Construction Business Talk

Take those discounts!

So, how much money do you save if you take a 2% discount for paying your bill in 10 days vs. no discount paying in the normal 30 days? It's pretty significant!

Most contractors don't realize how much of a money conduit they are. A $5MM a year builder will push $400,000 per month through the bank and write checks to suppliers for over $2MM. That's almost $200,000 per month! If we assume that all suppliers would give a 2% discount the savings would be $4,000 per month or $48,000 per year! If only half your suppliers will give this discount, it is still $20,000 per year. What is the rate of return for doing this?

Assume you have to borrow the money to take the discounts. And, to make this illustration easy to understand, let's assume you have to tap your credit line for $200,000 for the entire year and the interest rate you pay is 8%. Your cost is $16,000 in interest. Your discount savings is $48,000. The difference is $32,000. And, that is $2,650/mo. you put in your pocket!

Let assume you don't borrow the money. What is your rate of return on the $200,000 you have invested? $48,000/$200,000 is 24%. The rate is actually higher since our example assumes the money is invested for the entire year. However, it is only used for 20 days per month. 30days/20days = 1.5. 1.5x24% = 36%.

Where can you invest your money and get a 36% rate of return? Nowhere!

Change Orders - Necessary Evil?

Many contractors look at Change Orders (Claims) as disruptions and a general pain in the neck. How many projects have you done that had no changes (probably very few)?   Perhaps there is a way to make lemonade out of these lemons and add to your overall profit. Car dealers have been doing it for years. Look at the cost of extras compared to the original base price. Or, look at the price of parts (only available from the dealer).

Change Orders for private work are inevitable and must be dealt with from the beginning. If you are in the residential market, you are the expert who has to train the client.  If you do not prepare your client for the rigors of change orders, you will be the one to pay the price not them.  The beginning is the time the contract is signed (or perhaps before)!  A sample change order along with an outline of your change order procedure should be included in the contract attachments and the client should initial that he/she has read this. This prepares them for how it will work and what the charge for these will be.

Look at what happens on even a small change order such as moving a door over a foot to the right and enlarging from a 2’-6”to a 2’-8”:

• Fortunately this should not change the schedule, unless the door turns out to be a special order.
• There are several people involved including: the architect/designer, the door supplier, the framing crew or sub, the finish crew orsub, and the project manager.
• Each of them have to be informed of the changed beginning with the designer who must check on possible conflicts and possibly redraw that part of the building.
• The crews and/or subs must be informed of the new door specs.
• The PO to the door supplier must be amended.
• Someone, usually the project manager, has to coordinate all of the above.
• The Change Order to the Client must be drafted with the new charge and approved.

Change Order or Claims are also inevitable.  If you are in the commercial or public works arena, you must pay particular attention to the contract and specs with regard to changes and billing for them.  Proper format, approvals, and billing deadlines will get you paid.  Anything less may not.

Where is the opportunity for profit?

For Private Work (both residential and commercial) profit is a negotiated figure (not a fixed percentage) and once you have the contract you are in a much better negotiating position than you were during the bidding process! If your NORMAL profit figure is 10%, Change Order Profit might be 20, 30, or 50%. There is also the issue of overhead. If you are doing your homework properly, you are establishing an overhead figure for bids every year. Simply divide all non-project expenses like office rent, phone, etc. by total contract revenue for the previous year. This would quantify NORMAL overhead. Change Order Overhead is a different matter. If your NORMAL overhead is 10%, Change Order Overhead might truly be 20% or 30%.

So, if the original bid for the 2’-6” door was $100, its cost to you would be about $80 (using 10% overhead and 10% profit). The additional costs would be the increase for the bigger door (assume $10), the cost for the designer (1 hour @ $50), 1 hour for the project manager ($45/hour) to get the new change order drafted and approved, and 1 more hour for the project manager to coordinate all the changes.  Our costs increase by $150. Our profit and overhead at $40% add an additional $60 for a total of $210 to change the door. 

How much is too much? 

That depends on your client, how much they know about your business, and how well you have trained them for the change order process. If you are a subcontractor dealing with a knowledgeable general contractor and price your change order too high, you may have a difficult time collecting or may not see any more work from them. On the other hand, the general contractor is simply passing this on to the client with his profit. As long as your figure is not outrageous, there may be no problem. You will not know until you test the water.   If you are a general contractor dealing with a homeowner (remodeler or custom home builder), you are in a very good negotiating position. However, most of your business is probably from referrals that might dwindle if you are seen as taking advantage of you clients.

Strategies

You might want to change your normal contract to include a specific number of change order estimates at no charge. For instance, you could make the first two free. After that, there might be a change order estimate charge of $100 or more. You might also prepare the client by telling them that change orders items cost significantly more than if included in the original contract. In any case, you want to standardize the change order process into a routine.  

Change Order Procedure

You might want to consider a written procedure for Changes.  This will vary depending on the types of jobs you do.  However, it is important for project managers to logs changes immediately,  This will keep things from falling through the cracks and enhance your bargaining position when the client questions the actual price of the job vs. the original contract price.  We also recommend a standard form be used to describe the work and inform the client about charges (for this and previous changes).  Here is a link to a sample Change Order Policy you can use as an outline: 

Sample Change Order Policy         Sample Change Order (format)

For those of you who use construction accounting software like Sage Timberline Office or Sage Master Builder, this is a snap! Both systems include robust change order management that integrates well with accounting.

Bill Early Bill Often

By Jim Cumming

Those who have been in the construction business for a while put a lot of effort into billing despite the fact that it is a time-consuming task.  The big reason for this is CASH FLOW.  The longer the bill gets delayed being sent to the client, the longer it takes to get paid. 

Here are some things you might want to consider to help you get paid sooner.

1.       Create a job called something like Billing Coordinator.  This could be part of someone’s job or for bigger companies a full-time position.

2.       Once you have been awarded a job, create a billing schedule for it.  Most contracts have billing “triggers”.  These might be certain items completed, or dates of the month, or days of the week.  These allow you to bill.  Our Billing Coordinator should be ready to submit a bill the same day as the trigger was pulled.

3.      Create a billing checklist for each job to include

a.       Triggers mentioned above

b.      Acceptable bill format.  This might be specified in the contract.  If not, the proper format is the one that makes it easy for the client to pay it.  We would prefer not having the client call to ask questions about what is being billed. 

c.       Who gets the bill and will approve for payment.  Submitting your bill to the wrong person will only delay its approval

d.      Billing Terms.  These may be addressed in the contract and are certainly negotiable.  We would all rather get paid in 2 weeks vs. 30 days.  It never hurts to ask.

4.      Create a follow up procedure for bills that have been submitted.  

a.       If you mail it, call in a couple of days to see that it arrived.  If you fax or email the bill, you can call that day.  Use common sense with this.  We would prefer not to irritate the client’s accounts payable clerk.

b.      Always ask if there will be any problem about this being paid on time.

c.       Make notes for each conversation especially with regard to payment.

d.      If the bill has not been paid by the due date, call the next day and ask about it. 

5.       Send Statements each month.  This is a standard communication used by all businesses.  It simply recaps outstanding bills and allows the client to reconcile what they have outstanding with what you have outstanding.  We recommend send statements on the 25^th.  Accounting software makes this pretty easy, especially construction accounting software like Sage Timberline Office or Sage Master Builder.

6.      Know your remedies for non-payment.

a.       Set up a procedure for who in your office calls about late payment and when.  For example:

                                                               i.      5 days late – Billing Coordinator calls

                                                             ii.      8 days late – The Project Manager or Supt. Calls

                                                            iii.      10 days late – Your owner calls and follows up with a letter sent certified mail.

                                                           iv.      15 days late – Your Attorney Calls and follows up with another certified mail.

                                                             v.      Each call should be a little more “serious”

                                                           vi.      Each conversation should be documented and be available to the next caller.

b.      Stop work – This is for the more serious situations and may seriously affect the relationship with the client.

c.       Suing for payment

                                                               i.      Small Claims court – You may sue for up to $7,500 and not have to pay attorney’s fees.  Make sure you dot your I’s and cross your T’s.  We also recommend having the papers served by the sheriff.   Here is a link for some of the basics: http://www.consumeraffairs.com/consumerism/small_ca.html.

                                                             ii.      Anything above the $7,500 limit will require your attorney.

d.      Check Credit – A lot of collection issues might be resolved if we simply check the credit of our client prior to signing the contract.  A bad report might cause us to:

                                                               i.      Walk away.

                                                             ii.      Have the money put in escrow.

                                                            iii.      Have the client bond for payment.

                                                           iv.      Raise the price of the bid to compensate for late payment.

Do You Put Enough Emphasis on Trust?

by Jim Cumming

I recently read The Speed of Trust by Stephen Covey,  it is a "must read" for anyone in business including contractors.  Why?  Because lack of trust slows things down and costs you lots of money.  Don't believe it?  Read and you become a believer! 

Check out www.speedoftrust.com. 

Boom and Bust – Surviving the Downturns

by Jim Cumming

 

If you take a look at construction activity over several decades, you will see a chart that looks like the roller coaster in Santa Cruz. There have been some high highs, like the early 70’s, late 70’s, mid 80’s, and just recently; followed very shortly by some low lows, like the mid 70’s, early 80’s, early 90’s, and right now. Interestingly enough, since 1991, residential construction has been on the upswing with a few minor dips along the way. Check this graph out at: http://www.nahb.org/generic.aspx?genericContentID=45409.  So, only those who have been around for a while know what it’s like to go thru the valley in which many contractors find themselves today.

 

What to do? What to do?

The veterans saw this coming and started socking away money to survive the valley. Recently, they and everyone else started paring down their operations. There were employees who were hired only out of necessity who have been let go and contractors have been scrambling for work to keep their longtime employees busy. Even these key employees have had their hours cut back to help survive the cash crunch. Some have let everyone go. (Not a good decision in our view.) What if the market starts coming back?  They won’t be ready while others will. They will have to put out an extraordinary effort to get ready for the coming upswing. Yes, folks, it will come back.  It always does.  That’s just the nature of any industry, especially ours.

 

Non‐residential contractors seem to still have lots of work; as do public works contractors, and several

high‐end residential companies in the bay area (especially Silicon Valley).  Will that last forever?  The answer is no!  What goes up will come down!  Public work contractors are watching California go through a budget crunch, and while there is still plenty of committed money to spend, there will come a time in the not‐to‐distant future when that will get turned off. Ditto the commercial sector. There are lots of commercial projects to fill the need for all this residential building that has taken place in the last few years. If residential construction has come to a standstill, what makes us think that commercial won’t follow with its own slowdown?

 

What to do? What to do?

 If you are one of the fortunate folks with plenty of work, realize that there are peak periods followed eventually by slowdowns. Try to think of your profit over a five or seven year period vs. just one year. In the last part of the building cycle, consider investing some of those profits rather than spending them. If you are in the downturn and want to stay in this business, redouble your marketing efforts and sharpen your estimating pencil to get work to keep your core employees busy until this thing starts again. Most veterans will work and even lose some money to keep these people on board. Remember how much time, money, and effort it took to get them in the first place? There are other things to do in the “valley”. These activities will keep everyone occupied and sharpen the organization for the next upturn. We suggest developing systems that will make you more efficient and profitable when business starts to get good again. Remember, only a short time ago when you didn’t have time to sneeze let alone upgrade your internal systems? You will have to invest some money to do this; a hard thing to do when cash is in short supply! You will also have to invest some time, but you have plenty of that. Here are some things you may want to consider:

 

 

1.       Marketing

a.       Call all your clients and say “hi”. Let them know you are looking for work and would appreciate any referrals. You may want to mention that “now is a good time to do a project at a good price”. You will have to put this in your own words so it sounds appropriate. Be sure to get their email addresses so you can send interesting news or links to places on the internet that they might want to see.

b.      Call your clients 3 or 4 times per year to keep in touch. You may want to track birthdays and anniversaries and send them a card.

c.       Set up a website. We have found that www.homestead.com will set one up for a pretty reasonable cost and provide you with a tool called SiteBuilder to maintain it and keep the information up‐to‐date. Refer to your website in everything you print or send business cards, letterhead, invoices, emails.

d.      Read Duct Tape Marketing for more marketing ideas. Great book!

2.       Training

a.       Business Skills – There is always room for improvement in

·   Business Planning

·   Motivating People

·   Marketing and Promotions

·   We do a seminar called “Successfully Owning and Operating a Construction Company”

b.      Estimating

·   We do a Best Practices seminar for Estimators at various venues around Northern California here new estimators can learn a few of the basics. Even seasoned estimators can brush up on skills.

·   2. If you are a Sage Master Builder user, we do a one‐day hands‐on workshop specific to the program.

·   Sage offers online and live training for Estimating Standard and Estimating Extended.

c.       Project Management  

·   We also do a Best Practices seminar for Project Management and a Project Management Workshop using Master Builder

d.      Accounting

·   We do a 2‐day “Bootcamp” workshop for Master Builder users and a 1‐day Best Practices seminar that discusses construction accounting at a high level.

3.       Policies and Procedures

a.       As a company grows it is imperative that policies and procedures be documented.

b.      Templates written in MS Word are available for a reasonable fee at www.copedia.com.

c.       Job Descriptions should be created for every position in the company. Templates for these can also be found at www.copedia.com.

d.      Procedures should be in place for:

·   Billing and Collections

·   Taking on new clients

·   Estimating and Bidding New Jobs

·   iv. Payment of bill to subs and suppliers

·   Hiring new employees

·   Terminating Employees Evaluating Employees

·   Acquiring and Evaluating Equipment and other Fixed Assets

4.       Look for ways to cut overhead without cutting to the core.

a.       Unload assets like vehicles, heavy equipment, and inventory (be sensible about this!)

b.      Move your office to a smaller space and pay less rent

c.       Cut hours to 3 or 4 days a week

d.      Trim benefits for the time being

e.      See about lowering insurance premiums (higher deductibles?)

 

5.       Look for money that is “falling through the cracks”.

a.       Bill for everything you can, including change orders

b.      Go through all your subscriptions and cancel the ones you don’t use or don’t need.  You may have picked up quite a few and forgotten about them.

c.       Make sure T&M charges are properly tracked and billed

d.      Go to your suppliers

·   Ask for larger product discounts

·   Ask for payment discounts

·   Ask for better terms like 60 days instead of 30 days.

·   Ask them to do some of the work your estimators and project manager might do, like take off and pricing.

e.      Set up a Purchase Order system to verify quantities and prices

 

6.       New Systems

a.       Estimating –

·   Replace your old Excel spreadsheet with one of Sage’s offerings like Master Builder Basic, Standard, or Extended. Your estimators can double their productivity with these tools so that you will be able to bid more jobs when the market comes back. More estimates usually translate to more jobs and more profitable margins. More money is made with estimating than any other part of the business..

b.      Project Management –

·   There are lots of offerings and they all require training/setup. Master Builder does a pretty good job for small to medium‐sized operations.

c.        Accounting –

·   Master Builder is used by over 8,000 contractors to provide them with accurate and timely information to keep jobs on track and evaluate profitability. Sage Timberline Office is used by over 16,000 contractors to track the needs of larger operations.

 

LCC specializes in the “Business Side of the Construction Business”. Our expertise and fine systems by

Sage help any organization do business better and keep money from “falling through the cracks”.

Let us help you help yourself.

Collecting Money

Contractors, like everyone else in the business community, are always suffering from lack of cash. This is especially true these days. Let's talk about maintaining the inflow with closer attention to collections. Important items to consider are:

1. Contract Terms
2. Prompt Billing
3. Proper Format
4. Watching for Overdue Payments
5. Making Collection Calls

Contract Terms

One of the interesting things about construction is the rules and the fact that there a few or none in the private sector. There are more in the public sector, but, depending on circumstances, even these are negotiable. Here are the four major areas of concern:

• Bill Points – The contract should specify how much can be billed and when. The object is to "front" load the contract, if possible, so your expenses are covered by income vs. borrowing on your credit line. Further, bill points should be clearly described so there is no confusion about timing. Private contracts might even have bill points specified on the Gantt Chart schedule.
• Change Order Billing/Claims Billing – Billing for these items can be done as soon as the work is complete if addressed properly in the contract. Waiting to completion only increases the likelihood they will not get paid.
• Retention – Again, if properly addressed in the contract, perhaps we can collect retention much earlier than the end of the job.
• Finance Charges – This is a touchy area. We suggest your contract address finance charges just in case. However, forcing the issue to collect them might be a different matter.

Prompt Billing

This is the one area most contractors can get the most results for the least effort. We simply need to make sure we are billing as soon as we can; not when we get around to it. Your contract will usually say the bill is due a certain number of days from the invoice date. So, if the bill is delayed a week, you can be pretty well assured the payment will be delayed a week. For larger bills this can get a little expensive. Just think about the daily interest on a large bill like $100K. At 6% interest it's almost $17/day.

Let's look at a contract with 30 day terms where the billing got delayed a couple of weeks vs. 15 day terms that got billed promptly. The difference is the 15 days plus the 10-day delay for a total of 25 days. At 17/day the total comes to $425. If you are billing $5,000,000 per year and this happens every time, your cost is 50 x $425 or over $20,000!!

The second major danger to late billing is the increased chance of not getting paid!

Proper Format

Many contracts will specify the appropriate format for an invoice like the AIA 702 and 703. If it does not, we think it is important to give the client enough information to make it easy for them to pay the bill; not too much and not too little. Too much confuses and too little makes it harder for them to write the check. Either of these may delay payment!

Watching for Overdue Payments

We think someone should be watching the AR Aging report on a daily basis. If payment is not received by the day it is due, someone needs to make a call. Of course, someone should have already made the call to see if the invoice was received. How about calling a couple of days after the invoice is sent to ask that question?

Making Collection Calls

Here's where you might think about formalizing the process and delegating the everyday collection efforts. Here is a step-by-step that might serve as a guideline for your company. Please understand this is a guideline. Maintaining relationships with your clients is a key to your success. Use these guidelines and some common sense to collect your money.

1. All contracts, where appropriate, will have proper pre-lien notices filed before work begins.
2. Bills will be prepared in the appropriate format and submitted to the client the day they are due.
3. Itemized Statements will be sent to the client monthly.
4. For invoices over $5,000
   1. A follow-up call will be made to the client or the client's Accounts Payable representative (APR) to make see that the bill was received. This call will be duly noted on the invoice.
   2. If the payment has not been received on the due date, our Accounts Receivable representative (ARR) will call the client or APR and inform them that payment has not been received. If the check has not been sent, our ARR will:
      1. Ask why payment has not been sent
      2. Rectify an problems if appropriate
      3. Determine when check will be sent and when we can expect its receipt
      4. Offer to personally pick up the check
      5. Offer to accept payment on a credit card
      6. Duly note the result of the conversation
      7. Send a letter, fax, or email to the client with a summary of the conversation.
   3. If payment has not been received on due date + 2 days, our ARR will again contact the client's APR and perform the same steps above. Send a 2^nd more strongly-worded letter to the client.
   4. If payment has not been received on due date + 5 days, our Project Manager (PM) will contact the client and repeat process.
   5. If payment has not been received on due date + 10 days, our owner will contact the client and repeat process. Send a stop work notice to the owner certified mail with return receipt requested.
   6. If payment has not been received on due date + 15 days, our owner will contact the client and repeat process. Send our attorney appropriate paperwork and note to begin legal proceedings.

Homestead for your Website

Our first website was designed by a pretty good web designer.  We did not know much about websites and he helped us quite a bit.  However, it became increasingly difficult to get updates uploaded and content changed.  So, we began looking for another.  Then, we found Homestead.com.  We were dubious that we could get all the features of programs like Front Page or Dreamweaver that lots of web designers use.  In fact there are some features like drop-down menus we don’t have that might be nice.  We can accept the compromise because their design software is pretty easy to learn and use.

 

Here are some cool things about Homestead:

 

1.     You can have them design your website for about $1,000 and they do a pretty good job with SiteBuilder.

2.     Or, you can design your own with their program SiteBuilder (we did this).

3.     You can easily maintain your own website with the same SiteBuilder.  This assumes you are reasonably comfortable with Windows programs like Word or Publisher since SiteBuilder acts much like these.

4.     They will host your domain and email and help you set these up.

5.     They have very good tech support to help you through issues

6.     The cost for us is less than $30/month

 

Check our site at www.lcc-mb.com to see what is possible.  Check out their site at www.homestead.comto get further details.

 

We give this service a thumbs-up!

Hiring & Keeping Great Employees

I have asked several audiences what the most valuable assets was in their construction company.  People think and come up with all sorts of answers like equipment, inventory, etc.  However, when pressed almost all will confess that their most valuable asset is employees.  What I would like to discuss is your great employees.  Which ones are these?

·         Arrive early, leave late when it is necessary

·         Take initiative and solve their own problems

·         Highly productive

·         Motivate others

·         Have a real concern that the job is done right and on budget

It is easy to spot the seasoned contractor that recognizes the value of employees and works diligently to get and keep them.  When we ask we are told about how many employees who have been around for years.  When we ask how they spend their work week they tell us of all the work they do finding new employees.  A lot of business people shy away from hiring.  Get over this!!  Great employees make a great construction company.

What is the Secret?

How do these seasoned veterans get these great ones?  Lots of work finding them and high expectations!  The work is in the hiring.  Those who value great employees are constantly on the lookout for additions to the workforce.  Many will find something for a great one even if it costs a little extra to do so.

Finding Candidates

We have found that great companies go thru quite a process to find new employees doing things like:

·         Post job openings on Internet

·         Advertise in Trade Journals

·         Hobnob at builder events and meet potential candidate

·         Incorporate Employment Opportunities on their websites

·         Have an employee who handles job inquiries

Once found, these candidates need to be vetted (popular new word).  Our problem as employers is that we have limited resources to find out who the candidate is and what baggage they are bringing with them.  The actual hiring of a new employee is one of the riskiest things a contractor does!

Checking Backgrounds

There are several things that should be done to minimize the risk of hiring the Employee from Hell. 

·         Call the last 2 or 3 employers.  Checking with only the last one will rarely get that frank opinion you are looking for.

·         If education, licenses, and/or special training are requires, check these out!  Very few applicants are totally honest with things like these.

·         Criminal Background Check  - Check out Alpha Background Investigations at http://www.alphabackground.com/.  This service is used by Robert Half and is reasonably priced.

Interviewing/

This can be time consuming for a busy manager.  Narrow the candidate down to 5 or less based on resume or references from people you know and trust.  Then, schedule interviews with the appropriate people in your organization.   There could be more than one person that needs to talk with your candidate.  Here are some items to consider for the interview.

·         Ask open-end questions that cannot be answered Yes or No.  It is important to hear how your candidate answers.

·         Ask why they want to work for your company.  This will tell you if they have done their homework and understand what and who you are.

·         Ask about their career plans.  You are trying to get a sense of how long they will be with you.

·         Ask about salary requirements and enjoy the ones who will negotiate with you rather than simply take what you have to offer.  This will serve you well when they deal with your subs and suppliers down the line.

Salary Offer

Seasoned contractors always have their ear to the ground with regard to prevailing salaries in the area.  We think you should pay the current rate.  However, we strongly recommend a probationary period of 3 months where the candidate is paid at 80% of the going rate.  At the end the rate goes to 100% with a bonus of the 20% withheld for the first 3 months.  If the employee does not measure up, or we find information that contradicts information on the resume, the 20% is retained and we part ways.  Look for your candidate to negotiate.  If they negotiate with you, they will negotiate with subs and suppliers!

High Expectations

Once you hire great employees you need to keep them motivated.  Do this with planning and communicating schedule, labor, and quality expectations before the project begins.  “This job is to be completed by May 15 (90 days), using this schedule of hours (by task), with no more than the usual number of callbacks from the client.”  Then you need to tabulate and communicate the results!!  We suggest you do this weekly for crews and project managers.

Replacing a Great Employee

Contractors who have been in the business for a while know only too well the value of a great employee. You know this individual! They show up on time, solve their own problems, and always have your best interests at heart. If you have ever lost a great one, you probably remember that pit in your stomach when you found out they were leaving. Why so?  Because you knew you would have to go through the very difficult process of finding a replacement. We want to examine this in terms of dollars. First we will look at a skilled craftsman. Then, we will look at a project manager or superintendent.

SKILLED CRAFTSMAN

Let us assume your great journeyman was being compensated at $72,000 per year. Let us further assume that management time to supervise this individual was minimal and compared to the average journeyman this individual consistently produced at a 20% higher rate. For some reason, they are leaving your company.

So, you could go to the union hall or place an ad in a trade journal for the replacement. The union hall is relatively inexpensive. The ad will cost you about $500. Not to bad on either count. You get 20 applications for the job. You have your staff run some background checks and narrow the list to 5 who you will interview. That took someone about 4 hours. It will take you another 4 hours to do the interviews. So far, so good.

You hire this individual and begin familiarizing them with your projects and the way you do business. Let's be conservative and say it takes 3 months to get them up to speed. We have to assume their productivity is less than normal at the outset (assume 75%) and that this person will probably produce at 100% at the end of 3 months. If we do the math, that ramp up cost you 1500 the first month, about $1,000 the second month, and about $500 the third month for a total of $3,000. Add to that your hiring expense of about $2,000 and the cost is a total of $5,000.

Now ask yourself what the likelihood is that your new employee will be around after the 3 months? You never really know who you have hired until they have been around for a while! The chances are between 2 and 3 to 1 they will stick. If we assume we have to hire 3 to get the one we want, your hiring expense is about $15,000 or about 20% of their annual salary. This does not take into account the fact that your great employee was producing about 20% more work. If we have to pay about the same for the replacement, your cost has now gone up about $1,200 per month; another $15,000 per year!

So, the pit in your stomach was not only the prospect of having to hire the replacement and all the time it was going to take, it was the cost you may not have realized it would take; a lot of money!

PROJECT MANAGER

It only gets worse when we have to hire new management people. The salaries are higher, the hiring costs are more, and the ramp up time is longer. Get used to the fact that the national average for this individual is about 80-100% of the annual salary. So, a project manager making $100K will cost about $80-100K to replace.

HIRING RISKS

Let's add another something to consider when we hire new folks; employee fraud and/or incompetence. You may not have had the pleasure of either of these, but then again you probably have. Here is a list of things you need to at least be aware of with regards to hiring construction workers:

1. Fraudulent workers comp claims that raise your work comp costs
2. Stealing materials and tools
3. Fraudulent time reporting
4. Hiring phantom employees and subs and pocketing the wages
5. Submitting phony supplier invoices and pocketing the cash (usually working with the suppliers employee)

This just adds to the potential misery. What's the answer? Figure out how to keep them around. See my article on motivating and keeping employees.

Pricing the Job

Real Estate appraisers use 3 methods to arrive at the value of a property:

1. Income Capitalization Approach
2. Cost Approach
3. Sales Comparison Approach

Contractors would do well to apply some approaches to the price they bid on jobs. But first, let us look at the objective we are trying to attain which is the highest price the client will pay and be satisfied they are getting a fair deal. That being said, do you have some built-in rules for pricing that are cutting profits? If so, change!

Cost Estimate

Most contractors first consider their costs first by detailing the quantities of material, labor, equipment, subcontractors. Then, current costs are factored in to arrive at a total cost to finish the job. Let's not confuse your costs with the price you charge. And, let's not forget to add an overhead factor to your costs before adding profit. A lot of people add a margin that includes overhead. We like to do the overhead calculation first (gets us to break-even) and then play with the profit figure.

Market Assessment

If the market is such that lots of your competitors are also bidding, then you need to lower your profit to get the work. In a really poor market you might not factor profit in at all so you get jobs to keep your employees busy. In a "bull" market we believe you should raise the profit figure substantially depending on work load and your limited resources.

Your resources

Your ability to finish your project is limited by your resources in supervision, skilled labor, availability of materials, and availability of subcontractors. Once you have maxed these out you simply cannot do any more work. You will have to make a conscious decision to grow the business to take on more jobs. Please consider that fast growth is many times uncontrolled. Uncontrolled growth can lead to lots of problems that have hidden costs. These costs may very well eat substantially into your profits so that the extra work might not be producing what you thought it would under normal circumstances.

Client Assessment

We know that some clients can be difficult. This difficulty manifests itself in slow or no pay for work, lots of disruption, and a potential for being sued. Not fun to be sure! We suggest doing a series of background checks to root these out before you price the job. If you are doing work for a proven bad actor, this will definitely need to be added to the price. We know of subs who routinely mark up for GC's who are slow pay and difficult.

Example

Let's assume we are bidding on a job where we are confident our hard costs will be $50,000. We then determine that last year our overhead was 8% of hard costs and have every reason to believe that overhead will be about the same this year. So, we add $4,000 for a break-even cost of $54,000. In a poor market this might be our price to the client. In a normal market we might figure a 10% profit and bid $59,400. In a bull market, perhaps we bid $65,000. In a bull market with a difficult client we might bid $75,000. Remember these percentages are for illustration only. There will be differences depending on your trade.

Dictating Emails with Jott.com

Cell phones have added a new dimension for the project manager. We can get hold of suppliers, subs, clients, inspectors, etc. from the field with a call. The problem is phone tag. Many times these people are not available and we leave a message. Wouldn't it be nice to send them a quick email and have a copy sent to your in box? Here is the latest to make this device even more useful: Jott.com.

This service is relatively inexpensive and allows you to dictate messages to anyone in your email list by pushing one button on your phone. A nice female voice asks Who do you want to Jott? You give her the name and it looks it up. You then dictate your message (30 sec. max). You are then asked to confirm delivery and away it goes. You can also do some other useful things with the service. When asked Who do you want to Jott? you can say Reminder or Appointment. Reminders are transcribed and sent to you. Appointments end up in your Outlook Calendar.

We think this might very well be worth a try. The basic cost is $13.00 per month.

www.jott.com

Marketing and Promotion are Meant to Build Relationships

Where do you get your business from?  The answer is from people who trust that you will get the job done on time and on budget. 

How do they know that will happen? 

1)      You have done work for them previously and did a good job at a fair price.

2)      You did work for someone they know who sang your praises.

3)      They saw one of your jobs and like the quality of the work.  They asked around.

 

For some reason they trust you and are willing to put their project or part of it in your hands.  Construction clients spend a lot of money and need to feel very good about your ability to do it the way they intended it to be done.

 

So, how do we get new clients?  We start by letting them know we exist.  That is one of the main purposes of advertising, signage, and all the other ways we spend the advertising dollar.  Do they trust you just because of the promotional stuff?  Not yet. 

 

The next step is to make the sales call to see what they need, what the budget is, and the schedule.  This gives the client a chance to meet us and get some particulars like references.  How we act during the pre-contract meetings and how well we respond to questions and concerns will have a huge impact on whether they put their signature on the contract. 

 

At some point a trust is established and we do business.  Are you done yet?  NO!!  The next step is to deliver what was promised in a professional manner that leaves the clients perceiving that they got more than what was promised.  Notice I said “perceiving”.  Usually this means that your project manager went the extra mile and communicated with the client over the course of the project.  Weekly reports, returned phone calls, proper and accurate billing, consideration for neighbors, etc. don’t cost much but greatly enhance the perception of the client.  Now we are done, right?

 

NO!!  You spent a lot of money getting the client.  You spent a lot of time and money preparing the estimate and proposal.  You went the extra mile to make sure they loved working with you.    So now you let them drift away?  That would be the height of foolishness. 

This will turn them into enthusiastic referrals!  Referrals cost much less to obtain than the clients we got from the advertising and they are much more likely to buy the job from you!

• Now you pay attention to post construction calls and make sure they are attended to promptly and professionally. 

• Now you put them on you contact list and call them every few months just to check in. 

• Now you include them on any mailing pieces you send to prospects