Any contractor on any project can experience problems. But small contractors bring a particular set of challenges to the job site. If they don’t take the right steps to overcome those challenges, they can easily cause headaches for everyone – including clients and other contractors and subs on the job. (And a headache is probably the best case scenario.)
Being a small contractor isn’t a problem in itself. Contractors of all sizes can run into issues with workload, cash flow, or business practices. But with fewer staff and resources available, smaller contractors can quickly end up in a situation that gets out of their control. The solution lies in anticipating these problems and protecting yourself, the company that hired you, and the jobsite itself from the potential fallout.
Reason #1: The workload is too big
One of the primary problems that many contractors face, especially when times are good, is a lack of capacity. You just don’t have enough time, or enough staff, to complete every job available. With a limited workforce, a company can only do so much work.
If you’re a contractor with a small staff, or you have multiple projects going on at the same time, you may not be able to perform at the pace required to keep those projects on schedule. Don’t assume that you can take on a big job and hire as you go. It can be difficult for companies to find and hire skilled labor on short notice. Construction companies across the country are having to get creative to overcome the current labor shortage.
Solution 1: Bite off projects that your workers can chew
The construction industry has a high rate of business failure – and probably not because contractors they turned down work. It’s more likely that they derailed because they tried to grow too fast.
It’s important for small contractors to learn to say “no” when reviewing potential projects. If you take on too many projects or a project that’s too big, your employees can quickly feel overworked. And you want to keep them as happy as possible. The labor shortage means everyone is looking for skilled workers; they don’t have to go far to find a new job.
Solution 2: Use a temp agency to fill a gap
Temp agencies, especially those that specialize in construction labor, can help you find skilled or unskilled labor near the project on short notice. This can help fill a need during a busy period, but they’re probably best as a stop-gap. Once the job is done, find a long-term solution. (There’s a reason they’re called “temps” and not “perms.”)
Reason #2: Not enough money to last through payment delays
Another issue small contractors face is a lack of money, including access to sources of credit. It’s tough enough for contractors to manage cash flow, even those with deep pockets.
Many small contractors go out of business because they try to grow more quickly than their pocketbook allows. They bid on a project that promises a huge payday, but requires them to spend more money than they currently have.
83 days: That’s the average time it takes to get paid in construction, according to PWC. That’s nearly 3 months. As a result, contractors of all sizes are struggling to weather the delay. In a national survey of over 500 contractors, 51% said they have had to use business savings or a line of credit to make ends meet on a project. Even more worrying, 34% said they had to dip into personal savings or go into debt in order to survive long enough to get paid.
Small companies are less likely to have the bank account or creditworthiness to get a lot of cash quickly. And contractors need a significant amount of cash to start a new job. Nowadays, contractors can’t rely on a down payment to get started. In the survey, fewer than 1 out of every 20 contractors say they get paid an upfront deposit. To make matters worse, most say that retainage is regularly withheld on projects – that’s 5-10% of the contract total that you’ll have to wait for even longer.
Solution 1: Start small to control your cash flow
To paraphrase Lao Tzu, “A journey to a thousand construction projects begins with a single nail.” If you start by taking jobs that you can afford to lose, your wallet won’t be as stressed if you don’t get paid right away. You’ll also be in a better position to practice good cash management (see problem #3).
Solution 2: Build communication habits that help you get paid faster
Being seen on the job site can be difficult, especially if you were hired by a subcontractor (or a sub-subcontractor). The contractor that hired you probably didn’t tell you who the GC or property owners are, even though they are the ones who will ultimately be paying you.
Send a preliminary notice and other visibility documents on every job. And not just to protect your lien rights. A preliminary notice is more likely to get the attention of the GC and property owner, so they sit up straighter when your invoice comes across their desks. Even if your project is in a state where preliminary notice isn’t required, there are lots of reasons to use them.
Reason #3: Lack of knowledge (business, legal, etc.)
To run a construction business, it’s not enough just to know how to lay a foundation or weld a steel beam. You need to know how to estimate and price a job to make sure you cover material and overhead costs, employee salaries (not to mention schedules), and make a profit. It can take time and experience to learn the pitfalls of accounting in construction projects, and how to avoid them.
In a small construction business, the person who runs the back office often wears several hats (lots and lots of hats). They’re often expected to be a lawyer, COO, and psychiatrist – but without all of the degrees.
Solution 1: Get your staff some training
At the very least, the Office Manager should have a solid understanding of human resources, accounting, and legal requirements that affect the construction industry. Check with your local community college or trade school – they often have affordable classes with flexible schedules for adults with a day job. Many construction associations offer training and education opportunities as well – see the CFMA Education page for an example.
Solution 2: Get expert help with confusing or time-consuming tasks
In business, there’s something called the ‘Pareto Principle.’ It’s also known as the 80/20 rule. The rule basically says that we spend 80% of our time on activities that make up 20% of our income. It works in reverse, too – we spend 20% of our energy on activities that account for 80% of our earnings. Small contractors should be focusing on what they do best – planning, creating, building – and getting help with the rest of the complex issues.
Take getting paid, for example. The Office Manager is probably quite comfortable creating and sending invoices. They probably have legendary time management skills – more than enough to create a calendar reminder to follow up on unpaid invoices.
But if that invoice goes unpaid – what’s next? Did your office staff know about the documents they needed to submit in order to protect your lien rights? Do they understand the state requirements for actually filing a lien on a property?
Filing a lien isn’t rocket science, but it’s also crucial to get the details right. By using a lien filing service to do the research, double-check information, file the lien, and track documents, you can lift a huge weight off of your Office Manager’s shoulders.
Many small contractors seek help getting paid faster. Others might benefit from a part-time construction accountant, or a lawyer that can double-check a contract. Understanding the limitations of your own knowledge is the first step in overcoming it.
Reason #4: Other Contractors
Sometimes, the challenge isn’t you at all – it’s the company that hired you. Some contractors communicate terribly, write bad contracts, and use unfair payment practices. They use retainage as a weapon and tack on back charges so there’s nothing left for you to get back.
Solution: Get to know the contractor
Create a prequalification process to gather information on contractors before you even bid on a job. Get to know as much about a company, their management team, and their payment practices as soon as possible before working with them.
The prequalification process may include a list of questions to ask the contractor, or company details that you can find online. Visit their Contractor Profile to find out if they have had a lien filed against them, or to read customer reviews about their payment practices. If the contractor has a long history of late or non-payments, you may want to pass on that project.
After a job is over, you can use the same Contractor Profile page to leave your experience to help others – whether that payment experience was good or bad. Because to build a successful construction business, it’s just as important to find the good apples as it is to avoid the bad ones.