Apr 21, 2023

This Podcast Is Episode Number 520, And It's About The Problem With High-Profit Jobs In The Construction Industry

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 with a reputation and a substantial company generating 15% or more profits decides to start building custom homes. Or the opposite, a home builder who decides to branch out into residential remodeling.

Residential Remodel Contractor Building A Home

The processes, tools, equipment, materials, skills, and invoicing procedures required to build a house from the ground up differ entirely from modifying a home with people living there.

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 remodeling 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.

Home Builder Doing A Residential Remodel

The processes, tools, equipment, materials, skills, and invoicing procedures required to modify a home with people living in it differ entirely from building a house from the ground up.

New construction workers are more like cave dwellers with a brute-force mentality. If something doesn't fit or will not work the way they want, 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 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 working on residential remodel projects understand change orders and how to pressure the builder to get paid. Too often, this is the main reason home builders go bankrupt - cash flow issues.

The Solution

Most construction business owners who use accounting software quickly master the basics. They automate processes like invoicing and payroll, track expenses, and view real-time financial reports to manage cash flow and make better business decisions.

The problem is that 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 on the project using whatever model you are accustomed to using, and in the end, you wind up with cash flow problems.

But what many business owners don't take advantage of are key insights that can improve customer care and increase sales. With the help of your accounting software, you can continue to provide services that you're good at, work on improving them, and help boost your bottom line.

• Gain insights that increase sales

If you're not tapping into your accounting software analytics to better understand your clients, you're missing a significant opportunity to close more sales.

Most accounting software can highlight your biggest spenders and buying trends. Knowing who your best clients are, your most extensive selling products and services, and how much each customer spends impact your marketing decisions – not to mention - help you fine-tune your sales strategies.

• Improve customer care and boost profits

Accounting software can offer peace of mind when you know your financials are accurate and up to date. But another significant advantage of an online accounting solution is how much time you'll save by automating processes like invoicing and payroll – giving you more time to follow up with clients and seek out new prospects.

We all know how important the personal touch is in sales. So why not use your accounting software client data to help remember your customers' birthdays or thank them when they've hit a milestone – being on your subscription service for five years, for example?

With enhanced customer data at your fingertips, your construction business will earn a reputation for personalized service. You'll be able to respond quickly when a client calls with a question about a service. And you'll be able to suggest substitutions and offer valuable add-ons based on their buying preferences, so upselling becomes a snap.

How will you use accounting software to grow your small contracting business?

Savvy construction business owners take the first step toward better profitability when they stop thinking of accounting software as a financial management solution and consider it a comprehensive tool for business growth.

You may be surprised at how accounting software can help you better serve your customers or improve your sales strategies when you look at its true potential.

Final Thoughts

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.

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 much money and retiring wealthy. All contractors who try to do the right thing deserve to be rich because they bring value to other people's lives.

About The Author:

Sharie DeHart, QPA, co-founded 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 managing 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 sharie@fasteasyaccounting.com