Employees are the lifeblood of every construction company. No matter the size of the company, each individual serves a purpose, and their performance either helps or hinders the organization – there is no middle-ground. With that in mind, realize that the goal of every business owner should be to:
- Hire the right individuals for each position
- Set them up for success
- Ensure that they are making a positive contribution to the company
As a business owner, you have the ability to set up compensation and incentive programs that motivate your employees to make positive contributions to the success of your company. While money is not the only motivator, it is typically the ‘biggest’ motivator and the easiest for your employees to recognize. So, we will start with common financial structures of bonus and incentive plans, and later we’ll explore some other ‘fringe’ benefits that can be used to compliment these plans and help drive employee performance.
Business Development professionals in the construction industry are often the most misunderstood people at a company. They typically do not estimate project opportunities and do not manage projects or other employees. They rarely produce anything physical or tangible, and successful ones are not even in the office very often.
However, they are often the lifeblood of the company. They are responsible for finding and nurturing relationships with potential clients, partners and suppliers. They feed the company with opportunities for new work, new projects, partnerships and deals. They are the driving force that create all the work that the rest of the company performs: estimating, project management, construction, accounting, human resources, etc.
Remember, Tom Watson of IBM famously said “Nothing happens until someone sells something”. It is the responsibility of the business development people to find the opportunities, bring them to the company, and then help to close the deals. This is their positive contribution to the company.
For smaller companies, this role is usually filled by the owner, who is the original business development engine for the company. They forge and nurture relationships with people who become the first clients. As the company grows and becomes more successful, they may charge their project managers with business development responsibilities, or hire a full-time business development professional to fill this role.
What Do the Desired Results Look Like?
When thinking about compensation and incentive plans for your business development people, it’s helpful to think about the actions and results we are trying to achieve and reinforce. The key desired results we should be expecting from our BD people at both the GC and Subcontracting level are the same:
- Build strategic partnerships that result in high-value project opportunities
- Generate leads, manage customer and partner relationships and close deals
- Meet or exceed the company’s strategic growth, marketing and sales goals
There are also some secondary results we may desire from our BD people:
- Enhance relationships with clients, prospects, and partners
- Identify new services that would appeal to existing and new clients
- Prepare and present quarterly goals and forecasts for future projects
So, what if we could design an incentive plan for Business Development people that drives these key results we are trying to generate?
The most common incentive programs for BD positions are commission-style and are based on Contract Value and Projected Revenue of each project. This system can be used for both General Contractors and Subcontracts alike.
The Contract Value is exactly what it sounds like: the value of the contract signed with the client.
The Projected Revenue can be calculated several ways, but is typically calculated as the Contract Value minus all direct costs to perform the project. This would include all labor, materials, equipment, subcontractors and direct costs associated with the performance of the project. This is often referred to as the gross profit on a project, as it does not include company overhead costs.
Let’s create a sample project for this article:
$100,000 Contract Value
$20,000 Direct expenses
$82,000 Total cost
$18,000 Projected Revenue ($100,000 - $82,000) = 18%
The estimate should be built by the Estimator and is used to bid, negotiate and win the project. It is not typically performed by the Business Development personnel. However, a talented business development professional will not just bring opportunities in the door, they will see the opportunity all the way through to the close. This would include providing insight on the client’s budget, pain points, goals and desires, positioning their company as the best solution for the project, helping to drive up the value of the services being provided, and potentially handling any final negotiations that lead to a signed deal. In this way, they are able to leverage the relationships they’ve built and nurtured into strategic partnerships that lead to high-value (profitable) projects for their company.
So, how can we structure an incentive plan that drives the key behaviors we are looking to reinforce?
In order to drive the first key behavior “build strategic partnerships that result in high-value project opportunities”, we can set a minimum profit threshold that must be satisfied in order for a deal to qualify for a commission. This is often set as a function of the company overhead level (typical range is 8-12%). Assuming our sample company runs at a 10% operating budget, then they might set the minimum profit level at 15%. This now becomes a simple yes/no gateway; any project that does not meet this requirement would not qualify the BD person for a commission.
Based on this qualifier, our sample project looks to be a ‘high-value’ project, with an estimated profit of 18%.
So, now that the project qualifies for a commission, how do we calculate and pay that commission? What are the industry standards? How do we ensure that the BD person continues to nurture the client and stay involved?
The commission structure is often set as a tiered-percentage system. This means that there are distinct ranges that pay set percentages. The tiers for the commission structure would be set for your company based on several factors, such as average, minimum and maximum project sizes, typical profit margins, type of work, duration of projects, etc. Within this basic framework, you can increase or decrease the number of tiers and adjust percentages, which are often set as diminishing percentages. What this means is that as project values go up, the percentages go down.
Here’s an example:
The reason the percentages diminish as the project value increases is mainly attributable to the amount of risk the contractor is taking on the project. Smaller projects typically have less risk and are therefore more likely to achieve estimated profit levels. Larger projects inherently have more risk associated with them, and therefore the company can assume that the profit will more closely be linked to the performance of the Project Manager.
Additionally, it does not make sense to offer high commission percentages on large projects, as they do not promote consistent behavior. For example, if the BD person receives a flat 3% commission on a $1MM project, this would equate to a $30,000 payout. If they can make 1-2 sales like this each year, then they are likely to only chase these types of clients and projects and will not give each opportunity and client equal importance. This is probably not in line with the company’s desired behaviors of consistent performance in nurturing prospects, enhancing relationships with clients, and consistently meeting sales goals throughout the year.
Conversely, using the tiered structure, the commission on a $1MM project would be calculated as
$100,000 x 3% = $3,000
$400,000 x 2% = $8,000
$500,000 x 1% = $5,000
Commission = $16,000
This is a much more reasonable commission (by industry standards) and also keeps $14,000 in the project budget for the PM to use to mitigate risk.
In our tiered bonus example (from the chart above), a project must have a minimum contract value of $25,000 in order to qualify for a commission.
- For contracts up to $100,000, the commission will be 3% of the contract value.
- For contracts between $100,001 and $500,000 they will earn the 3% on the first $100,000, plus an additional 2% on the money between $100,001 and $500,000.
- For contracts between $500,001 and $1MM, they will earn the commission from #2, plus an additional 1% on all money up to the $1MM.
- For contracts over $1MM they will earn the commission from #3, plus an additional ½%.
So, for our sample project, the business development person would earn 3% of $100,000, or $3,000 as a commission. This could be paid as a lump sum upon receipt of the first payment on the project, or could be paid out over time based on the duration of the project.
Commission payout terms would be decided for your company based on many of the same factors. If you perform short-term projects (less than 3 months duration), a one-time payout often makes sense. If you perform longer-term projects, then tying commission payments to monthly billings/receivables may be preferable for maintaining cash-flow. This also incentivizes the business development person to stay engaged with the client for the duration of the project. Should there be any billing (or other) disputes, the BD person now has a stake in resolving them to the client’s satisfaction while also protecting the company’s interests.
As in our previous articles (part III and IV), we listed some ‘fringe’ benefits you can offer your people as incentives beyond money. Here again are some of the most common ‘extras’ that are given to successful Business Development people as incentives:
- Extra paid vacation days (PTO)
- Company vehicles or vehicle allowances
- New/upgraded company laptop
- Company-branded merchandise and clothing
- Restaurant or store gift cards
- Air travel rewards (travel vouchers, seat upgrade certificates)
- Tickets to sporting events and concerts
- Golf clubs or other sports equipment
- Electronic devices and gadgets (Bluetooth speakers, headphones, radios, mp3 players, tablets, etc.)
We hope this article provides you with some ideas for your own incentive programs, and shows you how to create a structure that rewards Business Development people for their performance and supporting the goals of the company. We also welcome your feedback and suggestions for other ways you’ve found to incentivize your BD people! Leave a comment below, or email us with your ideas so we can share with our readers!
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