As a result of what we do, we get to see a lot of people starting a construction company for the very first time.  We like this.  It warms our hearts to see people following their dreams, wanting to be their own boss, and cut a larger piece of the construction pie for their families.  What we hate is seeing those businesses fail, and they do fail.  A lot.  We’re not going to go into numbers, because it’s not helpful.  We just want people we work with to not be part of that group.  If SiteBoss can help any number of people stay out of that column, we’re happy.

We could give you a bunch of things you SHOULD do when you start a business (in fact, we already have), but it occurs to us that it is more important for you to be absolutely sure you DON’T do a few things that can really get you into trouble.  So:

1. Don’t start a project without a complete breakdown of YOUR costs.  This one is easy to skip, because it’s easy to get rough estimates of what things are going to cost you, from people you trust.  Don’t do it.  Get REAL quotes and organize them (and preferably bid them out to multiple vendors to make sure you are getting the best deal), so there are no surprises down the road.  Nothing will kill a business (and your drive to work) like waking up and realizing you aren’t going to make enough (or maybe ANY) money out of a job.
2. Don’t start a project without a SIGNED contract.  Another easy one to skip.  It’s crazy how many contractors we run into who don’t want to get a contract signed because it “damages the trust with the customer”.  Hogwash.  Anyone spending money to have their home or business worked on is going to want a contract.  You should want one too.  Remember:  contracts are less about protection, and more about clarifying everyone’s understanding of a job.
3. Don’t manage subcontractors like a friendship.  Same as #2 above.  If you have a contract with the guys you are working FOR, why wouldn’t you have the same thing with the guys you are working WITH.  Crucial.  Payment terms, scope of work, late penalties – it should all be in there.
4. Don’t do change orders on a handshake.  This is huge.  Our guess is that MOST contractors happily fly without change orders.  Two things here.  First, that you are just setting yourself up for disaster if you do this.  Something as simple as “Can you move this outlet to the other wall?” can end up being a point of contention in court if things ever (heaven forbid) get ugly.  Second – money.  You should be charging for EVERY change order, no matter how small.  They take your time, and your time isn’t free.  Starting a construction company means valuing your time.  All of it.
5. Don’t think that there won’t be problems.  There will be.  On every job.  With every vendor.  Almost every day.  Be prepared to deal with those, and with a smile on your face.  Remember – this is your role in the whole thing – the guy that deals with problems.  It’s what you are good at, and it also happens to be why you make the most money.
6. Don’t even THINK about not using financial software.  Another huge mistake.  Putting checks in the bank and keeping track of things on paper is NOT good enough.  You will forget things, you will overpay people, you will forget to collect things.  Use something.

OK, yes.  SiteBoss by Pi Software does indeed do a lot of these things for you, and pretty well, we think.  But this goes beyond that.  You don’t have to use our software.  But please use something to stay organized.  In the long run, it’s better for you, better for your family, better for everyone if you stay in business.  For a long time.

Task 10 general contractors what the most important part of remodeling a kitchen is, and you’ll get 10 different answers.  Ask the same 10 what the most important data is to them – and 9 will say tracking construction costs.  That other guy will probably be out of business soon.

But a better question might be this:  when tracking construction costs, how much detail do you really need?  That one will baffle most everyone – because it’s a tough question to answer.  We can probably all agree that tracking one number for the whole job isn’t enough (you don’t know where you need to cut costs or make changes) and tracking every single individual item is too much (you’d need a full time person for every two jobs you do to keep up with the data entry).  So the answer is somewhere down the middle.  So how to decide?

The quick answer is “as much as is reasonable”.  In that second example above, it’s cost prohibitive to add employees just for tracking construction costs – even if it saves a lot of money.  But let’s be clear – you’d LOVE to have that level of detail.  Being able to get a report of ALL of your costs would allow you to be ultimately efficient in keeping costs down, and therefore maximizing profits.  You could take a list of every cost on a job – every sub, every material, every broom, you name it – and sort it in descending order by total cost.  Then start at the top, and see where you can buy for less or negotiate a better price!  You’d get through 10% of that list, and probably have upped your profit margin considerably.  But we can’t do that.  But can we get close?  You bet.

Deciding the level at which to track construction costs

It really comes down to levels.  At level 1, we get no detail other than by trade.  So the project would look like this:

• Demolition
• Framing
• Electrical
• Plumbing
• Finishing

So you know what you spent total on each trade, but nothing more.  Saying to yourself “Seems like I sure spent a lot on Framing” isn’t going to get you far.  Let’s go to the next level:

• Demolition
•     Labor
•     Materials
• Framing
•     Labor
•     Materials

Etc…

This is better for sure – you can now say to yourself “The Labor for Framing sure seems expensive – lets make some calls.”  Somewhat actionable data.  But look what happens when we move to the next level:

• Demoltion
•     Labor
•         Workers
•         Insurance
•         Travel Costs
•     Materials
•         Trash Bins
•         Tools
•         Hauling

Etc…

Now we are talking.  You can start to see immediately the benefit of detail at this level.  You start saying things like “Whoa!  We are spending a fortune on Hauling costs – we need to find someone else for that.”

Keep in mind that tracking construction costs doesn’t mean following this exact template.  You can arrange things any way you want (assuming you have good construction software that allows for it), as long as it gets you to a level of detail that allows you to ACT.  That’s the way to save money, and ultimately put more in your pocket.

This post probably applies to just half of all of the general contractors out there.  Why only half?  Because half of all the people we talk to would never dream in a million years of not using construction change orders on every single job they do.  The other half – this is for you.

Most people start their construction businesses by doing a piecemeal job for a friend, then someone else finds out and has you do some work, then their friend wants a kitchen remodel, and the next thing you know it’s a full blow business.  You have a contractors license, workman’s comp insurance, all that stuff.  You are running a business.  You get a process rolling, a billing policy, and everything is good.

The reason people don’t use change orders is well understood.  They take time (unless you have some really good change order software to use), they don’t have any obvious or immediate benefits, and worst of all – they seem to damage trust with the customer.  They just want an outlet moved from wall A to wall B!  It doesn’t matter if the plans call for wall A, just do it, right?

Well, no.  There is one thing you need to know:

Construction Change Orders can save your business!

That’s not an over exaggeration.  Take the example above.  You move the outlet to wall B.  Lets forget for a moment that you’re not really being PAID for a change that could end up costing you more money, and lets also forget that you don’t have any records to refer to the change later if you are trying to figure out what happened somewhere.  Lets just say that something happens at the end of the job, the customer is disputing what they owe you, and you end up in court.

The very FIRST thing someone is going to suggest is that you didn’t perform as agreed to.  You’ll be happy to show that you did.  Here, your honor, is the contract that was signed, here were the invoices submitted and paid (up until the end), and here are even some pictures of the fantastic work that was done.  The lawyer for the customer then shows the plans, and shows just one example of how you are not performing.  The plans clearly show an outlet on wall A, and then a picture of said outlet on wall B.  But wait, you say!  We agreed to move it to wall B!  Oh really  Show me the document, signed by the owner, that says that, says the judge.  There must be a change order, right?

You lose.  How much?  Well, it depends.  If you allow the customer to build up a big balance, you might not see any of it.  Worse still, maybe the customer is going to be a real jerk about it, and try and get damages out of you.  These are not small numbers.  We have seen MANY cases where these situations are enough to kill a company.

Don’t do it.  Get construction change order software (or something, please) and make sure this doesn’t turn out to be you.