January 1, 2012
Five Best Practices For Construction Contractors
By Mike Testani, Manager
There are more construction companies in the United States than any other form of business. Take a hard-working contractor, add a pickup truck and some tools and a business is born. With that said, construction companies have one of the highest rates of business failures in the United States, second only to restaurants. Given today’s economic environment, it is critical for contractors to focus on specific areas in order to ensure their survival.
TIP 1: Consider New Sources of Work
Landing new projects has never been more difficult. Bid lists for public work that used to include a handful of bidders can now have more than 20 companies bidding for the project. In addition, pricing submitted by the lowest bidder is sometimes lower than the direct cost estimated by other bidders. Contractors performing work for private owners, particularly in the commercial real estate sector, are finding a very limited number of opportunities. As a result, contractors may be required to “re-invent” themselves or seek opportunities in a new jurisdiction. Reinventing could be in the form of a roofing or electrical contractor getting into the solar installation field, which is a market that is seeing some growth.
Successful companies are being proactive as opposed to reactive and identifying new opportunities before their competition does. Expanding operations into a new market or jurisdiction can come with risks. A new market can: have union versus non-union concerns, fall short by not having an experienced labor force and dealing with subcontractors where no relationship or track record exists. Performing work for a new owner also adds new risks or complexities.
For public work, there may be an extensive pre-qualification process. On the private side, working for a new company means some level of due diligence must be performed to gain comfort with their ability to pay for the work performed. These risks would need to be evaluated in order to determine if work obtained in a new market would prove to be beneficial.
TIP 2: Marketing is Key!
Marketing a construction company becomes even more important in a down economy. During the construction boom, work was easy to come by and marketing was not a necessity. Now it is. Today, contractors are finding that marketing their business is critical. Marketing plans vary widely based upon the type of contractor (general contractor, specialty subcontractor, etc.) and the market that they operate in (public versus private work). Marketing may involve networking with current and potential customers or even the hiring of a business development employee when no such position existed in the past. It is important to take the time to understand where the business is, and where the business needs to be.
TIP 3: Cost Reporting
Given how difficult it is for contractors to obtain new work these days, it is critical that management is working efficiently and effectively. A cost reporting system that provides management with relevant and timely information is a necessity. The complexity of the cost reporting systems are based upon the size of the contractor and the needs of the users. Many systems use “dashboard” reporting capabilities which allow the users to view job costs or productivity information in real time. The old saying of “garbage in – garbage out” holds true so the contractor’s staff needs to be trained in order to ensure that the job costs are accurately recorded and quantities are accurately tracked. Timely input into the system is also important. There are many “PDA” type devices that are available that will allow field employees to enter hours worked and quantities completed into accounting software in real time.
One of the most overlooked aspects of a construction cost reporting system is the “post-mortem” review process. After a contract is closed-out, construction contractors should be reviewing cost and productivity reports to see what work was done well (or within budget), what work was not performed so well (or was over budget) and where improvements can be made. This process should include the estimating department so that lessons learned can be applied to future bid situations.
TIP 4: Change Orders – Get Paid
One challenge that many contractors face is collecting on additional, out-of-scope work. Many times this type of work is performed in good faith only to later face problems getting paid by the owner. The simple solution, or best practice, is to have a policy of not performing any additional work without a signed change order to the contract. Instituting this type of policy is not always realistic. If waiting for a formal change order is not an option, there are certain things that can be done to increase the odds of getting paid for the extra work.
First, attempt to get work orders signed in the field by the owner’s representative. The work orders should clearly show the description of the work, the labor spent on the extra work, equipment hours and any materials used. Second, segregate any costs that are incurred for extra work into new cost codes. This process starts with field employees being trained to identify extra work, reporting it to supervisors who will then request that the appropriate additional cost codes be setup in the job cost system to track these additional costs.
Identifying the extra costs incurred only makes it easier when it comes time to substantiate those costs to the customer. Finally, make sure that there is compliance with the terms of the contract when out of scope work arises. There are most likely strict guidelines of when changes need to be communicated to the customer in order for additional monies to be claimed in the future.
TIP 5: Review Your Overhead Costs
Most contractors are routinely reviewing their overhead costs looking for areas to save money. If not, this is the time to do so. One area to review is the owned equipment costs. Contractors do not always like to part with excess equipment but this is one area where they might be able to save some money while also generating cash flow. With contractor revenues substantially lower than they were a few years ago, chances are that most contractors have excess equipment that they are carrying. There are carrying costs for this equipment that are incurred regardless of whether the equipment is being utilized. These costs may include things such as insurance, interest (if financed) and maintenance. The market for used construction equipment is currently fairly strong and selling excess equipment can provide contractors with some much needed cash flow while also reducing carrying costs.