You have what appears to be a high profit job and now you are thinking you have it made and I hope you are right!
The problem is high profit jobs have a way of turning into low or no profit jobs and in some cases they can bankrupt your construction company because you bid the project using whatever model you are accustomed to using and in the end you wind up with cash flow problems.
Construction company owners who understand Construction Psychology and the need for Business Process Management (BPM) System also know the importance of being process dependent, not people dependent. One will bankrupt you and the other will make you wealthy.
A lot of problems can be traced back to the "Halo Effect" which happens when a contractor thinks "We are so good at (fill in the blank) we should expand into (fill in the blank). They have the attitude "I am going after Moby Dick in a row boat with tartar sauce!"
The most common situation is when a residential remodel contractor who has built a reputation and a substantial company generating profits of 15% or more decides to start building custom homes. Or the opposite a home builder who decides to branch out into residential remodeling.
The processes, tools, equipment, materials, skills and invoicing procedures required to modify a home with people living in it are completely different from building a house from the ground up.
New construction workers are more like cave men with a brute force mentality. Every problem has one answer "Brute Force". If something doesn't fit or will not work the way they want it to they use more brute force until it does.
The same goes with managing sub-contractors and suppliers. I know because I spent a few years being one of them and in my 20's it was great fun!
The home builder bids a residential remodel project using the same square foot costs they have always used in building houses and discovers quickly the true meaning of "Hidden Costs".
These costs arrive in the form of dry rot, cracked foundations, broken plumbing, bad wiring, worn out HVAC and other unpleasant surprises.
Homeowners living in the house while the remodel is happening and do not ever want to be without water, lights, heat and privacy and they don't have a clue how much debris, dust and noise is involved in a remodel.
When it comes to change orders that is something most home builders do not understand. They don't have a process for tracking them let alone pricing and getting paid for doing them. Homeowners want to believe everything is included in the original contract price including the little extras they think of along the way.
Most trade contractors and subcontractors who work on residential remodel projects do understand change orders and they know how to apply pressure to the builder to get paid. Too often this is the main reason home builders go bankrupt is cash flow issues.
The processes, tools, equipment, materials, skills and invoicing procedures required to build a house from the ground up are completely different from modify a home with people living in it.
Residential remodel construction workers are more like cowboys herding cats.
The remodel contractor uses a form of "Cost Plus" or "Not To Exceed" to provide the homeowner with scope of work and a contract price the bank needs in order to finance the construction. That process can work for a residential remodel because the house is already in place which helps define the size and scope of the project.
The size and scope of the homeowner's dream house is limited only by what the building codes will allow.
When the labor, material, other costs and subcontractor bills start piling up the remodel contractor asks for a construction draw and is told the bank needs a Pay Application filled out and submitted. Then it will take a while for the bank inspector to review the project and approve the draw.
This is when the remodel contractor figures out they are providing all the labor, material, other costs and subcontractor expense up front and getting paid only when and if the building inspectors, architect, bank and the client agree to the draw request.
In order for your construction company to survive and thrive in any economy you must pick a niche market and develop your Strategic Business Process Management System (BPM) with definite written goals of what you want to accomplish and how much money you want to earn from it.
Once you have picked your construction specialty stick with it no matter what and in the end you will have the best chance of making a lot of money and retiring wealthy. All contractors who try to do the right thing deserve to be wealthy because they bring value to other people's lives.
If you need a construction accounting services who understands you and your industry we would like the opportunity to chat with you. We can be reached at 206-361-3950 or by email sharie@fasteasyaccounting.com
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About The Author:
Our Co-Founder Randal DeHart - Is a Certified PMP (Project Management Professional) with several years of construction project management experience. His expertise is construction accounting systems engineering and process development. His exhaustive study of several leading experts including the work of Dr. W. Edward Deming, Michael Gerber, Walter A. Shewhart, James Lewis and dozens of others was the foundation upon which our Construction Bookkeeping System is based and continues to evolve and improve. Check out our Contractor Success Map Podcast on iTunes and Follow Randal on Google+