JLC LIVE Blog

It is a written bid submitted to a general contractor by a supplier and/or subcontracting trade for a specific phase of work, for a single project, or a group of projects that contain certain, detailed and factual information specific to the Project.

“So why is this Blog Guy forcing more paperwork on me”, you ask?  I’m recommending managerial behaviour that will save you time, energy and effort, over the long run.

“But I’ve worked with ‘ole Charley’ for years. He just gives me a price and everything has always been fine. Besides, he’s a great tradesman who is bad at paperwork”. …Then you should fill out an agreement and have ‘ole Charley’ sign it, including:

1. Project name, address, lot #

2. Subcontractor License Number, Liability Cert, Work Comp Cert
3. Specific Work Details to be completed
4. Duration of work:  when will they start and finish
5. Decisions still needed: colors, stains, textures, accents, etc.
6. Payments:  How much; at which phase; within so many days of submittal.  By the way, if your can’t pay your subs with several days of their pay request, your cash backup and invoicing procedures need a face lift!
7. Clarifications needed or voids in the Plans or Specific Directives given by the Contractor. This avoids “Oh, I forgot syndrome”.
8. List Pages and Detail Block #’s from the Plans. Photocopy specific areas needing special attention. this way the exact notes you’ve written on the Bid Set of Plans is directly communicated.
9. Work to be performed by others to assist Subcontractor?

Most banks and construction financing entities require the aforementioned paperwork to somewhat assure that the contractor is working with real professionals to assemble and accomplish the work.

My historical experience has repeatedly taught and reinforced the idea, that the more revues and the more eyes on a set of plans, the better. There are always little or large …oversights, open ended issues, mistakes, incorrect dimensions, and any number of details requiring human management and experience for clarification.

Why is this the subject of my January Blog? Because I do some expert witness and consulting work for legal cases and a big case was recently won by the party that had organized, specific and professional subcontracting bids and submittals. It involved a lot of money that was saved by $150 worth of paperwork.

How long should a bid be? Short, sweet, simple. 1-2 pages is usually sufficient. Talk to your subs and suppliers. Ask for their advice and input. Maybe you can come up with a form that you just fill in the blanks. Maybe they can submit via Smart Phone …and the Certificates of Insurance should be sent automatically by their insurance carrier annually. This should be a simple, “no brainer” that will protect your professionalism.

Are you looking forward to the New Year ahead? For many this is the time of year that they set resolutions for themselves and goals for their companies. Often this process involves gathering information from the office team and putting together the goals based on the management staffs perspective. What is often overlooked is getting feedback from the field staff.

The number two factor in employee satisfaction, measured in a poll, has proven to be “being in on solutions”.  What this means is that employees of companies find a great deal of motivation in helping a company succeed but are often overlooked in the planning for success. Business owners on the other hand believe “it is all up to me”,  indicated by the same poll which ranks this motivation by business owners as 10, indicating what they think their employees would say. In my consulting work, helping companies deal with production loses and discussing the real financial situation with employees, I find their attitudes change dramatically as they see negative numbers. Some have even commented “if I had known this I would have changed my work habits a long time ago”.

So here’s a challenge for business owners. Do not sit in your office and worry about meeting your goals for this coming year.  Bring your entire staff in on helping set goals and meet them.  How can this be done?

1. Call a decision making meeting not an idea meeting. In other words at this meeting there will be some decisions made not “just a lot of talk”.

2. Set out parameters for the goals. In other words if you have to produce 2 million in work just to cover your overhead than that is the starting point. It is then your job to help them see that. In other words you will need to “guide” the discussion.

3. Help your team understand what you did last year and ask for their feedback on why we did not meet the goals or on how they think it went. Asking and listening are your best tools for success. If they feel that you really are letting them in, their attitudes will change.

4. Do not put down any feedback. As soon as you say “we have tried that before and it did not work” you will shut down the entire process. Allow them to dream up ideas.

5. Actually accept some of their ideas and work to make them happen. You will not be able to do all of their ideas, but you can do some. When they see you embrace their ideas, they will begin to embrace your ideas. Make it real team not a dictatorship.

6. Keep the goals out in front of everyone and measure progress. Many times we fail at meeting goals because we do not keep everyone informed. Again, many business owners sit in the office and worry when they need to be letting everyone know where the company stands.

7. Reward good behavior. Whether it is money or a fishing trip does not matter. Recognize their contribution in a big way.

Happy New Year!

In his book, Mastering the Rockefeller Habits, Verne Harnish describes the MeetingRhythm — establish daily, weekly, monthly, quarterly, and annual meeting rhythms and create the specific agendas that make them effective

Quarterly Meeting Agendas
A quarterly meeting agenda makes managing your business more efficient. While you can’t entirely eliminate the need for putting out fires on a daily basis, creating a quarterly agenda will help you establish priorities and improve your focus. The purpose of a quarterly agenda topic is to use three months to focus on one aspect of your business, make improvements, and track progress. Here are some ideas for your agenda and a proposed timeline. You can modify it, depending on your need.

Q1-2012 – Managing Labor Costs
The New Year is a good time to review your labor costs. The costs of putting an employee in the field include not only the gross wages, but all the burdens associated with that employee. As you close the books for 2011, review all the dollars that your employees cost you. The first step is to review their payroll taxes, workers compensation and employee costs. Then look at all the other costs.
• Does your company provide cell phones? When is the last time you looked at your cell phone contract to see if it is the right plan for your company? Call your cell phone carrier and ask them if there are any other plans that may reduce your monthly costs.
• Does your company offer health insurance? When is the last time you looked into other plans? Perhaps you should increase your deductibles to reduce the month costs. Or change the way that you share the costs with the employees.
• Do you have company vehicles or offer mileage reimbursement to your employees? Now is the time to review the costs. It may be time to change the way you reimburse employees. It may be less expensive to purchase a company vehicle than reimburse mileage at the current IRS rates (55.5 cents per mile). Or it may be less expensive to have employees use company vehicles instead of reimbursing mileage. If you give your employees a company vehicle, are you taxing their personal use correctly? Check with your accountant.
• How much did you spend on small tools last year? Perhaps now is the time to change your company policy on tools.
• Once you’ve determined the total cost of your employees, you can then determine the cost per billable hour. Review your billing rates to make sure you are covering all the costs associated with your field employees

Q2-2012 – Improving Sales Process
Springtime is a great time to focus on your sales process. As potential clients gear up for summer, you can use this quarter to improve your lead management process
• Create a process to track all the leads you receive this quarter. Keep a time card to track all the time involved with each lead. Track all leads, whether they turn into a sale or not. For those leads that become jobs, determine the ROI on that lead. Create a spreadsheet to take the total estimated revenue on each new job divided by the total hours spent getting that job. Compare the time on the big jobs vs. the small jobs to see where you should be focusing your sales effort.

Q3-2012 – Improving Slippage
As the summer winds down and jobs are completed, review your process for managing and tracking slippage.
• Divide each job into three phases: beginning, middle and end. Track the slippage during each phase. Where does your slippage occur? If you find that most slippage occurs at the end of the job, then use this quarter to concentrate on finishing jobs more efficiently. Focus on keeping the profits that you’ve earned in the first two phases of the job.
• Tracking change work is a big component of slippage. Track all additional work to make sure change orders are created and invoiced.

Q4-2012 – Manage the Financials�
As the year winds to an end, use this quarter to make sure that your financials are telling you what you need to know. Get ready to finish the year strong, with improved financial management.

These quarterly agenda topics are just suggestions. Use this time to create your own quarterly agenda. Creating a specific focus each quarter will help improve your business process and ultimately your profitability.

The process of predicting costs for any contracting project is really a barometer of your managerial skills, building knowledge and ultimately, a plan for profitability.

How does one know or determine the quality of a Cost Estimate, the estimating process and the accuracy of the estimate?  I use the tried and true grading method that all of us were graded on in school, but with a strict reverse curve. An A grade is best; 96 to 100% accurate; etc., but never exceeding the estimate.  B = 90 to 95; C = below 90%.  Raise your hand if C is okay by you!  Just for clarity – on that $100,000 estimate, if total cash costs final out at $106 that is $106 / $100, to generate a percentage, which equals 1.06. That means the cash costs exceed the estimate by a 6% overage, minus 100% = 94%, to generate a B grade.  

Sidebar: I always find it interesting when an architect or client wants to see and review a copy of my estimate. I usually don’t mind letting them examine my estimating paperwork packet in a controlled environment, such as my office …but I never let them have a copy. What school did they attend to certify their ability to review costs, based upon quantities, man-hours, historical unit production costs, and the general needs to construct …anything? Should we start asking for an estimate of the architects design fees? Hours, drafting time, printing costs and engineering elements?

Just to tie the full circle loop on this grading, self-evaluation system, I always use a “Fudge Factor”. If my FF needs to exceed 10%, something is wrong. That could be …plans are sloppy and undefined; too many open ended issues; use of calculated allowances won’t solve the issues; too many unknowns that you’ll be held accountable for; or pressure by others to generate an estimate in too small a timeframe, etc.

My recommendation is that if you cannot prepare an “A Grade Estimate” for any number of reasons, you should pass on the project.

So how do you get to the numerical count which determines the grade? I use two determinants:  money and time.  If the Cost Estimate was for $100,000 and your company completes the job for that amount or less, it’s an A.

“A Grade” estimating translates as Superior to excellent administrative management. It also shows that any good manager monitors the cash costs of a project through comparison to the estimate/budget Cost Code Line Items to assure that the project stays on track and delivers a profit.

The 2nd grade element as I mentioned is “Time of Completion”.  Same grading method.

Remember, most building professionals are reluctant to fully estimate a project for the main reasons of:  the time required; lack of compensation if they don’t land the job and lack of an estimating process. I never will agree to or accept a project for estimating services until I receive a retainer. That amount will be credited towards the Construction Contract Amount, so it does not cost “extra” for my company to prepare a Cost Estimate and or Budget. That policy has really saved my bacon over the years!

And by the way, anyone that disputes or argues about professional pay for professional work is NOT someone you want to work for.

Stay tuned to this Blog for further Adventures in Estimating.

I hope you are all excited about the upcoming JLC LIVE Show in Portland. It’s been a  few years since the JLC LIVE was in the Northwest, and the show looks to be as enlightening and informative as ever. As a sneak peak, I wanted to share some information from one of my upcoming presentations:  Coming Back from the Brink.

So many contractors have been in survival mode for what seems like an eternity, it is hard to see the signs of recovery. But from my discussions with remodelers all around the country, there is renewed optimism as well as increasing work in the pipeline. The biggest concern is how to keep this new work profitable and build on its success.

Controlling Overhead Controls Profit
Reducing overhead has been most successful form of triage to battle reduced volume. This was made very clear by a recent benchmarking study performed by CEDIA (Custom Electronic Design Installation Association). The most interesting finding is that when companies were compared by profitability, the gross margins of the companies did not vary significantly, but the overhead did. For example, companies that achieved net profit of 15% or more recorded a gross margin of approximately 41% and companies that were unprofitable achieved only 38% gross margin. This three point drop in gross margin does not account for the wide swing in net profit. When  ooking at overhead, companies that were at least 15% profitable had overhead around 21% of revenue, while companies that averaged a net loss of almost 10% had spent 43% of their revenue on overhead.

I realize that this includes a lot of numbers, but the important takeaway is that companies that controlled overhead were able to produce a profit while those companies that did not change their overhead with changes in volume suffered. Therefore, as your volume changes, controlling the increase or decrease in overhead is a key to keeping your company profitable.

Tightly Control Labor Efficiency
Now is the time to focus on avoiding slippage and keeping the gross margin on jobs on track. Labor typically carries the most risk on any job and keeping labor under control can improve profitability. Make sure that you have created a budget for hours as well as dollars on each job. Then track hours spent compared to hours budgeted.

Too many remodelers create budgets with billing rates and job cost at cost rates so that they can never accurately compare budgeted costs to actual costs. If this is your problem, consider tracking hours as well as dollars as a way to keep jobs on track.

Pressure for Raises
As business improves, you crew may begin asking for raises or increased benefits, especially if you had to make significant cuts in the past. The problem with raises is that they are easy to give and hard to take away. I recommend that you consider putting in place a good bonus structure instead.

When creating a bonus structure, you want to make sure that it is easily understood. You want your employees to be able to answer the question: “What can I do differently today to increase my chances of a bonus?” The more you can tie bonus to job performance the more effective the bonus will be. Perhaps you can create a bonus structure solely based on the number of hours estimated on a job vs. the number of hours spent on a job. I have one client who will pay one quarter hour for each hour that the job comes in under budget (assuming no call backs or warranty work). This keeps the crew aware of the number of hours budgeted as well as the time spent on the job. As an added benefit, the contractor found that when he instituted this type of bonus program, the number of signed changes orders increased. His crew stopped giving away free time to do “this and that” when the client asked for extras. He was amazed at the increased quantity of documented change work.

Focus on Today and Tomorrow
As work picks up, it is very easy to get engrossed in the day-to-day management of the jobs. However, you can easily lose sight of tomorrows work and not focus enough on sales. Therefore, make a commitment to set aside a specific day each week to focus on sales.

Dig Out of the Hole
Finally, if you’ve sustained losses in the last year or two, you are probably starting in a cash flow hole. This means that gross profit from today’s jobs needs to cover your current overhead as well replenish any cash shortfall. It can be disheartening to be finishing profitable jobs and yet still not have money in the bank. Look at all your liabilities, including your credit lines, unpaid payable bills, and any other debt that your company is carrying. Then come up with a plan for repayment. Look at the total debt and determine your timeline for paying off that debt. Then create a weekly goal for debt payments. This will help you better manage your cash flow and allow you to begin to dig yourself out of this cash flow hole. The goal in this recovery period is slow and controlled growth, with an eye to cash management, consistent margins, and constrained overhead growth.

For more information on this topic, I invite you to join me in Portland on December 7th at 8:00 am. Be sure to check out all the sessions during the show from December 7th through the 9th. I hope to see you in Portland next week.

One of the subjects I will be discussing at the upcoming JLC LIVE conference in Portland, Oregon on December 8, will be Developing an Effective Website that Sells. This class will run about an hour and fifteen minutes.

Why is it important to talk about websites? Because that’s where your potential clients go to find a contractor. Contractors with finetuned websites are bringing in a lot (if not all) of their business from that website. Yes, I know contractors believe they should get most of their business from referrals. But the thing that many contractors miss is that potential clients who hear about you from someone else, will check your website before they call you. If your website doesn’t catch and hold their interest, they are gone. To heck with the referral.

Your website needs to represent your work well, and a shoddy website doesn’t say good things about you. I hear from contractors all the time about how much effort and money they put into a websites with no return. Then I look at their website and it’s often easy to see why they don’t get any calls. Here are a few things we’ll cover during class. You might want to see how your website measures up.

1. Is it easy for them to call? Your phone number should be on every page. Top right corner.  In a font that’s at least two-thirds the size of your company name.

2. Is the website slow or distracting? You shouldn’t have revolving graphics or pictures on your home page, instead it should be static and easy to view. Put before and after pictures in your gallery.

3. Can your website be found? You should have keywords on every page, but every page needs it’s own set of keywords.

Whenever we get a call from a company that isn’t getting leads from their website and I address these issues, almost always their website doesn’t meet these basic guidelines (and more). Often they will tell me that their web designer says the best place for a phone number is at the bottom of the page. Folks, the purpose of a website isn’t to meet a web designers goals. The purpose is to make it easy for potential clients to learn about you and contact you. Find another web designer and get a website that potential clients can use. Common sense my friends, common sense.

Come see us at the JLC LIVE show in Portland on December 7, 8 & 9th It will be a great conference and show (Dec 8 – 9) and we would love to meet and say hello.

In my travels I talk with many people about the struggles they face within their business. Many of the struggles are the same from company to company. Occasionally they are very different. But what seems to be the common denominator in these discussions is the lack of action being taken by the business owners or their team of managers. Some of that lack of action is because they do not know what to do but some is just inaction caused by frustration. Recently I encountered a company that is taking action.

The first area and not as surprising as the second is in the use of technology, communication particularly. In this case the ability of the field team, project managers and lead carpenters to communicate quickly with everyone involved with the project. The company is larger than many and is set up by teams. So when a request is made it must be brought to at least 4 people attention. The solutions, I Phones for everyone! Not earth shaking but a big step. This represents a significant commitment to the team and to their budget. But not just the Project Managers and Lead Carpenters, but everyone, even the guys that can’t communicate well in English yet!

And that is the next point.
This company sits within the borders of Washington, DC, a multi ethnic city for sure. Roughly one half of the field staff is Hispanic with varying degrees of command of the English language. So rather than complain and fuss they decided to do something. They have started English classes after work, twice a week, in the office, for their workforce. One of the staff volunteered, put together the training and is doing the teaching. This is a significant investment of time and money. But it illustrates a commitment to the team they have assembled. I do not know all the details of this program but I was impressed that a company was not just complaining but taking action to conquer at least two of their trouble spots.

Cost Plus by definition is a Construction Project, of which, the contractor or remodeler is paid as a percentage of the actual “cash costs” for any work performed on that particular Project.

A simple example: The drywall work is billed at $3,000. The Cost Plus Contract stipulates a “Cost Plus 15%” billing arrangement. The invoice amount, to the homeowner would be 1.15 x $3,000 = $3,450.00

By the way, for any job, before you quote a percentage you need to consider your overhead costs, supervision expense and what your company is really making per hour or per dollar invested on your other work. In real terms, your company should be charging 25 to 40% on the cash costs to insure your making a profit. I can play with those numbers to make them more acceptable to a potential client at Cost+ 15%, but that’s the subject of another blog.

How Does The Estimating Process Change For Cost Plus vs. Fixed Price Contracts?

In theory, the estimating steps, procedure and budget assembly should be the same. The difficulty arises when there are unforeseen costs, work or changes implemented due to job conditions, owner changes or hidden circumstances that only are revealed as say, demolition occurs for a remodeling job.

As a general recommendation, I would detail, assemble and collate fact based information for every phase, cost category and line item, as possible for the project. I would also enter a list of unknowns and their potential costs. Be liberal when pricing potential problems, unknowns or labor over-runs. It’s always better to come in under budget than over. The ultimate danger is that with “realistic” budgeting, you might over price your company out of the project.

My overall philosophy is that I stay away from Cost Plus work. My company history and personal experience have taught me over and over again that the circumstances surrounding Cost Plus are frustrating. Why?

A. The owner, architect and contractor never really fully can or willingly commit to a realistic budget. All, if not most, of the costs are a mystery because no one has to commit to prices. And, if subs will commit, they usually have boosted their bid amounts by a good percentage to protect themselves for unanticipated circumstances unrevealed during the bid process.

B. The contractor fools themselves into the understanding that they will receive their percentage of costs no matter what. My experiences are that owners can argue about that percentage based upon the final production costs, and what a builder should have anticipated regarding unforeseen or cost categories that went over budget.

C. The plans and specs are NEVER 100% complete by definition.

D. The owner always thinks that this Cost Plus arrangement is going to save them money because all of the costs are documented and detailed.

E. The documentation. This is what drives me crazy. I don’t want to keep track of, photocopy and summarize all of the costs for the project for the purposes of billing the client. It is an open opportunity for questions, arguing, confrontation and price checking by the client. See example in the last section of this content.

6. With my estimating experiences and expertise, I can prepare a fixed price contract for a supposed cost plus project by using allowances for any unknown cost categories or work items. The danger with allowances is using too many. Then you do end up having a cost plus type project. I never have more that 7 allowances on any Remodeling job. If I need more than that, something is wrong with the plans, the specs or the overall circumstances of the job.

7. My Favorite – Cost Plus Function …NOT!  Sitting down with the clients and reviewing the Budget. I don’t ever object to educating and discussing costs or procedures or opportunities to save money, but I really find it frustrating to debate, argue and then rationalize to an owner about why the plumber is going to be charging $78 per hour to perform the work. “At that hourly rate, I’ll do the plumbing myself”. Sure you will!

My favorite example of an Owner Disputing a Draw Invoice, was challenging the plumbing fixture expenses and wanting my plumbing supply house to match the toilet prices as advertised, from a Big Box store during a sale. The newspaper ad was the source for his “cost” challenge. Once we went back and priced every plumbing fixture, pipe part and fitting, the plumbing supply house was about 12% less expensive. I spent 5-8 hours on that one little mess that I was not compensated for. I could have used that time on other items that would have brought in hundreds of more dollars to the company bottom line.

The homeowner still argued that we should have shopped for all of the components and purchased accordingly. I tried to explain the costs of time expended, but they don’t want to hear that.

As the economy has tightened up, we’ve seen an increase in the number of problems between contractors and their clients. Unfortunately, when money gets tight, some clients work overtime to keep from paying you what you are owed.

A classic example is a customer telling you, “I’m not going to pay you until_____!” They believe that based on whatever situation, they can change the terms of the agreement and you’ll have to live with it.

What can you do to prevent it from happening? Let me share with you an approach that will stop most of this nonsense from ever occurring up front. Will it work every time? Nope. There are some folks who will test any agreement you write just to see how much you will put up with or what they can get for free.

In your contract, in the section where you have your legalese located, you want to put a statement that says that if the owner defaults on the contract, i.e., not making payments on time, you reserve the right to shut the job down. If the job is shut down, there will be a $750 or $900 restart fee. Not $150 – you want to get their attention.

You might want to include language that says that if you have to shut the job down and the job is not restarted in so many days (or weeks or months) you reserve the right to terminate the entire contract. An example would be a progress payment that isn’t made on time. You give them 24 – 48 hours to make the payment, they don’t and you shut the job down. They now have 90 days to remedy the problem or you reserve the right to terminate the job.

Now all this must be read and approved by your attorney before you put that language in your contract. Your attorney needs to know your state’s usury laws. Most of them are stacked in favor of the buying public, so be sure that your wording is exactly right. For example, some states have a law that says you can’t charge your customer more if they don’t pay on time. However, it’s possible you can work around that by giving your clients a discount if they do pay on time.

Make sure that your contracts are put together based on your experience, your attorney’s knowledge of the law and insist that your customers abide by the agreement. Don’t put up with any nonsense on the payment schedule. Make them keep it. Now that means you must abide by the agreement as well.