Practical tips to help stave off bankruptcy.

We are hearing about Chapter 11 and Chapter 7 bankruptcies from far too many well-established contractors. In most cases, they didn’t do anything wrong - they just didn’t do enough right!

I had the opportunity to talk with several of these contractors about what went wrong in their businesses. All agreed: “We could see this coming, but we didn’t think it would be this bad.” They simply did not have enough cash on hand or reserves to overcome their crises. The following  incidents  happen to every contractor, but most have enough financial resources to survive:
  • Timely payments not received for work performed, stored materials and change orders;

  • Suppliers shut off deliveries until paid;

  • Bank shut off borrowing power;

  • Liquidated damages incurred for delays;

  • Failure to reduce and control expensive overhead;

  • Extensive legal expenses;

  • Jobsite labor kept on even when work slowed down;

  • Expensive OSHA citations;

  • Expensive false injury claims for workers’ compensation; and

  • Employee theft and embezzlement.

Minimize those threats and ensure both the survival and the success of your business by following these 10 practical tips.

1.The No. 1 thing every contractor should do when bidding a job is carefully read and question the entire set of bidding documents, as well as requests for information. Negotiate a favorable contract with timely payment terms, along with late payment penalties. Never agree to a “pay when paid” clause.

Each day, carefully document all costs related to change orders, then bill and collect each month’s progress. Present paid invoices for stored materials and collect in each monthly draw. Place a lien against the project for any late payment.

2.Negotiate credit terms with all your suppliers, but pay your bills as agreed to. Make sure to call them if you have a problem.

3.Shop around for your money and terms. Banks are competitive, profit-making enterprises, so you must negotiate with them for their best terms for holding your money, as well as for any loan agreements.

4.The construction schedule is critical; submit your input into the progress schedule and consistently meet or beat it. Complete your punch list immediately to ensure timely final payments.

5.Post your written chain of command defining authority and responsibility. Conduct detailed time studies to delegate proper time for each task. Negotiate employee job descriptions with comparable, fair wages. (Make sure you do this based on the cost  to replace, not seniority.) Maintain written performance files for timely wage reviews. Discuss flex-time options, shorter work weeks and possible layoffs with all employees.

A virtual office concept (work at home model) can be attractive for many employees and can minimize office size and expenses. Negotiate rental and insurance costs.

Reduce the size of your shop, warehouse and storage yard. Utilize a salvage center to reduce inventory, train service techs and help needy customers. Control rental costs on tools and equipment.

6.Stay out of court! You definitely need a good construction attorney for profit-oriented advice and to scrutinize whatever you must sign. However, never select an attorney from the Yellow Pages or television advertisements. Check with other contractors and with local trade associations such as AGC, ABC, PHCC, MCAA, NAHB, etc.

You should ask for and include an arbitration clause in any contract or subcontract you sign. I have been an arbitrator for many years where a fair and equitable settlement is decided upon without going to court. The most powerful elements in arbitration (and  with the court if you must defend yourself) is your foreman’s daily log. Check those logs weekly for proper documentation should a problem occur.

7.All your employees are deeply concerned with America’s abysmal unemployment rate. It is easy to understand your compassion for long-time, loyal employees and their families. Unfortunately, you may not be financially able to keep them employed.

Meet with employees privately to discuss their situations along with feasible alternatives should a layoff be necessary:
  • They could solicit and sell maintenance contracts on a commission basis.

  • They could work for Sears, Lowe’s, Home Depot, Ace Hardware, or any of the do-it-yourself building supply outlets as a customer advisor or installer.

  • They could repair and rebuild damaged or worn-out equipment or materials at your salvage center and share in the selling price.

You also may be able to delay layoffs with prefab work at your shop or for one of your competitors. Your competition is probably searching for solutions, too, and would lend and borrow skilled help when either of you is overloaded or hurting for work.

8.Obviously you are concerned about the safety of your employees. Unfortunately, many of them share the “It can’t happen to me” attitude. When they do not follow your safety policies and refuse to utilize the personal protective equipment you provide, you will suffer OSHA citations and costly penalties.

We covered safety in PM's February, March and April columns. I highly recommend you give copies to all your supervisors to read to their crews. You can hold a company meeting or discuss them as toolbox or tailgate jobsite meetings.

Should you receive an OSHA citation, always go to the hearing, which usually results in a reduction or elimination of the fines.

9.Fake claims for back injuries have haunted our industry for more than all my years on the job. These dishonest people lie in order to collect workers’ compensation, causing your rates to increase. You can help prevent this by requiring “previous injuries or ailments and references” as items on your job applications. Maintaining a safe site and assuring safe lifting practices will help.