The Design Builder's Blog

Seven Reasons Why Most Contractors Will Never Be Able To Retire On Their Own Earnings

Here is a wakeup call prediction for contractors and for tax payers as well;

Most residential construction business owners will never be able to retire.  They will have to work until they die or are too old to work anymore.  If they don’t or can’t work until they die, then they will have to get on the government dole so they can get housing and food to keep them alive. 

The same is actually true for most Americans.  According to an article on the Money Morning web sitecurrently retired Americans have less than $25,000 or less in savings and investments, and 31% have less than $1,000.  It’s sad to me to think though that construction business owners, after years of owning and running a business, won’t have enough money or investments accumulated so they can support themselves and their significant other during retirement.

Here is another scary fact found in that same Money Morning article.  47%, of current retirees were forced to retire early, mainly because of disabilities, poor health, or the loss of a job and the inability to get a new one.

Let me offer just a few reasons why I am so sure most contractors may never be able to retire:

1. In many of my seminars I ask contractors to raise their hands if they are on the path they need to be, financially, so they can retire.   It’s rare that 10% of attendees raise their hands.  I also think many assume they will be OK and raise their hands.
2. Most contractors don’t charge enough to properly run their businesses and pay themselves for their efforts.   They seem satisfied with earning just enough to stay afloat in business and in their personal lives.  In fact, when they take into account the number of hours they work each year, most admit they earn less per hour than most of their employees.  Some even admit they make less per year than their carpenters.  I know a good number of them, probably out of embarrassment; don’t admit their financial short comings.
3. A good number of construction business owners don’t make enough money to support their families.   In fact for a good number of them, because their wives have jobs and therefore provide the family’s health insurance, they are able to keep their business doors open and pretend everything is just fine. 
4. Only about 20% of construction business owners know the true cost of being in business.   Of the other 80% a majority may be able to estimate project costs accurately, counting very stick and brick, but then they are guessing on the real break even burdened cost of estimated labor hours and also use the wild ass guess method (WAG) when it comes to the markup they use to cover overhead and profit to price their jobs.
5. In addition to using the WAG to price jobs, most contractors have no idea how overhead and profit works.   As Melanie Hodgdon points out in her Remodeling magazine article titled “Four Ways Hopeful Thinking Can Ruin You”, many contractors say “Yeah, that job was a mess, but at least I didn’t lose money on it."   The sad reality in this assumption is that the job didn’t cost more than they sold it for, but they didn’t earn any money to cover their overhead and or any profit.  So in reality they did lose money and there will be no profit on that job to save for retirement.
6. Most construction business owners I speak with haven’t done any retirement planning.  In fact 56% of American workers haven’t bothered to figure how much they’ll need to retire comfortably either. (Source: Employee Benefit Research Institute) How then could these contractors even know how much money they will need to retire and when they can actually retire?   For these contractors I am pretty confident they won’t have what they need.
7. The last and my final reason (although there are plenty more) most contractors will never be able to retire is because they see themselves as contractors instead of business owners.   It’s a simple fact to recognize that when a business sells at the right price it earns a profit.  But when the business owner straps on his tool belt he is only earning a wage. 

So, what should contractors in this position do?

Here is a short list:

• If earning a wage isn’t earning you enough to retire on, you might want to learn how to become a real business owner.
• If you are using the WAG method to price jobs you might want to advance your math skills and or find someone who will do the math for you.
• If you have been selling on price to get work you might want to invest in some professional marketing and sales skills.
• If you won’t do anything about these challenges you might want to look into how to apply for government assistance now so you’re ready to do so when your body eventually gives out.

3 Reasons Contractors Don't Share Financial Info With Employees

I recently read an interesting article about how much a business owner should tell their spouse about their company finances.  Two different opinions were shared and explored.   I’m on the side of sharing the info myself, but certainly not everything in detail.

That article got me to thinking about why so few construction and remodeling business owners share financial information with their employees.   First, I’ll offer a few great reasons to do it.  I hope the benefits will motivate more business owners to do so.   Then, I’ll offer my thoughts on why business owners avoid doing so. 

3 reasons to share your business financial information with employees:

Construction business owners who keep all the financial information about their businesses to themselves are definitively missing out on several potential benefits.   Simply put, by sharing financial information you can accomplish at least three things that will help lower your financial anxiety and help you make and or keep more money:

1. You can get the opinions and advice of others so you can be more confident in your numbers and using them to make sound business decisions.  Getting insight from others can also help you avoid costly mistakes.
2. By involving the right employees with the creation and interpretation of business financials you can share the workload required to create them.  This can make getting your financial reports much more timely and therefore improve their accuracy.
3. By mentoring employees on how to use financial reports you can help them learn to think like a business owner so they too can make sound business decisions.   This is an important and required step if you ever want to remove yourself from the day to day management of your business and or offer a profit sharing plan to employees.

So then why do so few owners share their financial information?

Let me also offer three common reasons why many construction business owners can’t or won’t share business related financial information with their employees:

1. The most common reason is because the business doesn’t have a real financial system that properly separates and tracks costs and expenses.  For these business owners their financial system is really no more than a checkbook showing money coming in and going out.  Without the ability to identify and separate your actual job costs from overhead expenses there is no way your business can get a meaningful profit and loss report.   These business owners don’t share the information because there really is nothing of value worth sharing.   Eventually, once a year for most of these business owners, their accountant gives them the good or bad news when their tax returns are ready to be filed.
2. Often financial information is held back because the business owner is embarrassed that he or she doesn't understand the business finances well enough to explain them or answer questions about them.  This is not good.   Imagine what a great employee will think about his boss and or the business if he discovers the owner is guessing at the financial health and well being of the company.  Think about it.  If you were an inspired and career motivated employee would you want to invest in your career at a business that is in the dark about predicting and measuring profits?
3. During my years of experience providing financial consulting for construction business owners I have had many owners share with me their concern that if they educate employees about and share company financial information with them it will only serve to help them get ready to leave and start their own businesses.  This could be true.  On the other hand I found by educating my employees most of them figured out they didn’t want all the stress and financial responsibilities that came with being a business owner.   However, those who did leave and started their own businesses where in a much better position to be financially successful.   As a business owner I found personal satisfaction in helping make that possible.

Some words of advice

If this articles speaks to what is happening at your business it’s up to you to do something about it.   I definitely recommend you do not consider growing your business in any way, or sharing the information with employees, until you and your business can produce and interpret accurate business financial reports.   To help you see if doing so might be worth it try this self quiz to see if a properly setup financial system can help you and your employees improve business profits and reduce financial anxiety.

10 Causes of Construction Business Owner Financial Anxiety and What to Do About Them

Anxiety affects our whole being.  It affects how we feel, how we behave and has very real physical symptoms.   It can be exhausting and debilitating.  Mild anxiety is vague and unsettling.   Contractors with lower total sales volumes might be suffering already from what I call mild financial anxiety.   Then, as the number of dollars going through the business increases, say above $4-500K, a contractor can suffer from severe financial anxiety, which for some business owners can be extremely debilitating.  Not only can it be personally debilitating, it can also have devastating effects on the health of the business.

Below is a partial list of causes of financial anxiety for construction business owners.   I see these causes all the time when I work with contractors to eliminate them.  If you already have financial anxiety consider how many of these describe you and your business.   If you plan to grow your business make note of these causes.   You might want to address them before you grow.

Causes of financial anxiety

1. Not knowing the true costs of being in business as your business grows and being surprised about the costs when the bills come in.
2. Not knowing in advance if you will have enough money to pay your bills and or meet payroll when they become due.
3. Not knowing how much of the money in your checking account is profit and how much is unearned income for work not yet completed.
4. Not knowing which project types are making money and which are not.
5. Not knowing how much workers compensation insurance will actually cost you until you get audited.
6. Not knowing if you made or lost money all year until your accountant does your taxes.
7. Guessing at what to charge for labor rates.
8. Guessing at what markup you should use.
9. Wondering whether you will be selling or buying a job when negotiating price with a prospect.
10. Fill in your own anxiety trigger(s) here: _______________________________________

What contractors can do to eliminate the anxiety

All of the causes listed above can be solved by creating a true financial system for your business.   With a properly designed construction business financial system, and an accounting software program like QuickBooks to support it, your business can have the ability to:

1. Predict overhead and direct costs
2. Predetermine your mark-up and labor rates
3. Track actual expenses against budgeted using the same format as when they were determined
4. Make apples to apples estimated to actual job cost comparisons
5. Track revenue and gross profit margins by cost categories (IE: materials, labor, subs, equipment...)
6. Predict and track actual Workers Compensation exposure
7. Potentially reduce workers comp costs if your state and or insurance provider allows you to use multiple classifications for the same employee
8. Track accounts receivable and accounts payable to know in advance if receivables will cover payables
9. Tell you if you are ahead or behind your customer(s) regarding money collected versus work performed
10. Track revenue and earned gross profits by profit centers (IE: residential vs. commercial, remodeling vs. new construction...)
11. Compare produced margins for project types your company performs (IE: kitchens, baths, roofs, decks, handyman...)
12. Fill in your desired function here: _____________________________________________

Get the help you need to do it right!

Just as most home owners shouldn’t design and construct their own home, most contractors shouldn’t attempt to design and construct their own financial system.   Without the proper knowledge and experience to do so you could be putting your business and your own personal health through unneeded anxiety.

If you see yourself in what I have described here, get the help you need to improve your business financial system and your health.   Find an expert to help you.  The cost to do so may be far less expensive than the health care bills if you don’t.

Seven Ways Contractors Can Get Paid Faster 

Wouldn’t it be great if you always had the ability to pay your bills on time? 

Even better if you could pay them early when a discount is offered for doing so?  

To improve cash flow at your construction business consider these seven strategies to help you collect project related payments from your customers much faster.

1. First, during the sales process, discuss upfront in a businesslike manner your desire to finance the project with their money.   Let them know your cost of doing business, and therefore the cost of their project, will be much higher if you have to finance the job using your business’ line of credit rather than their money to pay for their project as it progresses.  

2. When creating a project’s payment schedule use project milestones to determine when payments will become due.  If when doing your estimate you list your tasks and related costs for each task in critical path order, you can then add up the marked up cost of each milestone’s tasks to make sure the amount collected for each payment will adequately finance each phase of the project.   Then, add a little extra money to create a cushion of safety (front loading).

3. When writing up those payment schedules make payments due for example “When ready to start drywall” rather than “At start of drywall”.   This way you will have the money you need before you start a phase to pay for that phase.   By using this wording, if you are having problems, you can delay returning to the project if your customer doesn’t give you the money when it’s due.  Be sure to explain how this works to your customers while they are still prospects and before they sign your agreement!

4. Make it company policy (in your contract) and indicate in your payment schedule that the final payment is due at substantial completion.  This is the point at which the project can be used for its intended purpose.   So even if you are waiting on the customer to provide the kitchen cabinet door pulls as the last item to wrap things up, you can still call the project substantially complete, invoice your customer for the balance due and expect the final payment.

5. Also make it company policy that your contractor’s warranty starts at substantial completion of the project.  Clarify however that no warranty work will be completed until the final project balance has been paid in full.

6. Make sure you bill your clients as soon as the job is substantially complete.   Experienced contractors have learned that if you take two weeks to bill your customers; they will assume they have at least two more weeks to pay you.

7. In your contract, and on your invoices, let customers know when interest charges will start on late payments.  If for example they have a 30 day grace period to make payment on a final invoice, and they make their payment late, will the interest due start at the 30 day mark, or start back on the original date of the invoice?   If interest will start at the date of invoicing customers will be more likely to pay within the 30 days grace period.  Again, be sure to explain how this works to your customers while they are still prospects and before they sign your agreement!

Being proactive will help contractors collect project payments on time

For some business owners dealing with and or talking about money with clients and prospects is scary.   When I discuss this subject with them many tell me they don’t want to alienate their customers. This certainly can be a valid concern.  However, if you discuss your policies related to making progress and final payments before you let them sign your contract, and you do it in a professional manner and tone, most good customers will toe the line.  There is definitely a difference between being aggressive versus being firm and sincere with purpose.  After all, the best results for the contractor as well as the homeowner come when there is a mutually beneficial relationship.