The coronavirus has already upended construction projects across the US. Now, with the “deepest recession on record” looming, many contractors are expecting to take a hit on their profit margins. The thought process seems to be one of “I will profit a few dollars less, but I will still have work.” While on the surface, that may seem like an easy fix to a complex problem, it could actually do more harm than good. The main fault with this strategy is that we will most likely be dealing with record-high prices for building materials. The production cutbacks or complete stoppages will cause current inventories to deplete, before production can catch up. A much better strategy is to work to reduce your construction company’s overhead costs, which will lower your pricing on every project that you bid.
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Cut your overhead costs, not your profit
Every contractor has to deal with overhead expenses. They are part of the cost of doing business in construction. But the overhead rate varies wildly from one contractor to another. In good economic times, lower overhead costs allow you to increase your profit margins, and still get the project done. In a less favorable economy, a lower overhead will allow you to remain competitive, without the need to lower your profit margins.
The smartest move is to reduce your overhead costs, by getting the same amount of work done in a shorter time frame. For most contractors, overhead expenses are made up of the same 3 components: Bidding, accounts receivable, and accounts payable.
Preparing your bid
Preparing your bid is the first step in eventually receiving a contract for a project. But the process can be time-consuming, to say the least. Here are some suggestions for improving your bidding process.
Consider moving to an online plan, instead of chasing down plans and specs for each project. This way the plans, specs, and any addendums are always just a few clicks away, whenever you need to see them. You will save large amounts of time (and of course money) by being able to access the plans, while sitting at your desk.
Spend less time doing material takeoffs by using an estimating software program. There is a myriad of estimating programs available today, ranging from simple to complex, with all the bells and whistles you could ever possibly need.
Most estimating programs include a customizable proposal form that you can create for the project. And most of these programs use “autofill” to complete the fields of the proposal form for you.
Simplify your material quote process by creating a simple material list once your takeoff is complete. Then you can send the same material list to several supplier options, and easily compare the quotes once they are returned.
Digitize your old bid files and store them on your computer or company server. Storing them electronically allows everyone easy access, at a moment’s notice. You will also be able to access them via a smartphone or tablet, without having to return to the office to pull the hard copy from the filing cabinet.
Streamline accounts payable
During a recession, you still have to pay your bills. But contractors can take steps to cut accounts payable overhead costs by boosting productivity, and reducing fees and penalties. You can streamline your accounts payable by using AP software to submit paperwork and make necessary payments.
Most of a contractor’s accounts payable can be done online now. This eliminates the need to print and fill out forms, write the checks, and rely on snail mail to get them where they are going on time. You can also avoid the penalty associated with late submissions as well, saving yourself even more money.
In most areas of the country, you can file and pay for the following costs online:
- Sales tax
- Unemployment insurance premiums
- Workers comp payments
- State income tax
- Federal business taxes
- Liability insurance
- Vehicle insurance premiums
Lastly, you can also use an online payroll service to calculate and create paychecks for all of your employees. Once you have completed the initial set up of entering each employee, and their withholding allowances, you simply enter the hours worked for the pay period, and the program does all the work for you.
Then you can load your blank checks into the printer and be done with payroll in no time!
Improve accounts receivable
Too many contractors and suppliers accept slow payments as the status quo in construction. What they don’t realize is that it actually costs your business money to carry your customer’s debt.
Improve your accounts receivable process to get paid faster during a recession – and further minimize your overhead costs as much as possible. When a recession makes money scarce, the subs whose paperwork is accurate and correct will be the first to get paid.
The reason for this is that if you have filed all your paperwork correctly, you have legal recourse towards the non-payer. Your company could potentially file an NOI, and if that doesn’t get you paid, you can file a mechanics lien.
Contractors should always:
- Send a preliminary notice to make yourself visible, and protect your lien rights in the event of non-payment.
- Submit a lien waiver, after you have received a progress billing, or final billing payment.
- Include correct retainage calculations on payment applications.
- Understand Prompt Payment requirements, and how to use them correctly.
- Know and understand the Notice of Intent to Lien (NOI) rules and timelines.
- File a mechanics lien if you don’t get paid.
Lower overhead costs to get paid faster and survive a recession
As you can see, there are several ways to lower your overhead costs, and make sure that you get paid for every project, at the same time. With a recession coming in the not-so-very-distant-future, it is imperative that your company is prepared for the worst. The length and severity of the recession won’t be fully known for some time, so why not get started on preparing for the looming recession now?