This post is only to remind you that if you are a construction-related business that is marketing to the general public, your web site and your newsletters serve one purpose: to encourage potential customers to call you.

I received two newsletters from contractors this week. Pretty pictures, well laid out but no phone numbers could be easily found.

Your web site and/or your newsletter are not about you, your staff, or the jobs you have built. They are to let folks know you are in business and here is how they can reach you. To do that, tell them about you and your staff and the jobs you have built, but make sure they know how to reach you!

Put your phone number at the top, in a font equal to your company name. If your company name is:

KITCHENS OVERNIGHT

your phone # should be directly under your name -

1-888-944-0044

People want someone to talk to. They don’t want to fill out forms and they don’t have the patience to look for your phone number. Put it where they can find it.

I had an interesting experience this last week. I had a couple of young guys at my place working on our front gate.

I asked they weren’t setting the post they were scheduled to set for the keypad. The young man said to me, “Your ditch is too wide, I don’t know how I am going to set the post. Besides, I don’t have time right now, I have another job scheduled that I have to get to.” What a treat to hear that someone else’s project was more important than mine.

I had dug a 12″ by 30″ trench for the electrical and phone line before they arrived. It was clear that the young man could only think in terms of his 6″ auger normally used to dig the hole for his post.

I dearly hope you have had a talk with your employees, and maybe even yourself to be sure this never happens on your job(s). That is no way to treat a customer. You can rest assured that the owner of that company is going to get an earful when we speak next.

It helps to be on the “customer” end of the business relationship now and then, to see life from the other side. Right now, I don’t like what I’m seeing!

When your employees tell you they want to work four 10-hour days because they want an extra day to play during the summer months, please consider more than just the needs of your employees.

If you only work four days a week, that means your jobs will sit idle for a day. How will that affect the other trades and, more importantly, the owner of the project?

I had a problem on a job we are doing at our place last week. When I called the office of one of the companies working on the job, the owner and almost everyone else was off playing. They take Fridays off during the summer. That means that what I hoped to do on Friday or Saturday has to wait until Tuesday or Wednesday this week. My job is now 3 – 5 days behind. I am not a happy camper.

Being in business is not about employing people. Being in business is about providing a service and making a profit doing it. If your employees want 3 days off every week, and you are in a service business like remodeling or any one of how many specialty businesses, then they should be given a choice to make. I am a strong supporter of taking a vacation, but shutting down your business one day a week, every week is not reasonable. Focus on the needs of your customers and your jobs first.

Had a two-part question from one of our clients this week. Thought I would share the questions with you and ask for your thoughts.

Two things I have been trying to figure out:
1) We want our employees to wear company shirts. But how do I decide how many each receives? How can I require that they wear the shirt if they don’t receive a full weeks supply? What about replacement of the shirts (the guys get hot and dirty). Plus other issues come up. I keep hesitating to buy them because I don’t want to trip up on this.

Great question, I’m hoping those of you who require company shirts can pitch in and let us know your policy. More and more companies provide company apparel for their staff, and NEBS offers company workshirts, pants, hats, but we’ll need advice from others in the field to answer this question.

2) How do I do a proper analysis to decide if we can afford additional office help? I know we need more office support but how do I know if we can afford it?

The best answer I can give you is that office salaries should range from 3% to 7% of the total sales of your company. If you use 4% as the magic number and your annual volume is about $850,000, then you can afford about $34,000 for office staff employees. That is all office staff employees, including any company owners. That might be 1/2 - 1 full time employee, with taxes and benefits.

Also check out the graph in the Markup & Profit book on page 43 (remodeling contractors) or page 58 (new home construction). Office staff counts as an employee on this chart, and I caution you to keep the total number employees in line with these graphs. If you have more employees than your volume of work can support, you will develop painful cash flow problems quickly. And it’s extremely painful for everyone when you have to let employees go.

Sometimes, time management and efficiency training is a better approach with existing staff before hiring additional people. You might want to consider that first.

Do you know who you are sending out to your job sites? Do you run background checks before you hire employees? It’s time to start.

You can’t tell about a person’s background by their looks, how they part their hair or what kind of car they drive. And there are some things you want to know. You can’t be too careful.

I don’t know how much you can find out in your state, but if possible, your criminal background check should include making sure they have a legal driving license, driving history, and any convictions, especially if they involve theft or any sex offenses. If you are sending them to a job site, you need to know the owners (and family members) at the job site will be safe.

This is an expense and effort you need to expend to protect yourself, your company, your other employees and your clients. Suppose someone on your staff was a convicted pedophile. You send them to a job site and they molest a young person. You might or might not be liable legally (I’m not an attorney) but what do you suppose will happen to your company reputation when the media gets ahold of it? The only phone calls you’ll get after that will be from the media and bill-collectors.

If possible, run the checks on both current and prospective employees. Get it done gang, it is cheap insurance.

I was reminded in a difficult phone conversation this morning about some of the maxims in a construction-related business -

• If you suspect you are having financial problems, you probably are, and
• If you wait until you can’t make payroll or pay your bills, it will be harder to fix.

When you find yourself in a hole, stop digging. Many businesses are in tighter financial situations this year, and need even more to be focused on what’s important. What’s important? Advertising, marketing, getting leads in the door so you can make the sale. If you haven’t been advertising, start now. Your business depends on it.

On another topic -

The first free online seminar for MyConstructionBiz.com was this morning. Don did a great job of outlining the information construction-related business owners need to establish and maintain to make it easier to work with insurance companies, and to make sure our quotes from insurance carriers are apples-to-apples for comparison purposes. He also talked about how to get the information you need from your insurance company to allow you to find more affordable quotes.

If you haven’t already, read our blog post at MyConstructionBiz.com and find out what it’s all about.

One of our clients sent a note recently about this article in the Northern Nevada Business News.

This same thing was tried in California last year, and the developers who tried to force specialty contractors to lower their prices were hit with major lawsuits. I don’t know if those suits were resolved or not, but the subs and specialty contractors banding together to fight this was a smart move.

My guess is that we are going to see more of this across the country. These developers, the ones that build several thousand homes a year, believe they are working in a market-based business. Not true. Construction is a cost based business. You can’t cut your prices and make it up by selling more homes.

I didn’t read in the article where the developer was cutting his profit margin, did you?

If you are smart, you won’t get involved in this nonsense. If you are working for anyone that comes back and tells you to cut your price, tell them where your next cut will be. Stay focused on selling and promoting your company. Return your phone calls, make your appointments on time, do what you tell your customers you would do, operate like a professional. You will get through this and you won’t have to cut your prices to get there.

One of the pitfalls of owning and operating your own business is having to purchase insurance policies you don’t always understand. You probably depend on your agent or broker to give you the straight scoop — wouldn’t it be better to know more on your own?

Don Bury will share his years of experience inside the insurance industry at MyConstructionBiz.com’s first free online seminar this coming Thursday, July 10th. This free online seminar is focused on providing information you can use to start getting the best rates possible when purchasing insurance.

The free online seminar will start at:

8 am Pacific
9 am Mountain
10 am Central
11 am Eastern

and is scheduled to last 1 hour and 15 minutes.

If you aren’t familiar with online seminars, all you need is an internet connection and speakers. If you have a headset with microphone, or if you call in to the telephone number provided, you will also have the option to ask questions. It really is free, but you must register to attend.

If you are unable to attend this free online seminar, it will be available as a recording for all MyConstructionBiz.com members. Membership on MyConstructionBiz.com will open July 10th, shortly after the online seminar - learn more about membership and it’s benefits at MyConstructionBiz.com.

Our second free online seminar is scheduled for July 24th, an open forum on Cost Reduction Strategies. You will be automatically registered for both classes, but are under no obligation to attend - however, one advantage of registration is receiving a reminder notice prior to the seminar.

Register today for Don Bury’s free online seminar July 10th.

Earlier this year I had the opportunity to interview with Brian Javeline for The Contractor Show. Our episode was just posted - check it out.

At a recent seminar I did, one of the young guys came up to me after class and said, “I can’t markup my work as much as you say I should, no one would buy from me.”

I asked what his markup was and he said “Cost times 1.2″ and added the famous old line, “That is all I can get in my town.”

Gang, old dad has heard that comment more times than he can count over the years. I know this young fellow has been to one too many coffee shops with the flakes or losers in this business because that is where that rumor starts. And it is a rumor, nothing more, and you should look at it as a false and dangerous rumor. If you are in remodeling you must use a markup of at least 1.50 times your cost or you will soon be out of business.

I’m sure this young man hasn’t tried to use a markup higher than 1.20 because as I have at least two coaching clients that work in the same market and they both use a markup of 1.70 or higher. If the job costs $10,000 or less, they use a markup of 2.0 times their job cost. I’ve seen their estimate sheets, read their P & L’s.

Be very careful about where you get your business information, my friends. Some contractors are too willing to fall back on old men’s tales instead of learning the right way how to run a construction business. A construction business is tough to run, and yours can quickly become history if you don’t charge enough for your work.

Recently I’ve been made painfully aware of a problem some contractors have that they may not even realize. That problem is focusing on themselves and their business, instead of the customer.

I was made aware of it by my own recent experience. I hired someone to do some work for us. I thought I’d found the right person, but as time went on and the job progressed, I saw something different.

Everything revolved around him. He talked a good story, seemed genuine in most things he did, but when push came to shove, it was all about him. If I asked about something that was or was not done, I heard why he did things the way he did. If something didn’t get done right, I heard about his being involved in other jobs and not having the time to supervise the work correctly. Then I heard he didn’t have time to research how to do something right or I heard the problem was his crew not paying attention. Regardless of the question or problem, it was always about him and why he could or could not do something.

Gang, when your customer has the gold, your focus is on keeping them happy. It is not about you or what you want to do instead of focusing on the customer’s job. It is not about where you spend your time that has nothing to do with the customer’s job. It is about making your customer feel like you are listening to them and paying attention to their job. You need to make them feel important. You don’t have to grovel or crawl on your belly. And it’s a completely different issue than writing and following your contracts. It means paying attention to the work you are doing for them, and making sure they know your focus is on them. The focus should be on the customer, not the owner of the construction company.

I had an interesting phone call the other day. A contractor who works in a coastal community told me he had a realtor call and practically beg him to come out and do some work on her home. The realtor told him she called a number of “contractors” and not one of them returned her phone call. Not one. The contractor told me he set an appointment to see the nice lady the same day.

I also spoke to a friend from church the other day, she’s having a tough time getting someone out to help her on her home.

I don’t know what’s going on - why would contractors tell me they can’t get the phone to ring, and homeowners complain they can’t find a contractor?

If you are a contractor who wants to make some sales, my suggestion is to make sure you are:

• answering your phone, and in a professional manner
• returning all your phone calls
• showing up for appointments, on time
• treating every customer like they count
• dressing like a professional, not like a bum or kid right out of high school

I used to tell contractors that if they would do the things listed above, they would get at least one in every five calls they went to on. My guess is that today, if you do those things, you will get at least one of every two you see.

How are you doing on your estimates? Are they accurate, on time, and dependable? Or, are you having problems? Slow to get done, items missing, estimated labor hours way off?

I am doing some research on estimating and could really use your input. Would you be willing to drop me a note and tell me the one thing that gives you the most trouble compiling an accurate estimate? What drives you crazy, what do you usually miss, what is the worst part?

Thanks for your help, I appreciate it!

Michael michael@markupandprofit.com

I had an interesting conversation with a contractor recently. He told me he takes leads from anyone that calls in. He does qualify them before he jumps on his horse and rides off to rescue or repair, but he is willing to look at most jobs that folks call him about.

Now, you might say, “That’s dumb, look at all the time he wastes on the little stuff. He will only get one in three jobs at best so why waste the time.”

Maybe, maybe not. This guy has his business figured out about as well as anyone I have talked to in years. He takes every lead and goes out with the mindset he is going to sell it. Yes, he knows he doesn’t make a lot of money on small jobs. But he makes darned sure that the folks get his best effort, on time, on budget and always with a smile, even if it is a small job.

Want to guess what happens when those small-job customer need other work done? He told me, on average, he will get a call from over 60% of those people he has worked for sometime in the next year. They will call about a new job or repairs or maybe just for information.

Here is the best part. On the first job he uses a markup of 1.50 to 1.55 depending on the job, distance from his office, etc. From that point on, his markup is 1.75 minimum on any job he does for those folks. He can get that markup because he does a good job, on time, returns his calls on time, does things right. The customers know and trust him.

He is making more than a good living; he is working on his retirement. I’d hire him in a minute.

A reader sent us a question —

We recently took on an insurance job for a good repeat customer. His water heater leaked in the attic while out of town and caused much damage in his home. After providing him a thorough proposal and beginning the work, the insurance company began the process of telling him we were overcharging and that our markup should only be 15%. We are currently in the process of explaining that the insurance company is not a construction company and does not know what it takes to make a living in this industry.

Normally we provide a thorough proposal with a bottom line price for a job and the client either accepts or declines. In certain rare situations, we are forced to expose (and usually defend) our markup. We run a good honest business and do not overcharge. I would like to know if you have any tips for explaining markup to customers when the situation arises. Sure hope more remodeling contractors in my town straighten out their markup!

Insurance adjusters are just parroting the party line. Each insurance carrier puts out an “edict” that states that the acceptable overhead and profit margin for any contractor should be XX% overhead and YY% profit. Many of them say 10% overhead and 10% profit. They expect their adjusters, by whatever means, to get contractors (and by default owners) to abide by these X and Y standards for overhead and profit.

The truth is, no contractor can survive on 10% overhead and 10% profit. The contractor’s insurance expenses alone are usually more than 10%, and that’s a small part of their overhead needs! What happens is that many contractors doing insurance work define job costs differently - many of the expenses that are probably included in your markup (i.e., overhead) are incorporated into job costs, allowing for a lower markup than usual. The price is the same - the factors used to reach that price (job costs and markup) have changed. It’s a game.

That said, insurance companies do recognize different gross profit percentages for contractors. I have heard of adjusters offering 10% overhead and 10% profit to one contractor and then approving another job with another contractor with a much higher overhead and profit.

That said, you have to deal with this subject with the homeowner. When I was doing insurance work, and when the subject came up, I would say something like this:

“John/Mary, as you know, any company that does construction work has the cost of building the job. In addition to that, there are also additional expenses that are accrued for overhead. Overhead is all the things you don’t see on your job. Payroll preparation, fuel for our vehicles, insurance for your job and our office and our employees. Our office employees must be paid, and city, county and state fees and licenses add up in a hurry. There are a ton of these expenses and they all must be paid.

A good example of this is that city, county or state fees can easily amount to 6 to 8% of the total cost of your job. Now, add to that our rent/mortgage for our office and store room, our insurances, our utilities, our office staff wages, my salary, phones, our CPA and legal fees, our office supplies and you can easily see that 10% for overhead won’t begin to cover our expenses. 10% is fair for profit; we can live with that although it is well below many other types of businesses, especially the insurance company that is insuring your home/building.

Now, there are different ways of determining job costs, and not everyone calculates it the same. Overhead items are sometimes included in job costs, allowing for a lower markup. You know that having the lowest price for a job isn’t a good idea, and you called me to do this work because you know I’ll do the job right. That’s what is important.

John/Mary, we do a good job of estimating the cost of repairing your home, we charge our overhead at the amount it costs us to do business and we ask for a fair 10% profit. We do a good job for our customers, we charge a fair price and we have to make a profit. I believe that is fair, don’t you?”

Take what I have here, modify it to suit your personality and move forward.

We’ve talked a lot recently about the importance of using current technology in your marketing, especially having a good webpage and incorporating video in your advertising. We recently received a great newsletter from Haines Contracting, Inc., in Doylestown, PA, with a video testimonial included. You can view the video on YouTube.

Dave Haines created a great newsletter, short and sweet with lots of fast-loading pictures. The pictures click through to other videos on YouTube, showing before and after photos of projects. Dave built the video himself, working with our business partner, Dan Baumann.

This is an example of a great use for the Flip Video camera.

Congratulations to Dave Haines for a newsletter that is as good as it gets.

Got a note in from a landscape contractor. He is wondering how to deal with folks that talk with each other, spreading rumors that he is high priced. Here, in part, is what he said:

We are a full service landscape contractor and we do a lot of work in high end residential golf communities. Everyone knows everyone and they play golf together. We have a reputation for being the highest priced landscape contractor in the community but worth it. The adage about not being able to please all the people all the time has finally caught up with us. How do we handle a client base that talks to each other every day knowing that some are not happy and that the unhappy ones tell 7 people and the happy ones tell 1?

If clients are unhappy about your price, but your reputation is that you are worth it, don’t worry. The most important part of your reputation is whether or not you do the work you are supposed to do, the way the clients want it done, in a timely fashion.

If clients are unhappy because of an issue on a job, and are telling others about their complaints, to be honest, there isn’t a lot you can do after the fact but hope that enough people who like you are talking as well. Everyone makes a mistake, the question is how you handle yourself after a mistake is made.

But you can, from here forward, let clients know upfront that you expect them to come to you with any problems or complaints, not anyone else.

As I talk about in our book Profitable Sales, A Contractor’s Guide, these kinds of issues must be dealt with before you sign a contract. When you and the client are sitting at the table, ready to sign a contract, you have 110% of their attention. One of the things you need to talk about right then is what the client is to do if and when a problem should arise.

“John, Mary, from time to time on any job, stuff happens that you may not understand or perhaps the job is proceeding differently than you had anticipated. Maybe we put a plant here and you thought it was going over there. Maybe a sprinkler head breaks and sends water everywhere. Stuff happens. When it does, we will be here to fix it. So, in the unlikely event that there is any kind of problem, I want you to promise me, BEFORE YOU GET MAD, that you will grab a phone, call me, and let me answer your question or fix the problem. I want you to call me before you talk to anyone else. I want you to treat me just like you would want to be treated if the situation was reversed. You call me; I will be here to fix the problem. Is that fair enough?”

You will still get nasty calls or short fuses. But now you have a base to deal with it from. Go back to the folks and say, “John, remember right before we signed the contract for your job, I mentioned there might be a problem that shows up on your job? You promised you would call before you got mad or talked to anyone else. Well, this is that problem. Let’s talk about it.”

Now you have tactfully reminded them that they promised to talk with you before they got mad or started telling others how bad you are. In almost all cases, this can at least slow down their badmouthing you to other clients. Of course, it depends on how well you take care of the problem, and how responsive you are to their concerns.

You will note that phrase at the end of the statement, “Is that fair enough?” That phrase will help calm others. We have all been taught by family and teachers to be fair to others since we started to walk. Use it. It helps to remind the client that they must treat you fairly. Then you can get busy and solve the problem.

Hey Gang - Have any of you had experience with the National Energy Rebate Fund?

You can read about them at: http://www.nationalenergyrebates.com

One of our coaching clients ran into a homeowner working with this company on a call, and we want to know what it’s about. We would appreciate any feedback anyone has. Does it work, how does it work, is it a good or bad thing for a contractor to get involved with?

Let us know, and thanks for the help.

Michael

I want to talk about a problem I keep hearing about. It’s called communication and how it applies to sales.

You say, “I do a pretty good job of communicating.” Really? Based on what I’m hearing, some of you are not as good at communicating as you think.

Does this happen to you? You go on a sales call and follow our game plan of getting the four basic questions answered. You find out what they want to do, when they want it done, who is going to make the buying decision and you get the budget set. Some of you are smart and get a design agreement at that point or possibly a letter of intent, some of you don’t.

Either way, when you come back with the final price you get the “deer in the headlights” look from your customer. “Your price is too high,” they scream. “We want our design/letter of intent agreement money back”. Or, “We’re not going to do business with you. You gave us a bid and now you tell us it is going to be twice as much. You’re nothing but a con artist.”

Somewhere between the initial budget and the final design, the job got away from you. Why?

Communication. If you are getting this reaction from your customers, there is an excellent chance you THINK you are communicating to your customer, but you aren’t.

Once a budget is set, you must be very strong with the customer and tell them how the cow ate the cabbage.

“John, Mary, now that we have the budget set for your job, let me explain a phenomenon that frequently happens. It is a natural tendency that as you look at products and furnishings for your home, you will find stuff you like better than the things we talked about when we set your original budget. When you find those things, you might want to include them. As long as you stay within the budget we set, you can include anything you want that will give you the job you want.”

“However, if you make a change or add something that will cause the budget for your job to go up, then you must listen when I tell you that your selection doesn’t fit in the budget for this job. If you add new stuff or make changes that don’t fit in the budget, you can be assured that the final price of the job will be higher than the budget we have set.”

“If that is the case, you can’t tell me my price is too high. You set the price of this job by the design and the selections you pick. So, to keep your job on budget, I will tell you if you are making a selection or a change that will not fit in your budget. You must listen carefully when I tell you what impact a selection will have on the budget for your job. Is that fair enough?”

And then you have to tell them. Every time. If/when they add anything to the job or make any change that puts the job over the budget, you have to tell them right away. Not later - let them know at the time that the final price will be more than the budget because of this change.

What I have heard at least three times in the last two weeks is the guys (doing the selling) think they are communicating this information to the customers, but in reality they are not. They go to all the work of getting quotes from subs and suppliers and when they present the final quote, the customer goes bonkers on them. “That is way more than our budget. No way.” Or “Our design didn’t change, you just saw a chance to increase your profits thinking we wouldn’t notice.”

It’s important to listen to your customers. It is just as important to know when to be strong and make sure they are listening to you. If you are getting design agreements and losing the sale because the price of the job was higher than the original budget for the job, it is almost always the salesperson’s fault.

So how can you prevent this from happening? You need some help. On the next few calls, take your spouse or someone from your company whom you trust that will not get emotionally involved in the sales process. Have them take notes of “you said”, “they said”, “you said”. Make sure they understand that their job is to observe, not to join in the conversation or take part in the sales process.

At the end of the sales call, right away sit and talk with the observer about the call. Better yet, let them give their opinion of the call while you zip up and listen. No “ya-buts”, no “let me explains”, none of that. Zip up and listen. Then take their advice and make the changes you need to make to your presentation.

It’s also a smart idea, if you know your final price is over the budget, to have a backup alternative plan with an alternative price for them to consider. This is all outlined in the book, “Profitable Sales, A Contractor’s Guide“.

Most of you will find that with more practice, you will start landing those jobs that are getting away. Stay focused on sales, and just as important, make sure your customer stays focused on their budget during the design process.

Something to consider if your construction company is an LLC.

LLC stands for Limited Liability Corporation. That works both ways.

I am not an attorney, but I can tell you what several attorneys that understand construction and many insurance brokers and agents have told me. You have limited liability, yes, but you also have limited coverage.

If you are in construction, there is an excellent chance you will end up in a disagreement with a customer at some point in time. Almost all of the contractors that I have talked to who chose to use an LLC did so because it was cheaper to get their company set up and running. None of our customers ever take that approach on jobs, do they?

I had one insurance broker tell me he thought attorneys pushed the idea of being an LLC because they knew that when the fight started, the contractor would come back to the attorney and spend 100 times more to defend himself than if he just set up a C or S corporation to begin with. That’s more cynical than I want to be, but the overbearing question is, “Is it worth the gamble to find out?”

If you have an LLC, make sure you completely understand what protection you have. And you might consider changing to a C or S corporation.

Alfred E. Neuman used to say, “What, me worry?” Many construction-related business owners are worrying, and we know that. What can you do?

Well, there are two things you must do and there can be little doubt about either of them. The first thing you must do is keep focused on sales. That means advertising 24/7/365. None of this “cutting our advertising because money is tight” nonsense. Money is tight because you haven’t been doing a good job of advertising.

Recently I spent a day with one of our coaching clients in the Long Beach, California area. He has four jobs working, all of them at $100 K + and he has (or had 2 weeks ago) an amazing 27 additional leads of the same size or larger that he was working. Brad is staying focused on sales and obviously doing a very good job of it.

If your sales are not good, if you are not getting good leads, don’t blame the so-called bad economy. Hay and horse feathers (or horse biscuits if you prefer). If you are doing your job of promoting and selling your company, you’ll get the leads.

The second thing you must do is quit working on jobs. You aren’t saving money (or making money) by working on jobs. You only have so many hours in a day - time spent working on jobs means time not spent promoting your company. How you spend your time today determines what you’ll see tomorrow. Get out there, schmoooz, talk to folks. Stay focused.

During the JLC Live show last week in Long Beach, I had a number of people ask me about the new flip video recording devices that I briefly demonstrated during my classes.

These small recording devices are one of the best new tools a contractor can use in advertising. The number of ways this little cameras can be used to gather and convey information to the buying public is almost unmeasurable.

Here is a very short clip showing a job sign posted on a new job site right on the water in Newport Beach. The sign on the fence shows that this contractor cares about his customer because he’s taking care of the job site by making sure that everyone who shows up to work knows the ground rules.

That video was quick and easy to make, and the camera is very affordable. You can find it here.

Quick question here: Has anyone been using a reward/penalty system in dealing with other contractors on your job sites?

I am speaking specifically here about offering a reward or bonus for getting the work done on time or ahead of time (and right the first time), keeping the job clean, etc.

Or, perhaps declaring a penalty if the contractor is late, doesn’t get the job done on time or requires callbacks to get it correct, leaves the job in a mess, etc.

Anyone care to share a comment?

I was asked this question in a class at the JLC Live show in Long Beach last week, and I want to know what you think about it. Tell me if you are doing anything like this, or what you think about it (I’d like to hear from both generals and subs).

One of our goals is to improve the image of the construction industry. We’re doing that by educating contractors on how to conduct themselves as professional businessmen. If enough construction-related businesses operate professionally, the buying public will treat contractors like the legitimate, professional business owners that most of them are.

One of our readers, Shawn Van Dyke of RedBud Construction Services, a professional contractor, shared a note he recently received from a homeowner (edited for clarity and brevity):

We would like to propose the following work be done for $14,000, over a 90 day time period in the following phases. Please let us know what you think.

1st - This proposal is for fixing foundation, removing existing foundation (if necessary) and installing new 8″ block and installing existing brick back to match rest of foundation. Price also includes installing entrance door at side of house w/ steps or an indoor latch type door w/ steps in the utility room . This proposal also includes installing French drain at side of house.
(Optional) Build a 8′x10′ treated wood back porch w/ wide steps (so a large appliance could be taken up)

2nd - Proposal for roof tear off and put back including putting down rolled tar-paper roofing underneath. Fix broken truss’s, replace plywood that’s damaged and remove chimney below roof line. Install Owen’s-corning fiberglass shingles 30# roof felt, and ridge vent, bearing in mind bathroom will need to be vented.

3rd - Replace roof on garage, repair and replace damaged wood on garage, use fascia board instead of guttering if desired; Install Owen’s-corning fiberglass shingles 30# roof felt (25 year warranty type) or metal roof of long lasting quality. repair and replace garage windows (use clear plastic windows (?)) remove, adjust, repair and replace large garage door w/ agreed on alternative.

4th - Replace kitchen and bathroom flooring with ceramic tile w/ sufficient subflooring and appropriate supporting material to increase life of tiles. remove carpet, repair hardwood flooring and stain floors, installing any new hardwood flooring as needed (4 rooms of hardwood flooring and one tiny spot). repair and paint plaster inside home (all rooms except front bedroom); do NOT paint non-painted wood areas. paint kitchen so paneling doesn’t show and spray ceiling. vent bathroom, repair/replace rotted wood, add vanity GFI outlets , replace drywall if necessary to keep walls from continuing to show/produce mildew. pressure wash outside

Payment schedule: First 1/2 phase payments may be paid after phase work is begun. Last 1/2 phase payment will not be paid until phase work is completely done.
phase one $ 3000
phase two $6000
phase three $4000
phase four $2000

This price includes demolition and hauling off construction waste. All material and labor is furnished by contractor with a 1 year warranty from date of completion.

That note was written by the homeowner. I wonder what he tells his doctor when he goes in for a visit?

Shawn’s response - “Are you asking me to put together an estimate for this work? If so, I would be happy to come by and prepare a detailed estimate. I charge $75/hour to prepare project estimates (assuming you do not have project drawings and specifications).”

In a later note, the homeowner said, “Didn’t expect ‘free work’. Just had a different expectation based on the service providers we have dealt with in the past year who provided competitive estimates/quotes for a project/job without charging the prospect for the opportunity to bid/compete for the job. We are each obviously operating under different sets of expectations based on our respective past experiences . . . Regarding ‘professional services’….hm. Guess we weren’t getting that before and got what we paid for.”

Shawn’s final note to the homeowner was well-said:

“No problem. I have learned not to compete with guys that provide free estimates for complex projects. You have 4 phases listed. I would be doing you a disservice by throwing something together ‘to compete for the job’ as opposed to spending the proper amount of time developing a quality scope of work and if I tried to compete against those guys that are willing to cut price in order to get a job, then I would be out of business.

Typical clients spend $300 or $400 having RCS prepare the proper scope of work. Minor in comparison to the overall project costs, when you consider the thousands of dollars that can be argued about in the end or the potential for contractor or client mistakes. I would rather pass on a job that may keep me busy than enter into a contract with someone without everyone being on the same page.

Your response is very typical and I understand. There aren’t enough contractors that act like professionals (specified scope of work, written contracts, downpayment required…) so when we do act like professionals, most folks think we are being unreasonable. The reason we charge what we charge is we are experts in this business and we want to remain in business and what we provide are quality and service above all. Construction just happens to be the manner in which we provide it.”

We educate contractors, and you are educating homeowners. Thanks, Shawn, for sharing your experience.

The other day, I read a business forum post (not just construction) that put a slightly different perspective on Cost Plus contracts. It said:

Cost Plus Pricing: This takes the cost of producing your product or service and adds an amount that you need to make a profit. This is usually expressed as a percentage of the cost.

It is generally more suited to businesses that deal with large volumes or which operate in markets dominated by competition on price.

This post brings to light two more good reasons why Cost Plus contracts should be avoided.

1. Many construction-related business might consider $250,000 or even $1M a large contract, but in the larger sphere of business, these sums are peanuts. Look at the sales of companies like GM, Dell, Microsoft, Wal-Mart, etc. Using the definition of the post above, Cost Plus is not suited for construction work.
2. Competing on price is financial suicide in any construction-related business, as so many are finding out right now. I give you the lowest price, and I win? That’s not how it works.

Lowest price doesn’t win, and cost plus doesn’t win. Learn how to estimate your jobs, then compile a fixed-price contract so the homeowner knows what you will do, you know what you will do, and everyone knows how much it will cost before you get started. That’s the smartest route to long-term success.