A thread I follow had a robust discussion recently on giving subcontractors a downpayment before they start work.
I’ve long suspected that contractors doing commercial work have a different way of looking at this business than residential contractors, and this thread confirmed that suspicion. And that’s what I want to talk about today.
General contractors performing commercial work are adamant that downpayments should not be made to any subcontractors, with a few exceptions. They have a low level of trust in their subs, at least that’s what we’re seeing from the generals who’ve commented so far. I’ve worked for years coaching and consulting with specialty contractors and I know that they feel the same toward commercial general contractors – the trust level just isn’t there.
On the other hand, residential general contractors (whether new home or remodeling) are far more liberal with their down payments or upfront money and certainly more trusting of their specialty contractors. And, based on my experience with subs, they trust residential general contractors more than those in commercial.
Now, I don’t want to add to the great divide. We have too much division in our society already, we don’t need it in the construction industry as well. But I’d like to look at where these differing attitudes, this different level of trust, came from.
I have said many times that every business owner has to decide how to run their business. Those who make good decisions survive and make good money.
When you get involved with commercial or government work, because of the rules and regulations that those with the money to pay for the work come up with, you give up your right to make many of the business decisions that you can make in the residential market. For example, who writes the contracts for most commercial jobs? That would be the owner or their architect or designer. If you’re working for the government, they write the contract. In both cases, the general contractor is severely limited on the conditions they are allowed to add to the contract. On residential work, contractors themselves write a very high percentage of the contracts.
When you work on commercial projects, the contract often tries to dictate your overhead and profit margins. This of course leads to all kinds of game playing and number manipulation, but it’s the game you have to play when you get into those markets. The worst part is that those who are dictating your overhead and profit margins don’t know, or understand, or maybe even care what you need to run a construction company successfully. As a result their numbers are usually way too low. I have seen situations where the overhead and profit monies “allowed” on a commercial or government contract were less than half what the contractor would need to breakeven.
An interesting side note that came up on the thread was that several of the commercial contractors claimed they make higher profits on their work than they can make on residential work. I’m sorry, but I doubt that. I’ve rarely found a commercial contractor making even a 5% net profit on their jobs. I know the jobs are larger, but that’s not enough, especially given the risk. We’ve gotten too many calls from contractors who’ve been “awarded” many major commercial projects and don’t know why they can’t keep their bills paid. It’s because someone else is making the important decisions for their business.
In my opinion, commercial and government contracts are handled this way because of the assumption that contractors can’t be trusted. And when you’re working for someone who doesn’t trust you, who tells you what to do and when to do it, often using rules that put your business at risk, you’re not going to trust anyone either.
Wouldn’t it be easier to just have everyone do their job and let the other guy do his job under the guise of Good Faith and Fair Dealing? With a fair, written contract, of course. If the individual parties don’t do the job they were hired to do, they don’t get paid and they don’t get any more work from you. Real simple.
I’d love to hear what you think.
The knowledge and experience Michael Stone gained in his 60+ years in construction has helped thousands of contractors improve their businesses and their lives. He is the author of the books Markup & Profit Revisited, Profitable Sales, and Estimating Construction Profitably, and is available for one-on-one consultations as needed.
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