If you’ve been with me these past two months, you know that I have finally begun to take the lid off our industry. It is no longer any secret that I believe contractors have been gradually taken advantage of by the purchasers of construction services. Congress began the injustice in the early 20th century by instituting “low bid” acquisition into the construction transaction to prevent themselves (politicians) from dipping into the public trough. “Contracts for services” were designed to protect the government not only from politicians but also from contractors who they wanted to blame for everything.
In my view, we should have protested back then against this inaccurate portrayal of our capability and intentions. We should always have been considered “experts” hired to provide and supervise construction services to the owners of the assets. No one thinks there was a contract signed to build the Pyramids or the Taj Mahal. Owners sought out and hired experts to build history’s great buildings. It took 120 years for the prominent artists and architects of the era to build St. Peter’s Basilica in Rome. They didn’t bid the Colosseum and have the builder finance it out of their own pocket. Builders were the sought-after experts that were paid appropriately (according to the standards of the day) for their services. They did not have to assume financial risk. If they messed up the job they were simply beheaded.
Back in the 1960s, my brother and I were hired by a local church to build an entrance to a basement meeting room under the parish hall. The job went well (even though, at that point, we were not really certain about everything we were doing) and then another church hired us to build a rectory at a nearby parish. That successful job led to a Church, and then a school, and we were off and running. Our reputation in our local market spread, and we never looked back.
The Secret to Our Success
The Schleifer brothers were hard-working but entirely self-taught contractors who made all the mistakes (maybe more) that all contractors make as they go along. I assure you we were not the smartest nor the most experienced contractors on the block but, despite any shortcomings, we made money. Why were we successful?
We Assumed Only Our Fair Share of Financial Risk
The imbalances in transactional risk that have evolved at contractor’s expense over the past fifty years were simply not a factor when my brother and I went into business. Low-bid acquisition was, of course, the order of the day for public work, but private work was often awarded to the contractor who had a reputation or previous association with the project owner.
- We usually signed a negotiated, not a “take it or leave it” contract.
- Commodity pricing was not yet the order of the day, so we priced our work with ample contingency. And profit margins back then were much larger than today. We minimized participation in competitive low bidding. Our reputation and eventual contacts got us most of the work we contracted for.
- The contracts we signed were generally with “friendly” counter parties, so we often renegotiated risk factors as we went along. The rule of thumb back then was “fairness” for all parties will lead to a more successful outcome for everyone. We did not have a punitive relationship with our clients.
- We didn’t accept slow pay. If an owner was reluctant to pay our invoices as submitted and agreed upon in the contract, we would often stop work until the dispute was settled and payment was forthcoming. We refused to finance the work beyond the number of days agreed to in the contract.
- There was no such thing as “punitive retainage”. Again, that concept evolved when clients began to look for ways to discipline undependable contractors. We never accepted that unearned reputation and, therefore, didn’t have to defend and finance an undeserved bad reputation. Reasonable, prudent retainage was generally paid immediately after the punch list was completed.
- We avoided work that would threaten our reputation as dependable, quality builders such as unusual designs, or too big, or too long-lasting complex projects that would tax our company’s capacity and reduce our ability to satisfy regular clients.
- We also enjoyed the luxury of not having to take work out of our geographic region.
The Good Old Days
“Ahhh, the good old days.” That’s what you’re thinking. I know because that’s what I’m thinking. I don’t recount the story of our experience for the sake of nostalgia, but rather to illustrate how dangerous the transactional risk has become for the average contractor. My brother and I did not create the positive business environment that we found ourselves working in. I am not sure there is anything today’s contractors can do to change the current business environment except clearly recognize the degree of transactional risk they accept every time they sign a contract.
Next week we begin the discussion of how to mitigate the risks that has been heaped onto the builder. Stay with us.
For a deeper look into financial management, read more here: FINANCIAL MANAGEMENT
For a broader view into risk management, read more here: RISK
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