The 80/20 Rule for Contractors

80/20 Rule for Contractors

Vilfredo Pareto 1848-1923

Vilfredo Pareto was an Italian engineer, philosopher and economist. He made several important contributions to economics, and was later credited with what is called the Pareto Principle. The Pareto Principle, often called the 80/20 Rule, is the idea that 80 percent of the results come from 20 percent of the causes. This principle can be applied to almost all areas of life.

Examples of the Pareto Principle:
• 20% of all of your clothes are worn 80% of the time
• 80% of wealth is held by 20% of people
• 80% of books are read by 20% of people
• 20% of motorists cause 80% of accidents

The numbers may not always be exactly 80/20. They may be 72/25, 87/13, or something slightly different than 80/20. However, the principle is sound and extremely valuable.

The reason this principle is so valuable is that it is counter-intuitive. We tend to believe that all causes have roughly the same significance. That all customers, for example, are created equal. Or, that every working hour of your day is as effective as the next.

When we realize that only certain efforts produce the most results, we can greatly improve our lives and our businesses. This is done by the process of substitution. Resources that produce weak effects are reduced or eliminated. That effort is then put into the resources that produce the most return.

Businesses have used this process for many years. Some 80/20 rules of business are:
• 80% of a company's complaints come from 20% of its customers
• 20% of the company’s salespeople are responsible for 80% of its sales
• 20% of customers are responsible for 80% of a company’s profits
• 80% of a company's sales come from 20% of its products

80/20 examples that apply to concrete construction companies –
As a contractor, 20% of your employees are causing 80% of your HR problems. Identify that 20% that causes the most trouble, develop replacements for them, and fire them.

Of all of the types of work you perform or services you offer, one or more account for 80% of your headaches, but only contribute to 20% of your profits. For example, at my concrete construction company, we used to perform concrete flatwork services along with our foundation wall work. After seeing that it was 75% of our problems, yet only 25% of our revenue, we dropped the service to focus on the more profitable – and less problematic – footing and wall foundation work.

As a busy construction company owner or manager, 80% of your daily tasks only account for 20% of your profits. Work toward eliminating, delegating or outsourcing much of those tasks. Then, you are able to spend more time on the 20% of work that produces 80% of your profits.

How else can you put the Pareto Principle to work in your contracting business? Start by finding out what the 80/20 ratios are for multiple areas within your company. That information presents opportunities for radical improvement.

What changes can you make that will improve your results? Where can you shift resources from non-productive areas to those vital few areas that have the biggest impact?

For example, determine your ideal client profile to find out what type of customer is the best fit for you. Then, devote your resources to marketing and selling to that specific type of prospect.

When you find the 80/20 areas in your business and make the necessary changes, you’ll have fewer headaches and you’ll be a more profitable contractor.

For more information on the process of focusing on the vital few and reducing the trivial many, I highly recommend Richard Koch’s excellent book, The 80/20 Principle: The Secret to Achieving More with Less. It is a fascinating read that will help you look at your daily life and business in a new way.

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