% 26.19% 73.81% 100.00% 56.69% 31.76% 0.20% 34.02% 6.65 6.65 26.19% 91.62% 67.62% Year 2 24.92% 68.72% 12.17 21 2.04 0.35 0.42 $15,627,055 Year 3 Industry Profile 27.62% 2.30% 0.23% 76.22% 23.78% 100.00% 7.62% 7.32% 14.94% 85.06% 100.00% 58.62% 29.63% 0.20% 39.20% 10.00 10.00 14.94% 67.33% 57.27% Year 3 28.99% 50.50% 12.17 27 1.48 0.18 0.51 $30,296,910 37.80% 86.20% 13.80% 100.00% 47.40% 12.90% 60.30% 39.70% 100.00% 16.30% 8.80% 0.30% 1.50% 1.83 0.92 60.30% 3.20% 8.10% n.a n.a n.a n.a n.a n.a n.a n.a Interest Coverage Additional Ratios Assets to Sales Current Debt/Total Assets Acid Test Sales/Net Worth Dividend Payout 21.85 0.28 10% 5.93 6.97 0.10 43.24 0.49 11% 6.65 2.76 0.00 72.59 0.67 8% 10.00 1.74 0.00 n.a n.a n.a n.a n.a n.a