Mistakes Cost Money

I want to share a few phone calls I’ve had recently as a reminder of how little mistakes can easily grow into big problems.

Wrong Markup Plus Low Estimates = Bankruptcy

A young fellow who had just started a new company called to talk because he wanted to do things right this time. The first go-around ended in bankruptcy, and he didn’t want to make the same mistakes.

As the call went on, it was clear two things took his first company down. He did not charge enough for his work, and he trusted his estimator to build accurate estimates.

I’ve talked a lot about charging enough for your work. It is the reason that most construction-related businesses fail. I hear from remodeling contractors who are charging cost plus ten and ten, cost plus twenty percent, and some even as high as thirty percent, and they don’t understand why they aren’t making a profit. Most remodeling contractors need to be using a markup of at least 1.50. If they read Markup & Profit: A Contractor’s Guide, they’d understand why and would start charging more immediately.

When you don’t charge enough for your work, your business fails and your family suffers. Making a profit on each job isn’t optional, it’s required.

This young man was using a thirty percent markup (estimated cost x 1.30), and his estimator had no idea what his error factor was. He kept estimating jobs, and they kept selling and building them at a 1.30 markup, and no one bothered to check how close the estimates were to actual costs.

Every estimator needs a feedback loop that tells them how close their estimated cost is to the actual cost when the job was built. That feedback loop (called job costing) provides an error factor that needs to be added to future estimates. My best guess is his error factor was over ten percent, which, for this young contractor, was all his profit plus a chunk of funds needed to pay overhead. That’s how you go out of business.

We discuss job costing and explain how to calculate your error factor in our book Estimating Construction Profitably.

Pay Attention to the Contracts You Sign

A licensed general contractor called to talk about his problems getting paid. He was working as a sub for a larger general contractor, doing over ninety percent of the total job.

The GC he was working for was almost three months late paying invoices. Our caller had signed an agreement with the GC that said he would get paid when the GC was paid, and that the GC would pay thirty days after receiving the invoice.

Don’t ever sign agreements with either of these conditions. You’re letting other people use your money. You purchased the materials and paid for the labor and or subcontractors; why should you have to wait to get paid?

Only sign agreements that allow to you get paid at least every two weeks, and three to five days after the job is complete. You shouldn’t have to send invoices; your payment schedule should be in the agreement. If they won’t agree to pay on your time schedule, and you agree to a one-sided payment schedule, you and your cash flow will lose.

I’ve had people tell me, “That is the way it is done in construction.” Maybe that’s the way it was done back in the dark ages, and maybe that’s the way it’s done with government contracts (which is why I recommend staying away from government work), but there’s no reason contractors need to put up with that treatment today.

There are fewer construction-related companies in business today than there were ten years ago, and fewer people going into the industry. If contractors refused to sign one-sided contracts, the people who insist on them couldn’t get their jobs built.

If I were in this situation, I’d stop work, file a lien, and find other work that pays on time. Run your business as you should, and get paid on time.

“There was a time when a fool and his money were soon parted, but now it happens to everybody.”
— Adlai Stevenson I

---

Listen to the audio here, or select dots on the right to download:

---