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Contractors Have to Plan to Counter Industry's Risks

Kent Beachy
Apr 2, 2004

The old adage, "the greater the risk, the greater the reward," should include a caveat: "except in construction." Entrepreneurs, especially contractors, absorb risk in literally hundreds of ways, often without rewards.

These risks include workforce issues such as safety, health, performance, and hiring and retaining employees. Material performance risks also exist including flawed or incorrectly handled materials as well as statutory issues like payroll taxes, income taxes, wage and hour, discrimination, safety, prevailing wage, EPA, pre-qualifications and sales tax. Job site security risks such as theft of materials, tools, public safety, fire and wind also need to be considered as do risks involving customers such as certainty of payment and satisfaction. Many of these risks are unique or magnified in the construction industry. On top of these risks, contractors share the primary risk of all entrepreneurs. By definition, entrepreneurs have risk of loss.

As an accountant and business consultant, I hate to see companies navigate through all these risks alone and then be victim to the risk of loss. To help contractors endure these challenges, here are three simple steps you can take to plan for these risks:

Step 1: Commit Yourself to Planning

I have yet to see a contractor who doesn't work harder than the average businessperson, with long hours, sleepless nights and lots of sweat, and enduring lean times and difficult circumstances regularly. Unfortunately, working hard each day doesn't ensure that some cosmic force will simply reward that effort. It's critical that contractors have a vision for their success including the process and steps that need to be taken to achieve that vision. To do this, you must be committed to the planning process.

Step 2: Develop a Pan for Pofitability

Too many people think hard work guarantees success. In reality, it's not only hard work that brings success, it's intelligent work as well. The rewards require proper planning. While a plan doesn't need to be extremely detailed and complex, it should address the ways in which you plan to reach your vision. The plan also needs to be realistic and achievable.

Contractors can begin the planning process by addressing the following questions:

• What is your break-even point?
• What gross profit percentages are you capable of achieving?
• Is it different for various niches or lines? What is your overhead?
• What volume of work could your current overhead support?
• As you increase your volumes, what is the largest increase your overhead will require?
• Where are you really making your margins?

Step 3: Implement and Maintain a Business Management System Designed for Profitability

First, it's important to look at your job cost system and determine how it's being utilized. Is it being used purely for historical purposes, or to manage your current activities? Are you under-utilizing your management system or do you receive constant feedback from the project manager and the field to report changing conditions?

Here are a few questions to ask yourself to help assess the use of your current management system:

• Historically, do you understand exactly where a job under-performed?
• Have you extended that knowledge into ways to change your systems to minimize chances of re-occurrence?
• Do you have a loop of communication between estimating and production?
• Do you understand for sure that the poor outcome is a result of failures in the field instead of poor estimating?
• Do you know what standard pricing and quantities are used in estimating? Are they periodically revised?
• What mark-up for overhead and profit is estimating using? Is it consistent with the assumptions in your budgets/plans?
• How is estimating allowing for use of company-owned equipment?
• Is your accounting system applying costs for company-owned equipment exactly the same way as estimating so that performance records can be compared to budgets?
• Do you insist that your job cost system be totally reconciled to, and a product of, your controlled accounting environment?

As a contractor, you have accepted that your success mandates dealing with risks that are more complex and more dangerous than most people would ever choose to accept, so it's important to reward yourself with habits and systems that deal effectively with entrepreneurial risk of loss.

This article was originally published in Columbus Business First, April 2, 2004 issue.

Note: This content is accurate as of the published date above and is subject to change. Please seek professional advice before acting on any matter contained in this article.

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