Wake Up and Smell the Coffee!

Q:
My company is a new construction residential plumbing contractor. While we’ve made some correct moves, 2008 was not great. Our business slowed from $19.5 million in 2005 to $8.4 million in 2008 and 2009 looks like another 25 percent drop. Since 2005, we have moved into some apartment and condo projects as well. This has helped, but our volume keeps falling. Please offer any suggestions for 2009, or just revisit the items discussed in your “Earn More, Work Letss” Series.

Steve Webster, Owner
WWW Plumbing

A:
Stop, wake up and smell the coffee. There isn’t enough new home construction work to support the lifestyle you are accustomed to. Your company will continue to bleed money as you try to bid work against too many contractors bidding low just to keep their crews busy. If I were you, I would open a service company and offer full plumbing, heating and mechanical services for commercial building owners as well as homeowners. This type of business is steady, built on providing excellent customer service and taking care of your customers and it requires a pro-active marketing and sales program. Waiting for the economy to turn around will eventually put you out of business. Taking what you’ve got and creating a future is exciting. Go for it!

Q:
I am a small custom home builder in Texas. We use a payment draw schedule based on project phases, and I have some questions for you:
    1. What is the average number of draws you recommend for a custom home based on best practices?
    2. How are the draws broken out to better manage cash flow throughout the project?
    3. Based on how the draws are broken out or phased, what percentage do you recommend applying to each draw to manage cash flow and reduce risk to the builder against not being paid at the end of the project?

    I appreciate you taking the time to provide answers to my questions above and look forward to reading future articles.

Fred Green, Owner
Green Homes Ltd.

A:
The draw system you are using is forty years old and not what professional contractors use today. That system was used back in the 1960s and 1970s when savings and loans funded most home construction. Start using a percentage of completion billing system. Invoice every month on a percentage of what is completed. Start with a line item cost breakdown and invoice the completed percentage on every line item every month. Make sure you also have line items for supervision, project management, overhead and profit. This will even out your cashflow as you get paid and go for the work completed.

There is no way to honestly pad or manipulate your invoices to pre-pay you in the event your customer runs out of money or doesn’t pay the final bill. Before you start any project, require a proof of funds available from your customer, and make sure they have the money set aside in a trust account or the lender has enough to cover your full contract plus potential change orders. Have them set aside the total contract amount plus 5 percent for extras in a construction bank account directed to pay for the work. Never start a project without all of the funds ready and set aside. Then, do a good job and get paid. If you don’t get paid, lien the job, hire a good attorney and sue the bums.

Construction Business Owner, May 2009