My editor says I am too mean and nasty, “Lighten up, stop scolding so much, be nice.” Oh, the burden I have to bear. That said, let me share with you some stuff that I keep hearing that I would like to comment on, again. Promise, I will do this nicely.
My business is different!
How do you know? I think many who say this are comparing their own way of doing business to their perception of others in the business. That is a very limited view. And it allows some contractors to say that basic business practices don’t apply to them, so they need to invent a wheel that will work for their business.
That’s an expensive route to take. Many cavemen probably went hungry or worked way too hard until they got the first wheel figured out. Are you sure you want to go that route?
Learn from the mistakes of others (and yourself), and do what it takes to be successful. Start by charging enough for your work to pay your job costs, overhead and make a profit.
Be different by returning your phone calls, showing up for appointments on time, dressing and acting professionally, paying your bills, and in general conducting business like business instead of as a hobby. Since maybe one in 10 contractors behave like that, you will be different and that is good.
Cost plus contracting
I had a call the other day from a contractor who has been to my class. I’ve talked with him many times. He was grumping about the uncertainty of estimating and said he was going to go to Cost Plus contracts. He said, “It is safer and I will get paid for the work I do.”
My response is the same one I’ve been saying for years. If you’ve read our book or previous newsletters, been to our classes, or used our audio/videotapes, you know the subject has been discussed, cussed, and re-cussed many times.
Cost Plus is not a safer way to contract. If anything it is at least three to four times more likely to cause you a problem with your customer. You don’t have to take my word for it. Call your attorney and ask them what type of contract generates the most lawsuits or arbitrations. You will quickly find that Cost Plus is always at the top of the list.
There are more problems than just the legal expenses you’ll incur to collect that last payment. You will also need at least three times as many meetings with your customers using Cost Plus. That is, if you can get them to attend the meetings. At those meetings you will have to show your customer all of your numbers. If you ever have to go to court, you will have to justify those numbers. If the other side has an expert witness that knows their numbers, they will catch you on every item that you have declared a job cost when in fact it should have been an overhead item. You will then be accused of double dipping, and at that point you have lost the battle.
Why put yourself through that? Use a firm price quotation and a fixed figure contract. Don’t tell me you need to use Cost Plus to deal with surprises — use a Demolition and Discovery contract to research those areas of job that are covered up or buried.
But if you don’t like what I’m saying and intend to continue (or start) using Cost Plus, I am available as an expert witness. For some reason, all of my expert witness work is on Cost Plus jobs — apparently there isn’t much of a market for expert witness work with fixed figure contracts. (Didn’t I say that nicely?)
Be selective, but find informational blogs to read. Like forums, stay away from blogs that allow flaming or have a vendetta against others. Our blog, www.markupandprofit.com/blog, has gotten great comments from our readers and we encourage you to drop by, read, and maybe post your own thoughts. Everyone is welcome to share their thoughts with their fellow contractors. Also check out the blog for Rural Builder editor Scott Tappa at http://ruralbuilderbuzz.blogspot.com.
Easily half the issues our coaching clients come to us with are the result of the lack of or improper use of additional work orders or contracts. The lack of paperwork or the improper use of additional work orders or contracts is a major reason contractors continue to go out of business.
First, additional work orders. When a job changes, call a timeout, estimate the cost of the change, add your markup and at least 10 percent more, write the change, and have the owner sign it. Do all this before the change is made, and it doesn’t matter what is going on, how it will impact time schedules or any of the other 49 reasons I’ve heard about why an additional work order wasn’t used properly.
You present the additional work order to the customer, they sign it, and if the change is $2,500 or less, they pay for the change upfront. If it is more than $2,500, get half upfront and the other half at the next progress payment whether or not the change is complete. This procedure, by the way, should be clearly spelled out in the contract that they signed before you started the job.
Now, if a change is requested between the last progress payment and the final payment for the job, the additional work order is paid 100 percent up front. That way you keep the final payment on the job to 2 percent of the sales price. If the customer doesn’t like those conditions, then don’t make the change.
One more comment on additional work orders. Make sure your staff understands the rules. Remind them that until an additional work order is signed and paid, they are to do only the work specified on the contract. If they do work not specified on the contract, you won’t pay for it.
Next, contracts. You should be constantly looking for new and better contract language to include in your contracts. When you find something new, have your attorney review it and put it in your contract.
What, you don’t need all those details on your contract? A good rule of thumb is to leave anything off your contract that you can afford to pay out of your own pocket twice.
I take issue with one- or two-page contracts. Their only advantage is that they are quick and easy to write. But the time and effort saved in writing will be spent at the end of the job, trying to collect payment, or during the job, arguing with your customer.
Today, one- or two-page contracts can’t include everything you need to cover yourself. Our litigious society, with all the well-meaning but ill-informed consumer rights groups and news reporters telling your customers how to deal with all the unscrupulous contractors, puts you in a bad spot to begin with. Add in the dishonest customers who define right as “whatever makes me happy,” and you better be sure your contracts spell out all the details.
Include clear language on items such as a rock clause, inadequate electrical service, hazardous building materials or gasses, change work orders, governmental required changes to job plans, cost increases, and most important, a payment schedule that gets you paid about every two weeks.
Also include what happens when your customer arbitrarily decides they are going to change the terms of the contract such as delaying payments or withholding payments rightfully due. How about what you will do if your customer decides they are going to deduct money from the contract for “damages” you supposedly caused. And have language that prevents customers from trying to go around you and get your employees or subcontractors to work directly for them.
Sales pitch — look at our Fast Track Proposal Writer software at www.markupandprofit.com/soft_writer.html. This program plugs the holes into which your money leaks. I have been collecting language for this program since 1969 and there are about 840 paragraphs of language included to help keep you out of trouble. It is also easy to add language as needed, and it only costs $195.
Michael Stone is a business coach and consultant with more than three decades of experience in the construction industry. He wrote the book Markup and Profit: A Contractor’s Guide, published by Craftsman Book Co. For Michael’s free newsletter, sign up at www.markupandprofit.com. Michael also is an experienced speaker and is available to speak at conventions and workshops. He can be reached by e-mail at firstname.lastname@example.org, by phone at 888-944-0044, or on the Web at www.markupandprofit.com.
Michael will be speaking at the 2007 Frame Building Expo in Indianapolis. For more information visit www.nfba.org.