Guest Blogger: Thomas Messier, CIC. Tom is Vice President of Construction Industry Services at Mason and Mason Insurance Agency, Inc. in Whitman MA. He speaks frequently to construction industry groups about insurance related topics. Tom is a Certified Insurance Counselor, and is a graduate of St. Michael’s College.
Note: To help better understand this article you might want to first read Tom’s previous post titled: Does Your Liability Policy Have the Right ‘Coverage Trigger’?
What’s a “Triple Trigger” — Can You Or Your Insurance Agent Answer That Question?
The Set Up
Let’s say five years ago you completed work on a commercial construction project. Then last month you received notice that part of the structure collapsed and that your client is filing a claim against your firm for the needed repairs, plus loss of use of the structure during the rebuilding. Their complaint is that your original work was done improperly and the stress cracks had been noticed soon after completion. “It was only a matter of time,” alleges the complaint, “before this collapse happened.”
Now What?
Ignoring for the moment the fine points of litigation, which Liability insurance company should you notify? Your current carrier? The one who had your policy at the time of the construction? Or both of those, plus every policy you’ve had during the past five years?
Although the correct answer will depend on the nature of the claim and the exact cause of the collapse, the best response at this point would be “all of the above.”
Policy Details Are Very Important
Because Liability policies usually state specifically that they cover damage occurring during the policy period only, you’ll need to ask when the damage actually “occurred.” At the time of original construction — during the time the cracks allegedly appeared and continued to worsen — or on the day the actual collapse took place?
Many courts, when faced with similar situations, have ruled that all three apply. This is what’s called the “Triple Trigger”. The courts held that because the damage had been occurring continuously since the first day of construction, every policy since then should provide a defense. And, if you’re found liable, you’ll have to pay a part of the claim as well.
The Good News
If you’ve been dealing with reputable and skilled insurance providers and your policy has been continuous and reviewed regularly in a constantly changing marketplace, the coverage will be there for you regardless of the “trigger” applied by the courts.
Bottom Line
If you have an experienced and recognized construction insurance specialist helping you, you’ll sleep better at night knowing an expert is watching out for you, even if you’re not fully sure of what you have to watch out for!
Guest Blogger: Thomas Messier, CIC. Tom is Vice President of Construction Industry Services at Mason and Mason Insurance Agency, Inc. in Whitman MA. He speaks frequently to construction industry groups about insurance related topics. Tom is a Certified Insurance Counselor, and is a graduate of St. Michael’s College.
Does Your Construction Liability Insurance Policy Have the Right ‘Coverage Trigger’?
What Is An Insurance "Coverage Trigger"?
A “coverage trigger” is an event that causes your Liability policy to pay a claim. There are two basic types of “triggers”: occurrence and claims made.
What is an Occurrence Trigger?
An “occurrence” trigger means that the policy will cover any injury or damage during the policy period. For example, if a roof that you installed four years ago collapsed last week, injuring five people, the occurrence trigger will apply and the policy will pay. It doesn’t matter when the roof was built or when the claim was filed – only when the actual injury took place.
What is a Claims Made Trigger?
A “claims-made” trigger, as the name suggests, focuses on the date the actual claim is made. Underwriting and rating provisions might limit how far into your past the policy provides coverage. However, the key question is: “did the claim come in during the policy period?” If so, a “claims-made” Liability policy will pay. Using the example of the collapsing roof, it doesn’t matter when the roof was built or when the event took place, the trigger won’t apply until the claim is filed.
If this claim is made during the current policy period, your insurance company will pay it. However, suppose the claim isn’t made for several weeks, and by the time it arrives, your current coverage has expired and you’re into a new policy period? In this case, the “claims-made” policy will pay the claim, since it was made during the new period.
Maintaining Coverage Is Key
One type of trigger isn’t necessarily better than the other. However, it’s almost always wise to keep the current type in order to provide relatively seamless coverage.
Make Sure Your Insurance Agent Is Able To Offer The Right Advice
Questions to ask your insurance provider if your a contractor:
- What is Claims Made Liability Insurance Coverage?
- What is Occurrence Liability Insurance Coverage?
- Which one is right for my business and why?
If you’re offered a Liability policy that offers broader coverage or more attractive pricing – but has a different trigger than your current insurance – consult with a construction insurance specialist before you make a decision. The only way to be sure you get the protection you need at a fair price is to consider all possible underwriting considerations and how the change in coverage trigger might affect your liability needs.
Watch for Tom's next guest blog where he'll discuss what a "Triple Trigger" is and why you should care about what it is.
Employee Bonuses Vs. Profit Sharing; What’s The Difference?
Every year a good number of businesses give their employees bonuses right around the first of the year, often right at Christmas time. Other companies offer profit sharing, typically distributed around the beginning of the New Year, but after the business has had time to review their accounting and access true profits for the previous year. It’s important for both businesses and employees to understand the difference between the two.
Let’s define and look at some of the differences between a bonus and profit sharing.
Employee Bonus:
Bonuses are compensation for employees for work performed; they are paid in addition to salary or wages. Often business owners give out bonuses without any structured plan or objective method for determining the amount or even how the bonus can actually be earned. Although typically given out around Christmas time, bonuses can be given out any time of the year.
Bonuses are typically used and are a good way to recognize special efforts or performance by individual employees. For example if an employee comes up with a good idea that saves the company a lot of money and or time, that employee might be given a monetary bonus as a reward. The amount of the bonus is typically left up to the employer, but can also be based on some type of pre-established formula where the employee gets a certain percentage of the actual savings.
Bonuses are considered compensation if (per the IRS) they "arise out of an employment relationship or are associated with the performance of services." Bonuses are considered taxable to the employee and are considered an expense of doing business. In most cases, bonuses are a tax benefit to the employer.
Profit Sharing
Profit Sharing is an arrangement between an employer and an employee in which the employer shares part of its profits with the employee. The key difference between a bonus and profit sharing is that there must be profit before any is shared with the employee.
As payment under a profit sharing plan, employees can be given stocks or bonds, or cash (cash profit sharing plan). If the profit-sharing dollars are part of an employee's retirement plan (deferred profit sharing plan), they are received at retirement rather than now, and depending on the retirement plan they may be tax-deductible. There can be eligibility requirements for profit-sharing plans. For example, the employee may be required to work for the company for a certain period of time before he or she can partake in profit-sharing.
Three Good and One Bad Reason to Offer Profit Sharing Rather Than Bonuses
Other Business Considerations:
Keep in mind that depending on how a bonus or profit sharing is distributed the employer may incur additional costs over and above the dollar amount given to the individual employee. Depending on the employment relationship the company has with the employee, the business may incur the expense of payroll related taxes, liability insurance and/or workers compensation insurance on the dollars paid to employees. Its best to consult with your accountant regarding the total cost of offering a bonus or profit sharing plan before discussing with or offering either to employees.
Also, it’s a good idea to let employees know they too may have to pay payroll and income taxes on any bonuses or profit sharing they receive.
Need help?
If you’re looking to start a bonus or profit sharing plan at your remodeling business give me a call or shoot me an email. I can help you develop a plan that works for your business as well as your employees. Businesses that share profits often earn more profit as a result!
Help Your Clients Prepare For and Deal With Remodeling Fatigue
Even if everything has been going well so far on the project, after about 6 weeks your clients are likely to experience what I call remodeling fatigue. They’re just sick and tired of the disruption to their home, their normal family schedule and their lives. And, if they’re not aware of remodeling fatigue, it could happen to them and affect your team well before the typical six week mark.
Living through the experience of remodeling your home is not easy. As creatures of habit its only human nature that remodeling customers get worn out and worn down by the normal remodeling process. If you have ever remodeled your own home you and your family have probably already experienced this condition. However there are several ways you can help customers get prepared for, delay and deal with the onset of remodeling fatigue. A page on your website and or a blog about this topic can help you advice prospects and clients about this condition.
Help them get mentally prepared: Let them know what to expect they will live through while the construction is under way. Tell them about things that might affect them like the noise, the dust, shutting off their water, change orders and the decisions that come with final selections and unanticipated challenges. Just as a doctor would do with patients regarding medications, a good remodeler will warn clients that it is likely there might be side effects experienced during the remodeling process. By doing so clients can recognize the warning signs so they will be able to mentally and physically adjust. Also, my experience was that by discussing these realities in advance, the fatigue might not set in as early, or at least would not be as significant, as early, as it might be if my team had not warned them.
Help them get physically prepared: Living through the remodeling process can be much easier with some preparation. For example, remind customers they will not be able to cook while you remodel their kitchen. Suggest they consider cooking and freezing easy to microwave meals and or collect take out menus before you start their kitchen renovation. Some remodelers have told me they actually provide their clients recipe books and or a collection of local restaurant menus to help with this. If you are renovating their only bathroom as part of a project, ask how they plan to deal without a toilet for a few days or more. They may not have even thought about such realities. Maybe you or they can even set up temporary spaces to tide them over until they get their homes and their lives back.
Earning good online customer reviews and referrals for new projects has more to do with the experience your team provides customers than the work they perform. If you manage their expectations you’re more likely to exceed them and delay the onset of remodeling fatigue.
Guest Blogger: Jason Dickerson is a freelance writer for Direct Marketing and Analysis who focuses on ways people can make their home's more energy efficient and green. When Jason isn't writing he enjoys mountain biking and spending time with his wife Marissa.
How Remodelers and Their Customers Can Both Make Money Being Green
So you have a client that has decided to remodel their home. Considering that they’ve decided to make a serious investment in their home, it’s easy to suggest that they should also think about investing in something that can pay them dividends.
The value of adding green energy infrastructure to a home is threefold. Not only will residents save money in the long run by decreasing the amount of energy they purchase from their retailer, they’ll be helping reduce America’s dependence on foreign energy, and they might even make money by selling the energy they don’t consume to others.
Here in Texas, there are plenty of energy retailers that offer special plans for homeowners with green energy technologies installed on their property. If your clients need to find out which retailers have the best offers, tell them to visit energyproviderstexas.com to explore their options.
What is green energy?
Green energy is a big buzzword in politics these days, but it’s rare that someone actually explains what it is. Green energy generally refers to energy produced through means that are not dependent on fossil fuels. Instead, renewable resources drive the production of energy. Some of the most recognizable forms of green energy are hydroelectric energy, wind energy and solar energy.
Hydroelectric energy
Hydroelectric energy is one of the most developed forms of green energy across the country. For generations, American engineers have been developing dams for many of our nation’s rivers. Once a river has been dammed, engineers can control how much water passes through at any given time. As that water flows, it rotates a series of turbines thus creating energy.
Unfortunately, if you don’t live close to a major water source, this form of green energy probably isn’t available to you, and it’s definitely not something a single homeowner can implement on their own property. That said, hydroelectric energy is collectively one of the largest sources of renewable energy in the country.
Wind energy
In order to turn wind into electricity, a new type of windmill has been developed. Often these windmills are installed in large groups referred to as wind farms. All throughout West Texas, there are thousands of new windmills that have been built over the past decade, and wind-generated power is becoming an increasingly substantial source of energy for the Texas grid.
Individual homeowners can harness the wind to produce energy on a small scale, or if they’d rather not make that sort of an investment, many energy retailers offer products that are comprised of energy derived solely from wind farms in Texas. Either way, utilizing wind energy is one of the most effective ways for Texans to support green energy.
Solar energy
Harnessing the energy of the sun’s rays requires the use of solar panel technology. While solar panels were once extremely pricey, prices have come down as technology has advanced. Now, many people in sunny regions, including many areas of Texas, are installing their own personal solar arrays in order to capitalize on the most abundant energy resource in our solar system.
If one of your clients is interested in pursuing a green energy solution during the remodeling process, be sure to suggest they install their own solar array. Solar energy in particular can really pay off in the long run, especially when homeowners elect to sell the energy they do not use to other consumers on the grid.
If a client is interested in adding a solar array to their home, but isn’t sure if they can afford it, there are still options for them to consider. Some energy providers in Texas subsidize solar arrays, by offering to lease them to homeowners.
Green energy and remodeling go hand in hand
Considering how volatile the energy market has been in Texas over the past few years, it’s easy to make the case to many clients that green energy infrastructure is a worthwhile investment. Consider adding green energy installation to your skillset in order to capitalize on the current trends in the market!
Guest Blogger: Judith Miller has worked with remodelers nearly 30 years; she writes for Remodeling Magazine, facilitates for Remodelers Advantage and consults with remodelers around the country with particular focus on the importance of good financials! Visit her website at www.remodelservices.com
Two Ways To Predict and Measure Good Cash Flow
In his excellent blog post on cash flow, Shawn mentioned direct costs, overhead and net profit as all potentially contributing to good cash flow. And, as he so rightly pointed out, the potential for good cash flow begins with accurate pricing for the job. Shawn also mentioned the importance of working on ‘accrual’ accounting rather than cash. When you’ve got these important elements of good construction accounting in place, you can lay out a couple metrics which will be useful in understanding cash flow.
First, get all your costs in the right place on the Profit/Loss:
Income = revenue from construction projects
Direct Costs = expenses, including ALL labor (even that production manager who doesn’t keep a time card) AND associated labor burden, related to jobs for which you receive the income. Don’t include work on your own house or you Mom’s in this category because you’ll skew (and screw) the numbers.
Overhead = all costs it takes to run an office, including a construction office, but not related to jobs – those costs go into Direct. This includes marketing expenses, rent, office supplies, professional fees, owner and admin salaries and related burden, general insurance – not liability or workers comp which go into Direct.
(List of Typical Accounting Terms and Definitions)
Second, establish a good system for job cost analysis
A good system for job cost analysis lays out the true estimated cost of the job – no SWAGs or ‘guesstimates’ – and allows you to post costs against the estimate as they are incurred. Remember that a cost is incurred WHEN THE WORK IS DONE not when the bill is received.
Third, reliable reports are accurate, complete and timely
Prior to calculating these metrics, be sure to review all reports for reliability.
Now you’re ready to develop these two useful metrics:
1: Slippage/Grippage: this metric calculates the difference between your estimated gross profit and the produced gross profit.
Slippage is negative, grippage is positive.
This is of critical importance because if you’ve got slippage either your estimating is wrong or your production is not working up to expected efficiency.
And if you’ve got grippage, you might be leaving money on the table from estimating too high.
Control of production allows for profits which can then be managed to ensure good cash flow.
- The calculation is: Estimated gross profit margin MINUS Produced gross profit margin
- The goal should be no more than 2 percentage points slippage – or grippage.
2: AR/AP Turnover Net: this metric calculates the difference between the number of days it takes to RECEIVE your cash from customer’s invoices (AR Turnover) and to PAY your customer’s expenses (AP Turnover).
If you receive money from your customers in 10 days and pay your expenses in 15, you’d have 5 days “float” – a good thing!
However, if the reverse is true, you might have to borrow to pay the bills.
The calculation is three part:
Once your accounting system is set up correctly, information is entered accurately, timely and consistently, you’ll be able to see where the money comes from, where it goes and how to control the all important cash flow! This is a set of gears which all work together to produce profits and protects cash!
Designer or Decorator – Know and Manage the Difference
Guest Blogger: Reva Kussmaul, owner of Remodel411. Reva began her practice as a remodeling coach in 1998. Reva believes that remodeling should be a 50/50 relationship and if it wasn’t cultivated as such - nightmares can occur. According to Reva, those nightmares are typically caused by a gap in communication and it could come from either side. For Reva it became quite obvious that someone who knew about and cared about both sides was a missing piece to the puzzle of remodeling nightmares. So, she decided that both homeowners and contractors could use a coach when it came to their relationship - the remodeling relationship that is. In this guest blog Reva talks about the difference between an designer and a decorator. Check out her book: Remodel 411: Secrets to a Successful Remodeling Relationship
COMMUNICATE TO CREATE AN AMAZING REMODELING EXPERIENCE
IT’S ALL ABOUT THE TEAM-WORK!
Contractors & Homeowners: There is a distinct difference between someone who chooses pretty things for the home (see the definition for decorator below) and someone who knows what choosing pretty as well as designing for the building/installation of pretty is (see definition of designer below).
Designer: A person who plans the form, look, or workings of something before its being made or built; a creator, planner, inventor; maker, architect, builder.
Decorator: A person who decorates, in particular a person whose job is to decorate the interior of someone's home, by choosing colors, carpets and furnishings.
Many decorators call themselves designers and they are far from it
I’ve worked with them, so I know. Now, I’m not making them wrong for what they do, I’m saying how they define themselves is incorrect.
Perhaps it’s easier to sell one’s services if called a designer as opposed to a decorator - maybe more money can be charged?! However, there is a very important difference. When a decorator, who sometimes has no true knowledge about building, has a plan B with possible change orders for “unforeseens”, etc.; the project suffers UNLESS they have consulted with the contractor and are willing to refer to their expertise. Then, we have what is called “a team” and an experience is created.
Design/Builders can offer the full service option
This is also part of the remodeling relationship I write about in Remodel 411: Secrets to a Successful Remodeling Relationship. My advice to homeowners - choose a design-build firm that is full-service and if you feel a need to have someone help you decorate with pretty, simply ask if their company is staffed for that service as well. Save yourself time, money as well as emotional fall-out. In the long run, this is what will create a great remodeling relationship.
My suggestion to design/build firms is to have a decorator either on staff or one you’ve built a good relationship with available to you, that is willing to work in conjunction with the designer and/or contractor as far as the pretty aspect of such things as tile lay-out, mirror and sconce placement goes. This is where creating a team comes into play. When all parties are able to communicate clearly with one another and work together everyone wins. That’s the whole point - everyone does what they’re good at, has a good time and works together so more business is forth-coming.
It’s about clear communication and teamwork
A great team, which includes quality craftsmanship, is what creates a win/win experience for all involved. It’s not about anyone being right or wrong, it’s about creating an amazing experience.
Remodelers: I Bet You Don’t Know Your True Burdened Labor Costs
Labor cost is one of the most difficult costs to predict in an estimate. Basically, this cost is determined by calculating the hours required to complete a task or project and then factoring those estimated hours by what it costs your business per hour to compensate and support your field employees. The cost per hour to compensate and support your field employees is commonly called burdened labor costs or your burdened hourly rate.
If you’re not sure which employee you’ll assign to the project you are estimating, it might be wise to use the burdened labor cost of the highest-cost employee and then also estimate the work hours based on his or her abilities and performance. If you are using my Free Excel Estimating Template, this would be the rate you would enter into the top section of the template as shown below. (Note, depending on your company’s situation, other options for which rate to use might make more sense.)
Don’t use another contractor’s labor rates
Because no other company is exactly like yours, it’s important to know precisely how much it costs your company to do business. The burdened labor cost used inside your estimates must reflect your company’s actual expenses. If you don’t know your true labor costs and or how to determine them, and you fail to account for a couple of dollars per employee per hour, your loss could quickly become significant. To make matters worse, also consider that the if the costs are missing from your estimate, those missing costs will not be marked up and included in your selling price to help contribute to required overhead and profit.
Burden and benefits
The hard cost of labor includes not only the hourly wage of the employee, but also all employer-paid taxes, Social Security, insurance, vehicle expenses, and any employee benefits. Workmen’s Compensation, liability insurance, auto insurance, paid holidays, vacations, medical benefits, education, employee meetings, cell phones, pagers, and every other labor-related expense must be factored into your hourly rates.
Keep in mind, if and when the new Obama Health Care Law comes into effect, you will need to add this cost to your burdened labor rates for each employee.
Also, be aware that Workers Compensation rates are expected to increase in many areas around the country. You might want to budget early for this increase.
The burdened cost of labor will be different for each employee
To calculate the burdened labor cost you should use when job costing employee time cards, you’ll need to collect the expenses specific to each employee. For example, one employee may have a company vehicle; another may get a vehicle allowance. This consideration alone will result in different costs for each, even if the two employees are paid the same basic hourly rate.
Are you paying for non-productive time?
In my next blog I will discuss how missing or improperly accounting for the cost of non-productive time may be eating away at your bottom line. I will also share how to build the cost of non-productive time into your burdened labor costs and how you can down load a free Excel Labor Burden Calculator.
Don’t Confuse Bad Cash Flow With Under-Pricing
First, it’s important to define what cash flow is.
Good cash flow is the ability to pay your bills on time because you have collected enough money from your customers in advance of having to pay those bills.
It’s called cash flow because the money flows in to cover bills and only flows out if and when you can pay them. Therefore, to have good cash flow, you need to know how much you need to collect and by when.
Bad cash flow or cash flow problems happen when the business fails to collect enough money at each progress payment and or doesn’t bill and or collect the money from customers ahead of when it is needed. The key here is that the money used to pay those bills comes from your customers, not from other sources.
Good cash flow for remodelers happens on purpose
If you don’t charge enough money for the jobs you sell you will experience what seems like cash flow problems. The difference in this case is that you will never be able to pay your bills using just the money collected from customers because you have under priced your work and there will never be enough money coming in to cover what needs to go out.
When this happens, it should not be referred to as bad cash flow. The problem isn’t with flow. It should be referred to as buying rather than selling jobs.
Paying the bills for yesterday’s project using the deposit money from a job you haven’t started yet may seem to solve the cash flow problem; however it only temporarily puts off the eventual reality that you are buying jobs instead of selling them. Due to the recession many contractors discovered this reality when the new job deposits dried up and there was no money in the bank to pay the bills for work already completed.
To avoid under pricing what you sell you need to know what it costs your business to do business. First, you must properly estimate what it costs to produce a project. Second, you need to know what your business’ overhead and profit costs are (I assume profit as a cost of doing business) for a certain volume of sales so you can determine what markup to use on estimated costs so you can get to the right selling price. Without knowing this information, when you quote a price to a prospect, you are probably using what is referred to as a WAG, a Wild Ass Guess!
Bad cash flow is sure to follow.