Jun 17, 2022
Many 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).
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.
Home Builder Doing A Residential Remodel
The processes, tools, equipment, materials, skills, and invoicing procedures required to modify a home with people living there are entirely different from building a house from the ground up.
New construction workers are more like cave people with a brute force mentality. If something doesn't fit or will not work the way they want it to, they use more brute force until it does. Every problem has one answer "Brute Force."
The same goes for managing sub-contractors and suppliers. The home builder bids on a residential remodel project using the exact square foot costs they have continuously operated in building houses and quickly discovers the true meaning of "Hidden Costs."
These costs include 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 do not ever want to be without water, lights, heat, and privacy, and they don't know how much debris, dust, and noise is involved in a remodel.
Homeowners want to believe everything is included in the original contract price, including the little extras they think of along the way. 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.
Most trade contractors and subcontractors who work on residential remodel projects understand change orders and know how to apply pressure on the builder to get paid. Too often, the main reason home builders go bankrupt is cash flow issues.
Residential Remodel Contractor Building A Home
The processes, tools, equipment, materials, skills, and invoicing procedures required to build a house from the ground up are entirely different from modifying a home with people living in it.
They understand brute force will not work, but patience, planning, and being respectful do. Randal spent a few years in residential remodeling, and it did not take long to learn that new construction behavior does not work in residential remodeling.
The remodeling contractor uses a form of "Cost Plus" or "Not To Exceed" to provide the homeowner with the scope of work and a contract price the bank needs 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 are limited only by what the building codes will allow.
When the labor, material, other costs, and subcontractor bills pile up, the remodeling 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.
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 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 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.
Lost and tired of your bookkeeping system? If you are using QuickBooks and doing your books (or have staff doing it for you), I recommend you head to our Construction Accounting Academy site and check all available classes immediately. Master the skills needed to generate useful reports, repeat quality performances, and make informed decisions to operate and grow your construction company.
About The Author:
Sharie DeHart, QPA is the co-founder of Business Consulting And Accounting in Lynnwood, Washington. She is the leading expert in managing outsourced construction bookkeeping and accounting services companies and cash management accounting for small construction companies across the USA. She encourages Contractors and Construction Company Owners to stay current on their tax obligations and offers insights on how to manage the remaining cash flow to operate and grow their construction company sales and profits so they can put more money in the bank. Call 1-800-361-1770 or firstname.lastname@example.org