JLC LIVE Blog

One of the distinguishing characteristics of business maturity in the construction industry is the understanding that it’s optional to be competitive. It’s required that you be profitable.

Over the last few years, one of the biggest complaints we have heard over and over again is that contractors are giving their work away. I don’t know how many times I’ve heard a contractor say that other people, bidding on the same job, gave quotes anywhere from 10% – 50% lower for the same job. This was followed by the question, “How can they do that?”

The answer is they can’t, but the poor souls who are quoting that low don’t know it . . . yet.

You are in business to provide a service and make a profit doing it. You aren’t in business to be competitive, employ people, drive new trucks or see how many bids you can win by cutting the other guys price.

If you and your company don’t make a profit, you’ll go away. It’s a simple concept, and it’s for certain. Putting your bids together in a profitable manner requires a thorough knowledge of estimating. Your estimates need to be done so that you have the confidence to sell the job knowing your numbers are right and you will make a profit when the job is done.

To make a profit, your accounting and bookkeeping functions must also be accurate and up to date. If they are accurate and current, you’ll have a thorough knowledge of your company’s financial position. With that knowledge, you can establish an accurate and firm markup for your company. The old shoebox approach no longer works, because then you’re just guessing. You’ll never know where you are, or how you got there.

You need a strong commitment to be profitable. You have to create accurate estimates, compute and use your correct markup, learn how to sell, and not cut your prices when pushed by a client. John Wayne once said, “Life is hard; it’s harder if you’re stupid.” Cutting your price to get a job makes life hard.

Don’t fall into the trap of trying to be competitive. Know your numbers and charge enough to make a profit.

According to the Association of Certified Fraud Examiners 2012 Report to the Nations, fraud is estimated to cost businesses over $600 billion each year (http://www.acfe.com/rttn.aspx). And the construction industry is one of the hardest hit industries.

But you might think that since you have a small company, it can’t happen to you. Well, think again! The median loss incurred by small business is $160,000, significantly more than the typical loss suffered by larger businesses.

The Fraud Triangle
For fraud to occur there must be three factors present: motive, rationalization and opportunity. These three factors constitute what is called the “Fraud Triangle”, an idea developed by Donald R. Cressey, a noted criminologist. The key to fraud deterrence is breaking this fraud triangle. While motivation and rationalization may not be under your control, opportunity certainly is. Therefore, it is your job to consider ways to decrease opportunity and thereby reduce the chances of fraud.

It’s Not a Question of “If” but “How Much”
When I first started consulting with contractors, I thought I could easily spot the shifty bookkeeper. Not true. I was asked by the owner of a small remodeling company to review his books. While he had had a few bad jobs, things were getting better – but cash wasn’t. It only took a few hours to become suspicious of the bookkeeper. But she had been a loyal employee for over 10 years and had even married the owner’s best friend. It just couldn’t be what I thought! Well, it was. She was finally caught and after I spent several months reviewing the books, it turned out that she had been stealing for over four years. To the tune of $550,000 – that’s more than ½ a million dollars!

The reason she got caught was that she got greedy. Each year she stole more and more, ultimately stealing about $25,000 per month. The sad fact is that if she had kept the theft to a more reasonable figure, she may never have been caught!

Take an Interest in the Books
You may have a limited accounting background and have delegated the accounting to your bookkeeper, but that doesn’t mean you need to abdicate your responsibilities. Never give the bookkeeper check signing authority. Avoid having the same person who writes the checks reconcile the bank statement. Instead, consider having the bank statement sent to your home and do it yourself, or arrange for an independent bookkeeper or your CPA reconcile the accounts. If your software allows people to print a check and then change the vendor name on the check, review your check images on your statement. You should regularly look online at the checks images that have cleared and spot check to make sure the payees and amounts are familiar.

Ask questions. A bookkeeper who knows that you are paying attention will be less likely to have carte blanche ability to handle – or mishandle your cash.

Embezzlement is not the only source of fraud; it comes in many forms, including padded timecards, theft of job materials, personal use of company vehicles and tools, moonlighting or stealing clients, and many other ways that employees find to enrich themselves at your expense.

Internal Controls
Create procedures in your company to prevent fraud:
• Create written policies that outline expectations for integrity and ethics
• Perform random spot checks on bills, checks, bank statements and other paperwork
• Include a third party to review the financial statements and paperwork process
• Create a tone at the top – as the owner of the company, make sure you act ethically and fairly
• Create a process for employee reimbursements that include all receipts and approvals
• Create a process to review timecards. Consider using GPS tracking reports on all vehicles

Trust the Controls, Not the People
While you need to have employees you can trust, it is also important to have a good set of internal controls that you follow. Good internal controls are essential, regardless of the size of your company. You work hard for your money – don’t you want to keep it?

The Operating Capital Reserve Account (OCRA) is a planned forced savings account that every company should keep for emergency or unbudgeted expenses. Stuff happens, and companies that plan for and build this account ahead of time are better able to weather financial storms that might come their way.

The account is set up within your bookkeeping system. Take between 1% and 4% right off the top of every check or payment received by your company, and put it in the OCRA. Once you have $1,500 – $2,000 set aside, deposit the funds in a separate savings account at your business bank. This account needs to stand by itself.

Add to this account until you reach your goal. Suggested goal amounts:

•  For specialty contractor’s, 3 to 5 months of overhead expenses
•  Remodeling contractors, 5 to 7 months of overhead expenses
•  New home contractors and commercial contractors, 7 to 9 months
  of overhead expenses

So, first you determine what your average overhead expenses per month. Multiply that amount by the number of months, and start setting those funds aside. Emergencies happen and if you want to survive, you must plan ahead and be prepared.

Example: You are a remodeling contractor and your goal is 7 months of expenses
Average overhead expense for month = $ 9,483
7 months x $9,483 = $66,381 is your OCRA goal.

To start, I recommend setting aside about 2% of each payment amount. As you learn to manage this deduction, increase the amount to 3% and then 4%. Going above 4% can put your company in a cash flow crunch so I would limit the contribution to 4%.

Even if you’ve reached your goal, it’s important to keep the habit of paying the account. So cut your contribution back to .25 or .50% (¼ to ½ of 1%), but don’t stop setting funds aside. It’s too easy to find places to spend the money instead of setting it aside for a time of need.

Don’t use this account to pay your taxes. You should be setting funds aside separately for your tax liabilities. And this isn’t a “TOYS” account. If you want to buy toys, put it in your yearly budget.

This account is only touched if an emergency arises and you need cash in a hurry. And, there should be two signatures required for any withdrawal from this account.

Having an OCRA in place is cheap insurance for your business. And when you need it, you’ll be grateful the funds are there.

Your definition can have a dramatic impact on the estimate and the overall financial aspects of a project.

In my 28+ years of being a contractor, nothing has frustrated me more than the continual marketplace misinterpretation, misuse and reckless application of the fact based term, “Cost / SqFt”.

My experience has been that virtually all the players involved in real estate have different interpretations and definitions of how you calculate and factually determine the unit cost of a square foot of a structure.

It’s all of us …appraisers, bankers, title companies, builders, remodelers, floor covering subcontractors, realtors, homeowners, designers, and even some architects. Talk of cost per square foot amongst homeowners at a social gathering can be almost comical, if it were not so tragically miscast. I’ve seen it numerous times.

I came into contracting as an outsider. I graduated from college and worked for a chemical company for eight years before I jumped into contracting and development. I had always wanted to become a builder, but was continually discouraged from doing so by adult mentors of my youth, including parents, realtors and even some builders that I sought advice from. Their take was that the profession was widely …unprofessional.

Given that, I found that numerous business practices in the building business did not make sense. There was too much control by outsiders, too much direction by superficial, non-contributing people that made their living off of the results of contractors and remodelers. Cost per unit was the most evident misused fact and negotiation tooI that I encountered.

My first project was a development with 11 townhomes. Initially the bank informed me that they would not finance the project because the cost / sqft production cost was too high. They were excluding the garage, the decks and the driveways. Once I included the unit areas of the other structural elements, the production costs fell way under the banks standard costs to green light a loan.

The solution: I found a uniform definition; AIA Document 102. It defines the measurement of square footage as outside wall to outside wall. It also describes methods to determine the area of garages, porches, utility spaces and closets, by measuring the area and then applying a percentage, to calculate a square footage area.

I like the AIA definition document, but I believe it should be updated. The application of percentages to specific areas, although understandable, can be misleading. It all comes down to defining “Livable SqFt”.

I could go on and on about my opinions and suggestions for building professionals, but I will shorten my discussion and advice to an abbreviated directive.

In your contractual paperwork, make sure you firmly and specifically define the plan documents for the project at hand, and also note the “approximate square footage” as per AIA Document 102. This will corral the “outsiders” into your calculation methods, not theirs.

Why should you worry about this? It’s determination of value. As a simple example will show: A home with 3,850 SqFt of livable space, adjoined to a garage with 1,150 SqFt, with a construction contract of $500,000 will pencil out at $130 per SqFt ($500,000/3,850 SqFt)or $100 per SqFt including the garage, ($500,000/5,000 SqFt).

Rationale: What’s the difference in construction costs between Billy’s bedroom and the garage, on a SqFt basis? The bedroom has carpet, a closet, and a nice ceiling light, whereas the garage has several doors and openers, finished Type X Drywall, etc. My experience is that the cost / sqft is a wash. Sometimes, the garage production cost is even higher than that of Billy’s bedroom.

Make sure that you discuss this with your buyers and customers. It will raise the bar of professionalism and level the playing field for value, appraisals and eventual resale pricing.

Note: NAHB also has a document that defines Square Footage and the appropriate calculations.

Let me know what you think. Talk to your fellow professionals over coffee …it’s a meaningful topic.

Is your volume increasing? As we move into spring, I see business growth all around. From the contractors around the country with whom I work, I see optimism in the economy, growth in the number of projects actually starting, and the need to rebuild after a devastating economic downfall.

You are in a unique position to rebuild your company – the right way this time! Over that last few years, I saw processes thrown out the window as everyone was in a triage mode. Companies just needed to find the work, hope it was profitable, and keep busy. But as the economy begins to improve (albeit slowly,) now is the opportunity to create or improve processes that will keep your company running smoothly and profitably.

Lessons Learned
Think back over the last few years. If you’d had a crystal ball, what would you have done differently? Would you have cut your staff sooner? Were there jobs that you shouldn’t have taken, but did just because you thought you needed to keep busy? Would you have focused more on sales, production or process?

As the saying goes, “Those who ignore history are doomed to repeat it.” Now is the time to look at the lessons learned over the last few years and rethink the way you do business.

Time for a Business Retreat
There is much to be gained from taking a day out of the office and spending it working on the business instead of in the business. Include your staff as well as other business advisors. Now that April 15th has passed, your CPA may be a worthwhile member as well.

Create an agenda and stick to it. Create a list of goals that you want to accomplish during this retreat. A sample list of some goals to accomplish would be:
• Determine sales goal
• Review completed jobs for profitability
• Improve your change order process
• Improve your processes for scheduling jobs and procuring materials
• Determine job cost reports that your employees need to review during each job to stay on budget

Ask your employees to contribute. Ask them to come to the meeting prepared with one change they would like to see that will make the jobs run more smoothly and help the company become more profitable. As an incentive, offer a prize (coupon for pizza, $10 gas coupon) for the best suggestion. Be ready to listen carefully to their opinions without getting defensive. As Michael Stone wrote in the previous blog, it’s time to do an honest evaluation of your company and see if your employees share the same story about who you are and what your company goals are.

Make a Commitment to Change
If you feel that the last four to five years was easy and profitable, then keep doing what worked. But if you’ve struggled with time management, job execution and lack of profitability, decide what changes you want to make now. Invest time to create a company that has clear processes that works. It can be done – there are contractors out there who make a good living, complete beautiful projects and have a staff that is loyal and enjoys working for them.

Are the goals and aspirations you have for your company communicated to your employees? Do they know what’s important to you?

When I’m consulting with contractors around the country, one of the things that often surprises me is the difference between what the owner thinks their employees know, believe, value or favor, and what I hear from their employees. The difference can be amazing.

Where did those differences come from? It should be safe to assume that if the owner did the hiring, they would look for certain knowledge, qualities, values and commitments in a potential new employee. They should be looking for employees who match the company creed.

After hiring, the owner needs to have checks in place to be sure that the company creed is constantly taught and reinforced to all the employees. I also believe that it’s wise to establish an ongoing training program that keeps employees up to date on everything the company is doing, how it is doing it and why.

The Marine Corps has an interesting approach. When they recruit, they look for certain basics in each of their recruits. Then they use their training program to teach the recruits what they need to know, with an ongoing training program for refresher courses as needed. The Corps doesn’t expect recruits to know everything, but expect recruits to be willing to listen, learn and stay focused on the mission of the Corps.

Your employees represent your business. When they know what’s important to your company, they will do a better job of representing you. Do an honest evaluation of your company and how you keep your people up to speed. Are you doing a good job or if asked, will your employees have a different story to tell?

In today’s U.S. building economy, builders and remodelers who have adjusted their modus operandi to target customers and projects in this “new economy” are surviving; even prospering considering the constant flux, lack-of-bank-funding and general depressed real estate economy.

Remember, things began going topsy-turvy in the fourth quarter of 2006. Our historical customer base and our way of doing business changed at that pivotal point in time. New construction has been at a minimum for several years. Repairing existing properties is an often overlooked business segment.

One source of work that might bring opportunity in your region is remodeling work that I refer to as “tune-ups.” It’s neither glamorous, nor a design-driven remodeling type of job, but rather a fix, repair and update function. Think of it as “handyman work.”

Come Again? What? The residential or small commercial “tune-up” means tackling small repair work of any type or value for any kind of real estate. Our nation is filled with properties that need lots of little, bothersome, tedious, and even, mundane repairs and maintenance. There’s gold in them thar hills!

Contact former clients from past projects and approach them with your skills in this “tune-up” function. You’ll quickly find that the list of items needing attention is substantial and can lead to quite a nice bit of income, as well as referrals and additional business.

The estimating function and quote portion of this work is simple. Quote an hourly labor rate, and offer materials at cost, plus a minimal markup, say, 25% for ordering, picking up and handling the purchasing of those needed items. I charge $47.72 per man hour, plus 28% for overhead, insurance, workers comp and profit. In short, I summarize all costs by work items, however small, get a subtotal and multiply that by 1.28 to generate an invoice amount.

Most people have a long list of needed repairs and chores that they meant to get to, but have not completed for years. You’re the answer man! Without stereotyping, most women of the household will see this as a Godsend.

Be prepared to offer a ballpark estimate for this time & materials type of work. Some potential customers might be appalled that their work list is estimated at $2,500; but don’t give up. There are plenty of customers that will jump at the idea of a trusted professional coming in and taking on their repairs. You might want to contact local realtors and home inspectors to identify small projects in need of repairs which might be holding up a real estate sale.

Examples of this “tune-up” work include: repairing screens; adjusting doors, locks, hinges, etc.; weather-stripping; lubing the garage doors; fixing floor squeaks, installing new floor coverings, repairing drywall  and reprints, repairing pet scratches and damage to woodwork; changing HVAC filters, vacuuming refrigerator coils; building shelving and tool racks in the garage, repairing roof leaks, or even installing a brick veneer surface to concrete areas.

My collection of projects spanning over twenty-eight years is substantial. Just since last fall, my company has done forty-three of these “tune-up” jobs. All parties are grateful, referrals and have been profitable, and I reap the subliminal reward of keeping my employees and subs busy.

Don’t let the thought of your company being conceived as a handyman workshop get in your way. Work is work. And, several of the $300 to $2,500 jobs have led to some big money remodeling projects.

Being a professional entity that can work on occupied homes with integrity and owner trust is worth the price.

Try it out on a small scale to see if this is a good fit for you, your management style and skill level if to see if you can profit from this type of work. It can be tedious and require full time site supervision, but that’s why lots of companies either can’t or won’t bother with it. Carve yourself out a new market segment!

Let me know how it works for you. Business is always evolving, as should you!

Presenteeism is a relatively new term – it’s the opposite of absenteeism. It refers to employees who come to work while unhealthy. But recently, the term has been broadened to include the tendency to stay at work beyond the time needed for effective performance on the job.

Showing up to work when you are sick has several consequences. But in construction, the consequences can be more significant. First, sick employees often make other employees sick. Second, employees who are not at the top of their game, or who are taking medication to mask symptoms, make mistakes. And the financial consequences of mistakes can be as minor as wasted materials or as momentous as a tragic safety accident.

When employees are paid by the hour, without possibility of bonuses for improved productivity, there is little to no incentive to work efficiently. In fact, hourly pay actually promote slower work, since an employee might think that the longer it takes to do a task, the more money can be made.

Do you have a way to measure your employees’ productivity? Do you provide hourly budgets for your employees? Do your employees know how long you expect each task to take? One of my clients has a production meeting every Monday morning, and sets clear expectations of what needs to be completed by the end of the week. He then writes this down on a big white-board in the shop and uses it as the starting point for the next week’s meeting. As an incentive, he creates goals that need to be met. And if the goals are met and the quality is consistent, the crew is allowed to leave up to 2 hours early on Friday, and still get paid for a full day!

While it costs money to pay the crew even if they aren’t working, he understands the benefits of keeping his crew happy. And he has found that as the crew works more efficiently, and considers the time frame of each job, his increased profitability on his fixed price jobs is greater than the additional costs of those extra hours. He has also found that this weekly activity forces him to set clear goals and expectations. While he admits that he was never very good at creating job schedules, he found it easier to map out goals one week at a time.

It’s true that time is money. But to make money, you need employees who think while they work. Unhealthy employees who still show up just because they need the paycheck can cost you more than you think. It’s time to make sure that all the hours your employees work are as productive as possible.

Remodeling and building are comprised of numerous elements that change from project to project, which impact your business efforts. As history has taught us all, “profit and continual success are based on consistency.”

My experience indicates that the largest, ever-present variable is the clientele and that controlling the client is the biggest obstacle we face in the building industry. Make sure your policies and procedures are CONSISTENT, and keep you as “captain of the ship.”

What is a BUI you ask? It’s an acronym we coined at Dixon Builders that stands for “building under the influence.” Having a client that, day in and day out, tries to manipulate you and the construction protocol continually challenges your organizational and scheduling efforts. You may as well be at work half-awake because your efforts are continually undermined, second guessed, questioned and confronted with alternatives.

OK …I get it you say. But, how do I avoid that pitfall? Several suggestions follow. Read on!

1. Write up an Evaluation Chart of all your past projects and clients. Rate them 1 to 10, 10 being ideal. Garner the common elements of the good ones and summarize their attributes, behaviors, personality types, etc. Use that as a basis for evaluating new projects and clients to determine if the new endeavor is one that you should pursue. By the way, needing the job is a poor excuse for taking on a problematic client or a project beyond your expertise. Anybody want to build a new dental office? Does that require some unique skills?

2. Make a short list of your ideal projects and clients. That makes it easy to direct your future goals and efforts.

3. Repetition breeds success. Reinventing the wheel, repeatedly, is exhausting, wasteful and erodes profits. If you have a track record with remodeling projects with contract amounts from $10,000 to $100,000 think twice, and talk it over with your employees and subs, before taking on the $500,000 remodel. Chances are you can do the job, but will it be as easy, comfortable and profitable as doing five $100,000 jobs?

Incidentally, do you know what it costs your company, hourly, daily, weekly, to keep an on-going job on your books? Does your office overhead cash cost stop on holidays and weekends? It operates 24/ 7 x365 regardless of the amount of days you work during the calendar year.

4. Ghost Supervision: Not having a supervisory person on-site daily, or anytime work is being conducted, is counter-productive and a train wreck waiting to happen. The excuse I’ve heard over and over is “there wasn’t enough money in the budget for supervision.” It’s a no brainier …then you shouldn’t be doing the job. “But we couldn’t afford the lumber needed either.” Are you kidding me? Never let money cloud your morals or professionalism.

5. Include a “Client-Builder Synergy List” in your contract. This is a gentle way of informing and encouraging customer behaviors that will make the project a smooth ride. This list might address:

A. Timely Payments. You as the builder have to create and include a detailed draw payment summary listing the work thresholds required for each payment.

B. Finalize selections, colors, finishes and choices prior to construction.

C. Discuss and write-up remodeling conditions such as: pets, the prize-winning roses, the Porta-Potty, dumpster location, parking, where the workmen eat lunch, etc. These simple things could generate conflict at a later date. You’ve been here before, your customers have not. Know what works to help minimize problems with kids, school holidays, neighbors, dogs, parking issues, working hours, potential noise, etc. There is nothing productive about a neighborhood association calling a home owner to voice a complaint about your company.

D. Have owners write up a priority list of their choices, priorities, favorite aspects of the remodel, etc. Most, if not all of these, should be written into the specs. That way confusion of top priorities between owner and contractor are eliminated. This can be initiated at your very first meeting.

More than 50% of the legal expert/lawsuit cases on which I have consulted, can be traced back to either no supervision or inadequate supervision. Also, I have never seen a lawsuit that alleges “excess management or supervision.” We’re paid to manage, supervise and organize the project. Make sure you earn your keep!

Thanks for reading. Happy profits!