How Contractors Can Manage Allowances To Protect Profits
Does this sound familiar?
During the design of the project the clients insisted that a $5.00 per square foot allowance for an “in-stock” kitchen backsplash tile was plenty. During construction they picked out a handmade tile from Spain that sells for $22.00 per foot, takes 5 weeks to get and requires significantly more labor to install than you assumed for the self-spacing stock tiles. The project will be ready for the tile work next week; however the clients finally selected and ordered the above mentioned Spanish tile late last week. The clients insist it won’t be a big deal. “You can keep the project moving. Finish everything except the tile then return when the tile comes in.”
Déjà vu, again?
If the story above sounds familiar, you probably also know the gross profit, scheduling and customer satisfaction implications such a scenario can have on your business. While this provides justification for your mark-up on the direct costs of a project, is it even worth trying to explain all this to your clients? Rather than risk such a conversation, many contractors will simply charge for the difference, eat the mark-up, pay the extra labor cost to the tile sub and hope it never happens again. Surprise, the same problems surface when the clients select the floor coverings!
Problems related to allowances will never go away completely. However, you can implement several strategies to manage their impact and protect your mark-up/margin requirements.
Being proactive is the key
Projects are most profitable and clients are happiest when everything happens as originally planned. Any changes to that plan can cause frustration for either party and may reduce your ability to get referrals if the client sees the changes as your fault. Before allowances throw a monkey wrench into your schedule, help prospects discover what will happen if selections are not made on time, or they choose products that will not be available when needed to keep the project moving as planned. Make sure you do this and mutually agree on things before you allow them to become clients!
Examples of proactive discussion topics:
- If you are remodeling their kitchen or perhaps the only bathroom in the house, will it be a problem if the project is not completed when originally agreed?
- Are they willing accept and to pay for the additional costs related to pulling out of the project and then trying to return later?
- If you do have to leave, how would they feel if you have to finish someone else's project before you return to complete their project?
- Please feel free to add your own in the comments section below
Just talking about these considerations is not enough.
After having proactive conversation with your prospects document their responsibilities in your agreement and what will or will not happen if they do not follow through. Without clear consequences, and understanding the impact of those consequences, prospects become customers who assume they are always right!
Looking for more help with estimating and managing allowances?
Check out the workshop titled: "Estimating, Pricing and Producing Successful Projects".
The workshop is being offered several times at different locations between now and the end of the year. Its also approved for 6 MA CSL Continuing Education Credits if you need to renew your MA Construction Supervisor License.
Marvin Windows Remodeler Summit Attendees, August 2013
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This language is best used at the beginning of your proposal
I also suggest you consider the possible liability you take on by creating specifications and or project plans and leaving them with a prospect that does not do business with you. By doing so you may have put yourself into a position where the prospect or another contractor actually works from them. If they have challenges when building the project and decide those challenges were caused by your plans and or specs, they may have legal rights to sue you. Regardless of whether you feel you are innocent or guilty, you will need to cover your own legal expenses if you get to court and most likely will not be able to re-coup your legal costs even if you are found innocent. If you are found guilty you may even be required to pay the legal expenses incurred by the person suing you.
When a prospect asks you if you will match someone else’s price for the same job you figure if the other guy can do it for that price so can you, so you say yes.
If you believe in the idea of relative success, where you convince yourself you are doing pretty well if you compare your results to other contractors who are doing far worse than you, then maybe you can be happy staying where you are regarding financial management at your business. On the other hand, if you want to measure your success against truly successful contractors, perhaps use 
If you have been playing Contractor Roulette here is a simple three-step plan to help you end your gambling habit:
“Schemes like this to avoid paying premium undermine the purpose of workers’ comp insurance – to protect workers who are injured on the job – and will result in unwanted attention from our investigators.”
How would you look at that? I know one contractor who had that happen to him. When I asked him about it he told me he was definitely scared about going to prison so he spent big money to hire a good lawyer to try to keep him out of prison. He said the lawyer was successful but he was definitely sweating it right up until the final verdict. He didn’t get any jail time but did have to pay a lot of money in fines. He also told me that when everything was said and done, and based on all the money he saved over the years by cheating, the fine and lawyer fees were far less than the money he saved. He told me he felt it was worth the risk.
Choosing the right association should involve doing a little fact checking. Does the association promote and foster a learning environment or does it seek to push its own agendas on you? Does it offer you training materials that are relevant to your company? Does it offer you a place to network with your industry peers? What is the overall tone of the association? Above all, does it portray a professional appearance? If their agenda is not in-line with yours you may want to re-think your membership.
Membership in trade associations can not only benefit the employees of your company, but it can also project a positive image of your firm to your customers; if you choose your association wisely. Membership in associations shows a business’ initiative, its engagement in a particular trade and its commitment to staying abreast of current developments in the market. It can also affect you negatively by conducting itself in an unprofessional manner and by throwing business and moral ethics out the window. Look closely at the way their key members hold themselves in a public forum and ask yourself one question- Is that the way you want yourself and your company to be seen?
How about before any real-estate is sold why not require a comprehensive inspection and inventory of the home be done? By doing so we could document the condition and configuration of that property. The next time that property is sold, the same inspection should happen again; plus any changes in status should be identified and listed. Then the property owner should have to provide proof that any work done that required a building permit and final inspection sign-off was actually obtained. If it’s a pre 1978 home all required RRP paperwork must be provided as well. If any of this can’t be provided by the seller, the property can’t be sold. And, if such information cannot be provided the entire property must be brought up to current building code standards and be dust wipe tested for lead paint contamination before it can be sold.
What is their background and/or length of time at their trade?
What town do they live in? Grow up in?
It’s important to have everyone around be relaxed; if it doesn’t flow easily after a couple of tries, take a break and return to the filming later. For the interviews, have each person sitting while looking at someone they’re friendly with, located just off to one side of the camera. Interviewees should remain looking at the other person continuously and avoid quick looks at the camera (or look only at the camera). If a person's eyes shift back and forth, they literally look shifty!
Surprisingly, the mantra in the film and video world is “Sound is half the picture.” Poor sound is a hallmark of schlocky work, dragging down many otherwise promising videos. If someone insists they don’t need an external microphone to record speech, don’t even consider working with them! Also, watch out for and eliminate distracting sounds in the background. Radios OFF! And don't seat someone close to an inside corner, because there will be very slight but irritating echoes.
The press release alleges that the violations occurred while James J. Welch & Co., Inc. was acting as the general contractor performing renovations on a project at the former Frisbee School in Kittery, Maine. At the time of the renovation the Kittery site was a child-occupied facility and therefore was subject to Renovation, Repair and Painting (RRP) Rule. 
In Feb. 2012, after receiving the anonymous tip, the EPA and the Maine Department of Environmental Protection performed an inspection of the site. Based on the inspection, EPA determined that the general contractor did not ensure that a company hired as a subcontractor to replace windows at the school, New Hampshire Glass, was complying with the required work practices required under the RRP Rule. 
The nightmare both of these businesses are going through should serve as a warning for other business owners. Both general contractors and sub contractors need to know each other’s responsibilities when it comes to compliance with the RRP Rule. By understanding the rule the GC and the sub can then come to an agreement about who will do what and when they will do it to make sure that both of them are in compliance while doing the work, as well as creating and maintaining all required paperwork and documentation. If you do not already have these things under control at your business I suggest you read my September 3, 2010 RRPedia blog titled: 
