It may be hard to admit, but most construction companies are leaving money on the table in some way on almost all of their jobs. It doesn’t matter if your company is a multi-national construction behemoth or a mom-and-pop shop. If you’re looking to run your company as efficiently as possible, you need to be aware of the cash vacuums holding you back.
Leaving money on the table hurts contractors’ cash flow
Cash flow is the lifeblood of a construction business. Without it, you can’t pay manpower, you can’t float future jobs, and you can’t grow into the powerhouse company you deserve. Your overhead will swallow you whole, and doggy-paddling to the next progress payment is exhausting.
Even during construction booms, when jobs are plentiful and contracts seemingly fall in your lap, construction companies are three times more likely to fail. And it’s due to cash flow.
When a company is following all of the steps to get paid on time in construction, they may still be leaving a trail of money behind that bleeds their cash dry.
Here are 10 ways that contractors are leaving money on the table. They range from manpower issues to organizational mistakes. Each of these problems is correctable, and doing so will shore up your company’s bottom line.
1. On-Site Damages
One of the quickest ways contractors leave money behind is through damages caused by your company or crew. Contractors are often hit with back charges at the end of the project, and they can be devastating to the bottom line. If your crew accidentally, or in the course of their duties, creates some damage to the job site, you’ll likely see one of these charges pluck some cash from your profit.
2. Clean-Up Costs
No one likes to clean up after someone else. Unless your crew is meticulous about cleaning up their own messes, you might see a back charge for clean up, cutting a slice off of your profitability.
If a General Contractor has to pay a laborer or another company for cleaning up your crew’s mess, you can bet he’ll be looking to recoup that money from your invoice.
3. Faulty Work
Callbacks are bad, but back charges are worse. If your crew’s work proves to be faulty or outside of the agreed services outlined in the contract, you might want to consider sending them back on your own to have it taken care of. Leaving the GC to hire someone to make it right will hurt your pocketbook and reputation.
If you’re preoccupied with running the business and converting estimates into projects, find a foreman or supervisor that you can trust. He or she will make sure your company’s work will meet the General Contractor’s expectations.
In the end, you’ll find paying a little extra for an employee with your best interests in mind will cover itself in back charges and callbacks.
4. Missed Deadlines
If you’re waiting for payment, you can’t pay your creditors early. This increases the amount of interest you’re paying for on a job. It also causes your cash flow to hit a standstill.
Without positive cash flow and lines of credit, you won’t be able to float future jobs. At best, you’ll have to delay them until you reach progress payments on other jobs. At worst, you’ll lose out on them altogether.
Lastly, missing deadlines crushes your reputation. The construction industry is smaller than it seems. You start missing deadlines consistently, and you’ll soon see the phone stop ringing from prospective clients.
5. Change Orders
Change orders are part of the construction industry, and without them, there’d be fewer happy customers. Giving a customer the input to make a change here or there allows them to feel as though they have input in a project. Allowing the plan to change direction often ends in a more positive end result.
If a customer wants something changed, it needs to be billed for. Contractors will often eat a change order’s cost to receive the final payment on a project. If you’re not billing for those changes, you’re leaving money on the table.
6. Poor documentation processes
Don’t let the dashboard of your truck become a filing cabinet. Instead, come up with an effective documentation process and system. This includes pay apps, change orders, and other documents that are important to the success of your project.
If you’re allowing documents to slip under the passenger seat of your truck, you’re probably forgetting to hand things in as well. Late documents, like pay apps, slow down your payments—sometimes by up to a month. This could see you relying on your credit lines to get through until the next payment.
7. Over-Extending Manpower
Your company is only as good as the men and women that make it work. If you’ve got a workforce that you’re proud of, you owe it to them to organize them effectively. While splitting a crew up over four or five jobs might feel like growth, concentrating that manpower on two or three jobs will yield better results and a faster timeline. Starting slow is often a better long-term business strategy, focusing your employees on the jobs that most benefit your bottom line.
As long as you have the right employees, managing their ability to work together will pay off greatly. Three good employees will finish three projects faster together than they would if split up. Over-extending them will burn them out and produce slower timelines.
More time on the job equals less money in your pocket.
8. Flying Blind Without a Process
Construction companies that operate without a standard process are doing themselves a disservice from the second they hang their shingle. Inefficiency causes contractors to lose money before they even realize it’s gone.
Your business needs a course to track, and that requires nailing down your essential processes. From the second you answer your phone, you should have a plan to follow that will lead to a successful job.
Following a standardized processes maximize your efficiency in two ways:
- You’ll waste less time at each step of the process, from estimating to final walkthroughs. Having a system in place streamlines your routine activities, so you know you’re taking each step the same way each time.
- You’ll have benchmarks and data to compare your company’s health and progress. Job costing reports, in particular, will show you where your strengths and weaknesses lie.
You need to focus on developing a system for your construction accounting practices as well. Your books or accounting apps will help you pinpoint exactly where cash has been left on the table.
Create a process for everything you can.
9. Not Protecting Payments
If you’re not protecting your payments, your construction company is losing profits and leaving money on the table. The minute that a GC or owner knows that there’s no recourse for late or delayed payments, you’ve taken your place at the back of the payment line. You could find yourself waiting much longer for a check than other crews on the job.
Every day that you’re waiting for payment leaves cash on the table in the form of interest. It also handcuffs you from floating another lucrative job.
Sending a preliminary notice should be one of your first steps when starting a new project. A preliminary notice gives construction businesses peace of mind. It introduces you to the paying parties and also protects your payment (in states where required). By sending a prelim, you’re making it clear that you run a professional outfit and know your rights concerning payments.
Preliminary notices aren’t shots across the bow, however. Prelims are friendly yet professional documents that most states require for protecting lien rights. They’ve been proven to reduce the amount of time it takes to get paid on a job. Don’t be afraid to make them an integral part of your company’s system.
Discover how a Florida contractor’s average DSO went from 60 days to 14 days after sending notices on every job.
Likewise, payment reminders and notices of intent to lien will speed up the payment process while also getting your point across. If you’re experiencing payment issues, sometimes reminding the owner or GC that you’re protected is all it takes to get a check cut.
10. Not Filing Mechanics Liens
When a payment problem arises, contractors that fail to file a lien will leave money on the table every time. Every state has mechanics lien laws that protect a contractor’s right to payment. But many are still worried that filing a mechanics lien will tarnish their customer-business relationship. The reality is that once you’ve reached the stage where a mechanics lien is a possibility, that relationship is already in question.
If you’re at this point, you’ve already sent notices and made yourself available for communication. The people who cut the checks have seen your company’s name and know they owe you money. You must protect your company and the people who work for it. The longer you wait to file your mechanics lien, the more it will cost you.
You may even find yourself outside of the window to file.
Get money off the table and in your contractor pockets
If your company falls short in any of these categories, it’s time to learn from your mistakes and adapt. By pinpointing where your construction business is leaving money on the table, you can take steps to correct your course. Take steps to maximize your profit margins and shore up the company’s bottom line.