Top Pitfalls for Contractors to Avoid
Biggest Pitfalls for Contractors in Texas & How to Avoid Them
No two ways about it, the construction industry is challenging, especially in Texas. Not only is it a struggle to be profitable, keeping up with changing government rules and regulations is almost impossible. Read on to find out what the top pitfalls are and how to make sure you do not fall into them!
Pitfall #1 Cash-Flow – Pricing & Estimating
In most small construction companies with less than 50 employees, cash flow is their number one problem. In fact, one in five construction companies has a cash flow problem with the majority of the issues occurring with commercial construction. The good news is there are a few ways you can avoid the cash flow crunch.
Shop materials – The first way is to have a solid pricing structure and update your costs quarterly. Appoint someone in your company (even if it is you or your spouse) to shop and price your main materials. An increase in materials of only 2% can throw your entire bid off. And on the reverse side, if you are missing deals from vendors on products, you are passing up profit.
Solid estimates – when you give an estimate, make sure you have covered all your costs including supplies, time shopping, labor, owner’s salary, and profit. If you do not add the profit into the job, it is a good bet you will not have very much. In your estimate state the timeframe the job will be done. It is important to let clients know that work may cease if payments are not made in a timely way.
Time payments – This is one of the most critical parts of your contract. You need to spell out your payment schedule. For example, if you are bidding a $40,000 commercial paint job that will take three weeks. It should consist of something like:
- $10,000 due when the contract is signed. (Check city and county for maximum deposit).
- $10,000 due at 25% completion
- $10,000 due at 50% completion
- $10,000 due at 100% completion
To cover yourself, you should state what will happen if payment is not received by a specific time and go over it when the client accepts your bid. It is up to you, but some contractors write in something like:
- Payment is due within 7 days of invoice.
It is not a pleasant thing to think about, but some companies both large and small stretch out payments – because they can. As contractors, those are the type of clients you really must cover yourself with an excellent iron-clad bid. And if they are slow-pay – stop working and go to another job. You will probably only have to do that one time.
Incentives & Penalties – Another important point to add to your bid is an incentive for on-time payments. You can offer a percentage off. And on the flip side state the penalty for late payments. Texas Statutes Property Code Title 4 – Actions & Remedies Chapter 28 goes over that contractors and subcontractors have a right to prompt payment.
Pitfall #2 – Lack of Skilled Workers & Using Subs
Running in a close second as far as pitfalls go is a lack of skilled workers, and this is not just a problem in Texas. Almost every state in the US is suffering from the need for workers who know what they are doing and how to perform on a job site. The solution to this problem starts with you as a business owner. If you have an idea that you will just hire and fire at the drop of the hat you are in for trouble. Investing time in your employees is the way to go.
Employee Training Programs
Invest in your employees and develop a program that gives them the skills they need for the job.
Yes, sometimes you will spend time training employees and then lose them to competitors, but that can happen in any business – banking, education, sales – you name it.
Once you have developed a training program, you have done most of the hard work. Then, run each employee through the steps. You can have a basic employee training program that goes over your company policy and then individual training programs for each position.
If you have an experienced employee who knows the ropes, offer them an incentive to impart their successful actions to the new hires, and add it to your training.
Tricks and tips of the trades are especially valuable for new hires coming into the construction industry. As professionals with many years of experience, it is easy to forget or overlook the efficient ways you go about a job or task. Being willing to train others also makes for a safer work environment.
Here’s an example of some training that Ricochet put together about the bulk fuel industry – How to Videos on Upkeep and Maintenance. As you can see these are short videos, and some even come from other sites than our own. The point is by making sure your staff is trained, you are actually building a team of professionals.
Base Pay & Bonuses
It is a hard fact – pay someone only hourly, and they move slower than giving a lower base-pay with incentives for production. An added bonus will be that your employees will have much higher morale when they produce more, get paid more, and you will be more profitable because the jobs will get done faster.
Make Sure You Have Insurance
If you have employees, you better have them covered with worker’s comp insurance because if you do not and you are caught, you will incur huge fines. Some of the toughest states are Florida and Texas. But one thing to be aware of is that at the state level, Texas does not require contractors to carry general liability insurance at this time.
Pitfall #3 – Licensing Requirements – Ever-Changing Regulations
Contractor Application Requirements
In many states, depending on your specific trade, there are varying contractor license requirements. In Texas, general contractors are not licensed at the state level, but municipalities do require licensing. Trades like HVAC, plumbers, and electricians have to get the state a state license. Some states like Texas will also have additional requirements depending on what counties you work in. So be smart and research what is required for your specific trade as far as federal, state, county, city. It may be a long list, but it is better to know the requirements and be legal, rather than getting a hefty fine.
Understand the License Application
When filling out the application, make sure you understand each section – get help if you need it. 75% of applications are returned because they are incomplete! And that delays your time to get your test date. That is why it is so important to get help from someone familiar with the application. That could be a school counselor or a licensed contractor who has gone through the process.
Avoid the Illegal Underground Economy
The underground economy is a huge problem; especially in some states like Texas. Unethical contractors cut costs by:
- Hiring undocumented workers
- Paying less than minimum wage
- Using unlicensed subcontractors
- Not carrying insurance
There will always be companies that take these shortcuts and get away with it. The way around it is to differentiate yourself and your services from them. For example, you can let your clients know that all of your employees have background checks, show prospects a copy of your worker’s comp and liability insurance. This goes a long way, especially with residential clients. It is essential not to get discouraged when you are undercut – anyone accepting bids from less than ethical contractors are only looking for the lowest price. Put your attention on getting well-paying clients who would never consider hiring from the underground economy.
Follow the Off-Road Diesel Requirements
Since we are talking about licensing, if you run heavy equipment you will want to purchase off-road diesel so you can save money. Before you do though, make sure you have completed all the paperwork you need. In Texas, there are three forms you will need to fill out:
- Signed Statement/Dyed Diesel Number Registration
- Become a Bonded User
- Existing DD# and Will Purchase Dyed Diesel from Ricochet Fuel
Pitfall #4 – Technology & Bookkeeping for Contractors of All Sizes
The first thing you will need as a contractor is a way to keep track of your income and expenses. If you have graduated from Excel spreadsheets, the most popular software program out there right now is QuickBooks.
There is a desktop version especially for contractors, and also a more basic online version. It just depends on what you need. If you want to do job costing or have inventory, stick with desktop. If that is not the case, you might want to check out QuickBooks online and the many apps that work with it.
One caution though, Intuit the owner of QuickBooks, is currently making big changes in the pricing structure of the online version which can be significant. Because of that, many contractors are either sticking with or going back to the desktop version.
If you are not lucky enough to have a family member available to do your books, hire someone you know and trust.
Minimally, you will want them to keep track of who owes you what, make sure your bills are paid on time, download your transactions from your bank weekly, and reconcile all of your accounts monthly.
Keeping up on this will make it possible for you to have a finger on the pulse of your company, as well as seeing a profit and loss statement at the click of a button on your keyboard.
Receipt Management – Helps Keep Things Organized
One thing technology definitely can help with is receipt management. Have you ever noticed the receipts you get from the stores darken and discolor after a while? That is not good. In case your business was ever audited by the IRS, you are going to want to make sure you have an excellent record of readable receipts.
A few options are – purchasing a desktop scanner and attach copies of the receipts to the transactions inside QuickBooks, download a mobile scan app on your phone, get a service like Shoeboxed.
If you are a contractor who loves technology – make sure the people you interact with do too. That includes your subcontractors, clients, and prospects. Nothing is more frustrating for a non-tech savvy person than to be asked to fill out an online form, or log into the latest web portal rather than talking one-on-one. Just make sure you can communicate effectively to whoever you are working with.
Smart vendors like Ricochet Fuel understand the importance of making technology easy for their customers. For example, one of the ways they explain using their fuel equipment is with informative videos like this one: How to Stick an On-Site Bulk Fuel Tank.
Pitfall #5 – Lack of Customers
Nothing is harder to deal with than the lack of customers. Not only can it happen to new contractors starting out, but also established businesses can find themselves losing their competitive edge. The solution is to build your presence online.
Contractor’s Online Presence
No matter what trade you are in, you know how important it is to have your business on the internet. The basics of an online marketing plan consist of several parts, some are more important than others. Here is a suggestion on how to spend your time and marketing money:
Website – 50% of your marketing budget should go towards your website. You need a good site with well-written content by someone who knows SEO. It is smart to find a marketing company that deals with contractors and understands their needs. Your website needs to be set up correctly with at least 20 or 30 well-written pages. Once you have a well-established site, then you need to keep it active by adding content weekly if possible.
Blog – 25% of your budget needs to be set aside for ongoing blogs. Are you surprised? Do you wonder why a blog is so important? Well, here is why – a well-written blog with proper SEO can answer your prospect’s questions and let Google know you are alive and kicking and ready for business. There is no sense in putting up a beautiful website and then just let it sit there. A website needs to be updated consistently. Otherwise, Google will not think you are in business, and your site will not rank well.
Emails & Newsletters – 10% of your budget should be used for emails because they still get some of the best responses when compared to other types of advertising. One of the most important things when sending out anything via email is to segment your list. Do not lump everyone together. For example, if you do work for both homeowners and general contractors – send each list a different type of email.
Google Ads – 10% is a good percentage of your budget for Google Ads. If you have ever run an AdWords campaign, you know it can be expensive, but, if you know what you are doing it can be worth it and pay off. Once your website takes off, you can cut back on your ad spend, but until then it is a good solution to getting the phone to ring.
Social Media – 5% is about the max to spend towards your marketing budget – although some people still wonder if social media drives traffic to your site, one thing we know for sure – clients and prospects check out their contractors before they hire them. Just having a profile on LinkedIn and Facebook with weekly posts adds more credibility to your company. It says, “Hey I am here, I am in business, and I am ready to work.”
Consistency – This is probably the most crucial point of all. The great thing about online marketing is that it lasts. For example, if you put an ad on Yelp, once you stop paying the ad disappears. But if you invest in a web page or weekly blog, that can stay on your website for years and continue to pull in traffic.
Pitfall #6 – Customer Challenges – How to Handle Them
When you think back on customers that were not the easiest to deal with, there were probably some red flags. Here are some of the main ones that are good to watch out for:
In the first conversation you had with the prospect, were they excessively critical of their last contractor? Of course, there can be exceptions, but if they seem incredibly picky and fault finding of their previous contractor or subcontractor steer clear.
Too Price Conscience
No doubt about it, everyone loves a good deal. Who does not like to save money? But, when it comes to business, it is vital to have pricing standards. If you know that you have given an honest bid, yet the prospect is pushing you hard to lower it, that is another red flag.
One way you can handle lowering a bid is to offer less for a lower price. For example, you can say, “Well I cannot lower my price because the bid I gave you is fair, but I could take off a few things, so the project fits into your budget.” Then find out what they could live without. If they are just trying to get a good deal, move on.
A way to stay on track and make sure you earn what you are worth is with change orders. It is an important way to cover yourself if a client wants to add things for you to do over and above what is included in your initial proposal. A good way to handle a request for an additional task is to say, “Sure, let me write up a change order, so you will know what the charge is.” Or, “No problem, but I will have to charge you. Let me write up a change order.” That way it is fair for both you and your customer.
Be Nice & Give Excellent Service
Sounds simple, right? Well, it is good advice, and it is the way we run our business at Ricochet Fuel. We treat our customers like family. It is good for us, and it is good for them. At Ricochet, we are in the business of helping contractors expand by saving money on their fuel costs and being more efficient. We would like to help you too! Contact us today at 833-925-5065.