Ontogeny and phylogeny
Nov 1, 1997 12:00 PM,
Recently, I heard a systems contractor ask, “How do small contractingcompanies survive?” It was so stunning a question that it set me thinking.
The minimum size of a contracting company is three people:president-salesperson-chief installer; office help to keep the books andanswer the telephones during business hours; installation helper. Theinstallation helper is necessary because one installer cannot lift today’smedium-sized loudspeakers, nor an amplifier cabinet. These might be onefamily: two spouses and one offspring. Let’s assume they’re hungry andexpect to stay that way. We’ll put down the owner for $50,000 in cost tothe company (salary, benefits, payroll taxes), the office help for $40,000,the helper for $30,000.
The business premises will cost, and that will vary a lot, but if they’repaying less than $25,000 a year, then they’re probably in a tent in theback yard. It’ll cost $12,000 to pay for the van and keep it running ayear. Let’s put down $25,000 a year for utilities and miscellaneous.They’re self-insured, meaning one strike and they’re out.
Let’s do the math. In order to earn the $180,000 they need to keep thedoors open they need to buy and re-sell another $180,000 in installationequipment. That’s a gross annual revenue of about $360,000. They’re makingno profit and paying no company income tax. Do you hear the sound of atrunk slamming?
They have to do a tiny $7,000 installation every week. You don’t need agraduate degree in business administration to see Mom-and-Pop Contractingwon’t make it. Three people can’t sell and install 52 systems a year.
Now, add a full-time salesperson and another installer, making real,livable wages. Mom, Pop, and Junior now want real wages, too, and they wantto see some profit at the end of the year. The contracting company’s grossmust about double, to $750,000, to cover these expenses. Even so,Mom-and-Pop-and-Associates Contracting is very vulnerable. It will takeonly one or two slow-pay jobs carried as receivables to get the contractoron credit hold with manufacturers. Having to eat even one single job willput them under.
So how come there are $750,000/year contracting companies all over theplace? How do they survive?
They don’t survive. Not like that, they don’t. They either grow largeenough to stay in business, or they go under, owing money everywhere. Yetthe category of $750,000/year contractors endures. For each one that makesit upward or goes bust there’s another optimistic entrepreneur ready tostart up, another trunk ready to be slammed.
Ontogeny is the life cycle of the individual; phylogeny is the life cycleof the species. There will always be $750,000/year contractors, although noindividual contractor will long remain a $750,000/year company. How long isalways? So long as the total market grows faster than existing companiesgrow. So long as contracting companies go out of business. So long ascontracting employees think they can do better on their own. So long as thethreshold for getting into the business is low. So long as the spirit ofentrepreneurship remains strong.