To follow is an overview of what I have found over the years regarding contractors.
I.The nature of the people who are contractors;
II.Requirements for successful contracting;
III.Conclusion:Typical shortcomings of our clients' operations – how to improve.
I. NATURE OF THE PEOPLE WHO OWN CONTRACTING BUSINESSES & HOW THEY CAN MAKE MORE PROFITS IF TAUGHT AND GIVEN THE TOOLS.
A. Contractors are usually skilled tradesman. Therefore the technical side of their trade is known very well but the business-side-of-the-business (understanding the financial aspect is usually fair at-best).
B. Proud of his work and his company. This can sometimes be a problem because he cant see the trees through the forest and can be very defensive of his business success (or) lack thereof. His trade is more important than understanding the profitability. (This is where a contractors must have an outside objective look at his business to see the trees through the forest).
C. Not interested in paperwork other than plans and blueprints. No trades person wants to become an accountant or financial analyst but just as their trade has required tools to get the job done right the financial have tool sets as well that simplify the job of making the correct financial decisions.
D. Doesn't really understand the cost of doing business. There are many hidden costs of doing business and if not know or taught how to calculate the contractor will always wonder were the money is going.
E. Hands-On Individual – would rather work than manage. There is nothing wrong with working but if they don't manage their business no-one else will. Monies will always just change hands.
F. Enjoys the “game†of taking chances. A roller-coaster comes to mind. Always up and down. Usually manages the business from his checkbook. If there is money in the account it's up. If there is little or no money in the checkbook it's down.
G. Wheeler-dealer.
H. Maintains a lot of detailed information in his head.If the contractor has a family the business will have trouble continuing in his absence. The business can be a “house of cards†because if you took the owner out if the business the business would be non-existent.
I. Constantly moving.If asked why the financial foundation and the policies and procedures for the superintendent don't exist...it's usually because they are working on that but just don't have enough time to finish it. The contractor and the deadline is always moving.
J. “Knows†the exact status of each job – often accurately, except for profitability. The most famous phrase is “I know I lost money on that job but made money on these twoâ€. Profitability should always be the first item of expense there is no reason to do a job that cant make you a profit unless the business owner is tracking their break-even point and seeking super penetration.
K. Wants no part of the regimentation of systems - “shoebox bookkeeper†The contractor must want to change. There are many ways to extract more profitability from each job. If the owner want no part of the day-to-day systems they must at least be able to follow them if they appoint someone else to design them.
REQUIREMENTS FOR SUCCESSFUL CONTRACTING
NOTE: After reviewing A-M below...rather than saying “I do that†lets be honest with ourselves and answer truthfully “yes†or “no†to each of the numbered points below the requirements. None of the answers can be “sometimes†or “I am working on thatâ€. If you answer “YES†you must be able to provide the written process or the written calculation(s).
A. Carefully select jobs to bid.
1.Worksheet to compare profit potential and resource requirements.(Y N)
2.Detailed job estimating sheet. (Y N)
3.Worksheet determining expected profit on a given job, must consider profit at various bid prices multiplied by the probability of getting the job at each of those prices. Similar to expected payoffs of a given poker hand with different number of players in the game.(Y N)
B. Thoroughly analyze each job selected before bidding it.
1.Worksheet for pre-bid analysis for the job itself.(Y N)
C. Exercise extreme care in estimating
1.“Seat-of-the-pants†or SWAG estimating used instead of of reliable mathematical methods. (Y N)
2.Is there a required Semi Detailed or Budget Estimates applied ie. Labor Fully Burdened rates (Y N)
3.Are you including sufficient allowances for indirect costs, or job burden,and overhead expenses, or fixed burden as a percentage of direct costs determined from detailed historical financial statements. (Y N)
D. Include a realistic markup for profit in bids.
1. Is your profit planned for as % markup or are you taking into account gross profit margins / contribution margins as a “Profit Factor†where M/(100 + M) where M is the percentage markup on total direct costs. (Y N)
2. Are the expenses of depreciation and amortization recognized (Y N) If recognized what fund are they applied to in your accounting ( )
E. Try to obtain at least some work through negotiation.
1. Is the responsibility for reporting information from the jobs placed with the field supervision on the job and are they charged with profit as a responsibility (Y N)
2. Do you have a cost variance in conjunction with a progress report that allows management to have the question of WHY answered. (Y N)
3. Close control of costs in the field is impossible without adequate supervision. Are these reports available(Y N)
F. Maintain effective cost reporting and control procedures
1. Profit is not cash. A job under consideration for bid may appear to be profitable, but since very few customers pay in advance, you cant take it with you without sufficient cash on hand to start work. What is your working capital? ( ). How did you arrive at that figure ( )
2. Do you maintain a cash budget, or cash flow projection, accurately and up to date (Y N). Don't forget retainage.
G. Maintain adequate cash to do the work
1. Do you understand how to use the financial statements to ask questions, make decisions and manage the business (Y N). If Yes then what is your businesses contribution margin? ( )
H. Hire and keep the best possible supervisors
1.If the foreman or the superintendant charged with profit responsibilities do you have an R.O.I. Figure that is used for incentives. (Y N)
I. Always strive to improve operations
1.When was the last date you had your business analyzed for improvement by an outside objective professional. This does not mean your tax accountant because the Accountant is the historian for the business, they take your data and prepare taxes from it.
CONCLUSION Typical shortcomings of our clients'operations – how to improve.:
Profits leaks in the business of a contractor can be stopped fairly quickly if the owner is able and willing to make more profits.
The typical shortcomings of clients in the contractor world that can easily see tremendous gain in profits by getting and using the required tools for the improvement of the following:
1.Lack of systematic approach in selecting jobs to bid.
2.Inadequate pre-bid analysis of the job itself.
3.“Seat-of-the-Pants†or SWAG estimating used instead of reliable methods.
4.Inadequate understanding of and planning for profit.
5.Inadequate actual cost reporting and control procedures.
6.Insufficient cash.
7.Poor understanding of principles of financial management.
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