Most contractors start out with plenty of ambition, guts, and resourcefulness. That’s what it takes to quit a good paying job and ‘go off on your own’ not knowing where your next buck will come from.
Most studies reveal contractors to be type A personalities (even double A). They’re entrepreneurs. They find it hard to follow the crowd and easier to lead. Startup contractors usually start with little or no capital, little or no team, and few customers. They work hard to get their first jobs and to make a few bucks. They like how it feels and go looking for more and bigger projects, which present new challenges with one surprise after another. Startup contractors will only survive if they learn the tricks of the trade.
The Tricks of the Trade
The construction financial transaction is unlike any other. Contractors are asked to estimate the final cost of a highly complex, high risk engineering activity that will take place over an extended period. They are then required to sign a legal contract binding them to the estimated cost and time of completion. They are not paid a fee for this service but must make a profit by bringing in the final cost below the contracted for estimated amount. What’s more, contractors are required to put up their own money to pay all costs and expenses incurred until the owner is satisfied that they have completed an identifiable portion of the work.
From beginning to end, construction projects are plagued by foreseen and unforeseen risks that have an impact on costs along the way. But this is the business of construction. It might be hard to hit a fastball, but if you want to play baseball for a living you have to learn how. If you want to survive in the contracting business, including being forced to finance the projects, you have to learn the tricks of the trade.
- The Schedule Trick
- Startup contractors often start with something like a piece work contract with a developer or a private home remodel on which they can collect a deposit. Their capital consists of savings or a small loan from a relative.
- They begin the work with well-meaning diligence but quickly realize they’ll need more jobs to finance the continuing production of the ongoing job because they’re already experiencing slow payments and schedule and budget creep.
- So, they leave the skilled labor to their new assistant and head out to find more work. To get the new jobs started they take some of their trusted workers from the job in progress and place them on the new project as a show of good faith. This trick of the trade causes schedule creep on the first jobs and further negatively impacts the job’s cash flow.
- The lack of startup capital and diminished cash flow from ongoing work prevent the startup contractor from hiring enough help to cover all ongoing work so it is time to borrow money.
- The Cash Flow Trick
- At this stage the contractor has few assets and limited experience, so the bank is unwilling to lend the amount the contractor needs to complete all the jobs. The bank is willing to lend a small portion of the contractor’s personal net worth, so the company is forced into a bad business practice we call ‘undercapitalized.’
- Since the working capital borrowing at the bank is inadequate, the new contractor tentatively begins to extend their accounts payable beyond 30 days. A little here and a little there and a lifelong race for cash is off and running.
- The Extra Trick
- Before long, the startup contractor interacts with architects or designers who issue work orders for additional work or changes to the work for which the contractor can charge extra, beyond the contracted total price. This generates a little fresh cash, and the contractor begins to look for ways to do more of this extra work. This creates a new belief that there will always be enough cash floating around bigger jobs to help compensate for the owner’s slow pay, schedule creep, and lagging invoices.
- The Frontloading Trick
- Most of us are familiar with frontloading as a strategic practice where we contractors allocate higher costs to early project phases, such as mobilization, demolition, or site preparation, to receive a greater percentage of the total contract value early on. The startup contractor learns to use this trick of the trade to cover initial startup costs, assist with positive cash flow, and reduce financial risk from slow-paying clients.
Beliefs
The four examples of tricks of the trade above are only a small sample of the ‘beliefs’ contractors hold about how to survive running a construction business. Few contractors ever question whether the beliefs are true or effective. They are simply the way a contractor must do things. They are neither right nor wrong. They are unquestioned beliefs that contractors take in, as I like to say, as standard operating procedures.
Is it? – Next week’s message will answer the question. See you there.
For more information on the contractor survival, read more at: SURVIVAL
For a broader view of contractor beliefs, read more at: BELIEFS
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Please circulate this widely. It will benefit your constituents. This research is continuous and includes new information weekly as it becomes available. Thank you.
