This from The Contractor’s Business Coach. Intended for General Contractors, most of the top mistakes apply to us painters as well.
The 10 Biggest Mistakes Contractors Make – Revisited
by Ron Roberts
It’s been several years since I published my first report: The 10 Biggest Mistakes Contractors Make. I wrote and released the report during the peak of the construction boom in late 2006. The report was intended to be a warning shot across the bow of construction company owners. I knew most were only succeeding due to the free-flowing money that flooding the real estate market. If the money was cut off, the economy would turn and the poor habits of contractors everywhere were going to hit them like a Tsunami. Few would survive.
In hindsight, the economy turned much worse than I thought it could. Lending completely dried up. Developers were forced to liquidate well-performing properties to accommodate the insanely tight new bank capital requirements.
As I look over the list today, I’d probably re-order a few of the mistakes in light of the present economy. However, the 10 are still the 10. I rarely meet a contractor who isn’t failing on at least five of them. Crazily, messing up on one of them at the exact wrong time can put you out of business. It’s not likely, but it’s possible. More commonly when a contractor goes out of business he has made 8 or 9 of the mistakes.
The following is a greatly shortened version. The full report is available at www.ContractorsBusinessCoach.com.
Grab a blank piece of paper. Drawn a line down the middle of it and a line across the top. Above the left column write INSIGHTS and above the right column write ACTIONS.
List the insights you’re gaining from the report. Next to each insight, write down the actions you’re going to take to protect your business.
MISTAKE #1: NOT SELLING AGGRESSIVELY
The biggest business mistake you can make is assuming that no matter what you say, people will always take the lowest price. Huge mistake. HUGE!
Clients, including general contractors, will ignore the lowest price offer when it is in their best interest to do so. In other words, selling is helping a prospect choose the right course of action, even if it comes at a higher price.
When you don’t sell:
- You struggle to make money.
- You work for bad clients.
- You lose good people.
When you do sell:
- You set your own price…and profits
- You pick and choose your clients.
- You can hire the best workers who help you maintain your competitive advantage.
The simple truth is; commercial contractors have been trained to offer the lowest price they can.
Clients Will Pay More For Your Services
Clients pay to have problems solved. It’s that simple. You must convince your prospect that you will solve his problem better than the next guy and the right solution costs more.
MISTAKE #2: NOT HAVING AN EFFECTIVE LEAD GENERATION SYSTEM
Commercial trade contractors often rely on general contractors to track down work opportunities. Tracking down low-price-wins bidding opportunities is not a lead generation system.
Contractors who thrive do so by generating negotiated work. Contractors who never land negotiated work have broken lead generation systems. It’s that simple. Negotiated work is the acid test of your lead generation system.
If your lead generation system is not producing ample opportunity for negotiated work, you need to fix the problem.
Marketing Efforts Fail When
They Are Not Performed Consistently.
Okay, so you’ve committed yourself to generating good leads, you deployed your favorite two lead generation systems, and worked them hard, but the leads aren’t coming in. You’re growing very frustrated. You’ve spent all that money and time on lead generation and it’s BOMBED.
Your message isn’t hitting your prospects’ hot buttons. If your marketing message isn’t hitting your prospects’ emotional hot button you’re flushing money down the toilet.
This is the reason lead generation is so tough to get right. Whatever you are saying, in writing or in person, must be phrased almost perfectly.
Test your marketing message. Consistently work your lead generation system. Reap the rewards.
MISTAKE #3: WORKING FOR BAD CLIENTS
There really is no other way to say it, so here it goes:
Bad Clients Will Break Your Business
Bad clients come in all shapes, sizes, and backgrounds but they all have one thing in common. They have completely unrealistic expectations. They want steak on a hamburger budget. They’ll throw you under the bus to save a buck.
Bad clients live by the golden rule, “He who has the gold sets the rules.” Bad clients use their control of your cash to force you to do whatever they want you to do…including accepting less money than your contract calls for.
You have to be sniff bad clients out before they steal your life savings. Do you often feel your clients are out to get you? To take advantage of you? Guess what?
How many times have you had money withheld without legitimate reason? How many times has a client demanded you go above and beyond the work scope just because they believed that’s what they were paying for? How many times have you been told your price is too high and you MUST bring it down?
Your clients don’t care about you. All they care about is about is getting their job done on time, in budget, and exactly as they want it…whether they paid for that or not. They couldn’t care less how you come out, whether you lose your shirt or not. That’s not their concern. That’s why over 75% of construction companies go out of business within 5 years and over 90% fail to make it 10 years.
You must stay away from clients who:
- Withhold payment as long as they wish.
- Refuse to compromise.
- Nickel and dime you to death.
- Back-charge you for perceived quality faults.
- Verbally order changes then refuse to pay a fair price for the change after the work is in.
- Use design teams who produce incomplete or error-filled drawings and specs.
You just can’t escape bad clients. Don’t let bad clients put you out of business.
MISTAKE #4: SIGNING BAD CONTRACTS
The laws governing the construction industry are well established. Here is what they boil down to:
You Will Be Held Accountable To Any
Terms and Conditions You Sign For.
Most contractors sign a bad contract now and then. When you do, you open a Pandora’s Box of headaches such as:
- Agreeing to a scope-of-work that you didn’t cover with your price.
- Throwing away your ability to force prompt payment.
- Throwing away your right to sue.
- Giving your client the ability to avoid paying for change orders.
Here are three actions that will keep you out of hot water:
- Learn to read contract language or find a good construction lawyer.
- Create a set of standard contracts and proposals.
- Read every contract closely before signing or pay your lawyer to.
Contracts are a necessary part of our industry. Ignore their language and you may end up paying the ultimate price – your life savings.
MISTAKE #5: NOT HAVING A LARGE CREDIT LINE
(Note: here is the one mistake I would re-word in light of today’s incredibly tight lending market. I’d re-word this to be MISTAKE #5: NOT MAINTAINING A LARGE NEST EGG)
The commercial construction industry is notorious for its slow pay. 60 day pay cycles are quite common (update: 90+ days is now common). Slow pay stresses your ability to pay bills on time, most of which can’t be delayed, such as payroll.
While working for a General Contractor, it never ceased to amaze me how few of our subcontractors had credit lines. Probably less than one out of ten did. That is no way to run a construction company.
You need to solve your cash flow problems before they arise. The solution is quite obvious: arrange for a line of credit with your bank. (update: leave money in the bank – a lot of money)
Your Credit Line Should Equal
10% of Your Annual Sales
Assuming you have sufficient professional and personal assets to back a credit line, here’s how to get that line going.
1. Have your CPA prepare a balance sheet for your personal assets and liabilities.
2. Copy your reviewed financial statements from the last two years.
3. Have your CPA prepare your financial statement year-to-date for the current year.
4. Create a 12 month cash flow budget that shows projected sales, job expenses, overhead expenses, inbound cash, monthly cash deficit or supply, and year-to-date accumulated cash flow.
5. Sit down with your banker, go over the documents and ask him whether he can get the line of credit you need.
6. If your bank is unwilling to provide the line you need, call your CPA, insurance agent, and bond agent and ask for banking references.
7. Schedule meetings based on their recommendations.
8. Keep meeting bankers until you find one that will provide your company with the support you need to run your business right.
Always Arrange For Your Credit Line
WHEN YOU DON’T NEED IT!
Waiting until you need credit is the surest guarantee your bank will not grant it. Always deal with a bank from a position of strength.
Of course, once you’ve been awarded your credit line your work isn’t done. As your business grows, your line needs to grow. To keep your banker happy and to get him to raise your line, you must:
Run A Profitable Business
You also need to:
1. Keep your balance sheet strong by leaving money in your business.
2. Pay off your line as soon as the cash comes in.
3. Keep your debt to equity reasonable.
4. Keep your banker up to speed on your business’ progress and future plans.
Proper cash management can save you a ton of money. Work with your banker. Grow your line-of-credit.
MISTAKE #6: FAILING TO HOLD FIELD LEADERS ACCOUNTABLE
Who do you pay to:
- Ensure your crews work safely?
- Ensure your crews perform quality work?
- Ensure your crews hit their production targets?
Your crew leaders, your foremen, and /or your superintendents. That’s who.
What happens when your field leaders fail to perform their jobs correctly? They endanger employees, customer satisfaction, budgets, and schedules. That’s a hefty price to pay for the poor performance of just a handful of people.
Let’s be honest here, field leaders have a tough job. So hard in fact, they rarely do their job right. Most contractors are so fearful of losing the leaders they have, they are hesitant to hold them accountable for poor performance. That is a costly mistake to make.
MISTAKE #7: NOT KNOWING THE COST OF WORK
Few contractors really know their cost of work or the speed at which their crews move. The problem usually shows up the first time they bid on an out-of-the-ordinary scope of work. As the contractor gets deep into the job, he suddenly realizes he is woefully short on man-hours. Has this happened to you?
Let’s face facts. A contractor must be able to predict how long his crews will take to complete their work. Otherwise projects will consistently run over budget and year end results will be less than expected and desired.
Here are a few suggestions to save you a lot of headache with your job costing.
Find the middle ground. You can mess up your tracking by being too general, assigning all hours to the job without further breakdown, or too detailed, assigning every hour to the cost codes used by your estimator.
Have your crews assign their labor and equipment time to the four to six tasks that account for 80% of the work. Have them throw the rest into an “other” category.
Do not lump equipment costs into overhead and spread them across all jobs based on job price. That approach typically leads to horrible job selection decisions. Know the average hourly cost of owning and operating each piece of equipment and charge it to the job based on hours used.
Financial accounting and tax accounting procedures are in direct conflict with proper job costing techniques. Unless you are running one of the high-end accounting packages (Timberline, for example), you may need to run two separate accounting systems: one for financial accounting and one for job costing. For contractors generating less than $5 million in sales, the easiest solution is to use spreadsheets for tracking and analyzing job costs.
Remember, not knowing how long it takes to put in work will lead to massive financial losses. Make sure your job costing system is producing the information you need.
MISTAKE #8: ACCEPTING HIGH TURNOVER
Construction workers are nomadic by nature. Guns-for-hire if you will. Furthermore, there isn’t exactly an over-abundance of really good ones. You are in a recruiting war at all times.
In order to be profitable, your employees must perform up to expectations; they won’t if you are constantly suffering turnover. Turnover is a killer.
Turnover leaves you standing in place. You end up wearing yourself out on staffing tasks. Turnover takes time away from sales and marketing activities. It takes time away from people development. It takes time away from your family.
Finding and recruiting good workers is difficult, especially if your company gains the reputation for being hard on employees. Research shows that 70% of employees who change jobs do so because they don’t like their immediate boss (this touches on Mistake # 6, failing to hold field leaders accountable). You’d better create a management team (including foremen and crew leaders) who knows how to get the most out of its people without ticking them off.
High turnover is a warning sign that your management team needs to make a few changes in its approach to managing the personnel. It really doesn’t have any choice.
MISTAKE #9: PURSUING A FOOLISH STRATEGY
We’ve talked about selling, marketing, people management, cash flow, but we haven’t addressed the big picture problem: trying to win with a losing game plan (strategy).
What strategy do most contractors use? Hire me! I’ll do anything you want. You got cash? I got the time.
Here is a list of the common strategy problems I see:
- Trying to do too much with too little office support.
- Taking on jobs they don’t have the right equipment for.
- Taking jobs larger and more complex than their team is capable of managing effectively.
- Pursuing work they enjoy instead of work they can make money on.
- Putting the wrong people in wrong jobs.
- Trying to compete on low price (Mistake #1) when they aren’t the lowest cost provider.
Very few contractors go through the strategy process systematically. When they don’t, they court trouble. Your clients’ expectations and your competition’s aggression change yearly. Your must keep your business strategy current. You must keep it realistic.
Find your company’s core strength – the thing you do better than every other contractor in your market. That could me your understanding of a certain client (niche market). That could be your use of technology. That could be your ability to attract highly skilled workers. That could be your financial strength. It could be several things.
Figure out how that core strength gives you an advantage that is meaningful to your client. Figure out a way to express that core strength persuasively to your clients (your Unique Selling Proposition).
Build your lead generation and staffing systems around this core strength / Unique Selling Proposition.
In order to win, you must pursue a strong, unique strategy. If you are adopting the same strategy as three or four other contractors in your area, you are fighting an uphill battle. Play by different rules.
MISTAKE #10: RUNNING THE BUSINESS WITHOUT A PLAN
As the old saying goes “When you fail to plan, you plan to fail.”
Contractors tend take whatever work comes their way and spend whatever money they feel like spending. When they do, they arrive at the end of the year surprised to discover:
- Their year was unprofitable.
- Their crews stood around a lot.
- Their equipment was often unavailable due to breakdowns.
- Most of the jobs ran significantly behind schedule.
Any of this sound familiar? It comes from not planning.
Few contractors plan well. Planning is a tedious and boring task to action oriented folks (like contractors). Ask yourself this, “How likely am I to meet my business goals if I don’t figure out exactly how I’m going to meet them?” Not very likely.
Would you try to build a building, bridge, or parking lot without plans? You shouldn’t try to build a business without them either.
The 10 Biggest Mistakes Contractors Make
Let’s revisit the list of mistakes you must avoid if you are to reach your financial goals, stabilize your company, and live a less stressful life.
Mistake #1: Not selling aggressively
Mistake #2: Not having an effective lead generation system
Mistake #3: Working for bad clients
Mistake #4: Signing bad contracts
Mistake #5: Not Having a Large Credit Line
Mistake #6: Failing to Hold Field Leaders Accountable
Mistake #7: Not Knowing the Cost of Work
Mistake #8: Accepting High Turnover
Mistake #9: Pursuing a Weak Strategy
Mistake #10: Running the Business Without a Plan.