BY PATRICK HOGAN
4 Financial Traps You Must Avoid Some financial pitfalls that contractors need to watch out for as you operate your business. Adobe Stock Images | By Maxim_Kazmin
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onstruction business owners often start their businesses with good intentions, and they have the know-how, experience, and connections needed to gain clients and carry out the work. However, many contractors and material suppliers overlook how important it is to allocate effort and time to managing finances. Here are some financial pitfalls that construction businesses fall into.
1)
LOWERING MARKUP TO WIN JOBS Without clarity on if a project is still profitable after lowering prices to win bids, you might find yourself knee-deep in deliverables without the returns to show for it. Being inflexible with your markup isn’t the solution either. Typically, smaller jobs allow for healthier markups. So, businesses can mitigate the risk of falling into the trap of being booked but broke by having a healthy mix of smaller and bigger jobs. Doing this doesn’t remove the need to ensure that you’re not losing money on the job. After all, the bottom line for any project is to increase your bottom line.
2)
SAME MARKUP FOR EVERY JOB Like the last pitfall, using the same markup for items or overall percentages on all your jobs might simplify the work involved in pre-construction and bidding. However, projects are often wildly different as complex as they are, and this templated approach can cost you big. You have to account for time spent
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managing the work on the job site, the in-house personnel who get tied to jobs, and other variable expenses and resource consumption that change depending on the nature of the project. You might be leaving money on the table or even losing money if you don’t do a thorough financial and operational analysis of what a job will entail before you write up your quote, bid, or offer.
3)
POOR FINANCIAL TRACKING WITHIN PROJECTS Precise tracking for change orders and all the details involved in the project is just good business practice. It is essential not only in managing the project but also in ensuring that you’re able to file the appropriate preliminary notices required to preserve your right to file a mechanics lien in case there are payment issues later in the project. It also helps clients understand the actual costs of what they’re having done. As a result, they’ll be able to make better decisions as clients for subsequent projects and requests for amendments in your current contract. It’s easy for these things to go out of hand, so establishing a straightforward process whenever there are change order requests is smart and essential. Document their requests. Write up a detailed cost breakdown and get on the same page with them before starting any work that’s not in the contract. Absorbing these costs has no real business advantage and is only shaving off from your profits.
4)
POOR ANNUAL FINANCIAL TRACKING Poor tracking for every project is often part of a bigger problem–poor annual financial tracking. You’re dealing with finances on a per-project basis, the business version of living paycheck-topaycheck. You won’t have a clear idea of where your business is financially, what types of clients benefit you the most, and what needs to be done to improve your standing. There are many reasons why many construction businesses fall into this trap; however common it also is in other business sectors. Construction businesses are often caught up on shortterm cash flow, and ensuring that all payables are covered and plans are correctly implemented. Project continuity, of course, is a crucial focus. However, business continuity can be significantly compromised if a business is not aware of where they are in the medium-term, at least its annual financial performance. Setting goals helps immensely. Metrics or key performance indicators help businesses have an objective look at numbers to assist them in evaluating their financial health. Ultimately, the goal is to have a profitable business. With awareness, conscientiousness, and diligence, you’ll be able to stay on the right track as you continue delivering value to your clients. Patrick Hogan is the CEO of Handle.com.
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12/10/22 12:55 PM