Let Us Help Reduce Construction Business Start Up Stress

New Contractor's Levels of Stress

You Quit Your Job - And started a construction business only to discover you need a contractor’s license and bond. Suddenly you realize it costs real money. Now that's stressful.

Ask A Friend Or Relative - To loan you some start-up capital and they agree on condition you are partners in the business and each have an equal share. You do all the work they get half the profits and you politely refuse. This is getting very stressful

Go To Your Bank - And they offer you a line of credit. They don't want to be partners they just want everything you own used for collateral. You say O.K. and then find out the interest rate is 24% and they can call the loan due if you miss a payment and take everything you own. This is getting extremely stressful

Use Credit Cards - And supplier accounts to finance your new business and be very careful about what you buy.

What To Do Next - You have never run a business. The only thing you know is your old boss was a terrible business manager and anyone could do better than that. But now that you are the boss you don't know where to start NOW THAT'S STRESS!

Spending Time To Set Up - Your construction company properly will save you grief, time, money and pay you dividends in the future. In addition you will do a better job protecting your business and personal assets.

  • Get Organized - Pick a company name that says something about what you are doing. We strongly recommend a Subchapter S Corp (a Sub S) for tax advantages, protecting your personal assets in the event of a claim or lawsuit against your company and for future expansion. Consult with a construction attorney and follow their advice.

  • Tax Advantages For LLC or a Sub S - The profit or loss from your business is passed through to the owners as normal income. Since the LLC or Sub S does not pay state or federal income tax (as separate business entities), you may be able to save money over a Sole Proprietorship; no double taxation.

  • Partnerships Are The Only Ships - Designed to sink. We recommend stay away from them like the plague.

  • Bookkeeping Service - That understands construction is best when you start because we can setup QuickBooks correctly in the beginning and take care of the accounting until you are ready to take over.

  • Bank Accounts - Set up two bank accounts in your company name. All large income and expenses go through one account and keep the debit card in your personal safe. The second bank account is for your debit card you keep in your wallet and has no more than $500 or whatever you need for small purchases during the week.

  • Never Co-Mingle - Personal and business money or you could lose the tax benefits and personal protection of your corporation.

  • Put Money In And Take Money Out - Of your business is O.K. in done correctly. Your bookkeeping service can advise you on how to do it so that it is recorded in QuickBooks properly. 

  • Insurance - Is critical to your construction company. General Liability and Auto/rental equipment insurance can help protect you and your company against claims for personal injury and property damage, and may provide you with legal defense of those claims. Talk to an insurance agent that understands construction about your insurance needs.

  • Architectural or Engineering Designs - Similar services are good reason to get Professional Liability (Errors and Omissions) insurance to help protect you and your company from claims arising out of mistakes in designs and calculations.

  • Contractor's Licenses - Information changes rapidly so check online for your local county or contact us and we can help 206-361-3950 or email sharie@fasteasyaccounting.com.

  • Performance Bonds - If you are doing public sector work you will probably be required to provide a performance bond to ensure that you complete the work in accordance with terms of the contract. Bonds or guarantees are provided by surety companies. Getting your construction company qualified is a process because the surety company will go through a due diligence process on your company to determine how much money they will write or guarantee for your bonds.

  • Business Planning And Strategy Development - Is the blueprint for your business to succeed. You get out of them what you put into them. Garbage In = Garbage Out! Your business plan is a living breathing document that you will change and update as needed. It provides the baseline and milestones for your business and lets you make decisions in advance in the calm environment of your office instead of "on the fly" while driving, talking on your cell, eating lunch, and putting together a bid. It is a must have to borrow money from a bank.

  • Paperwork - Begin the habit of putting all paperwork into manila envelopes which you write the job name on both sides in big letter. If you are thinking of doing your own bookkeeping think again, your time is more valuable in managing your business, getting customers and keeping them happy. Let us take care of your accounting.

  • Estimating Process - There is no one right answer. You can develop your own estimating and pricing process or you can use something like UDA. 

  • Contracts - We recommend seeking the advice of a qualified construction attorney to put together a contract that fits your specific needs. Your contracts need a well-defined scope of work, clear payment terms, a reasonable schedule and a good change order clause. No work should ever be performed based on verbal agreements. Get everything in writing, always, no exceptions! 

  • Invoicing - For small projects we have a Free Invoice Template you can download and for larger projects with multiple deposits, change orders, progress payments check out our Pay Application.

  • No Financing - Your customer or client's project by providing a substantial amounts of labor, material, subcontractors and rental equipment hoping to get paid later on down the road. McDonald's restaurant model: #1 Customer places order #2 Customer pays #3 Customer gets food. I have owned and operated several construction businesses and have clients who do it now and always work on "Other People's Money (O.P.M.). Nothing will kill your business and your hopes and dreams faster than running out of money.

  • Marketing Then Sales - Is a process that never stops. Selling convinces your customer or client to buy your construction services and it comes after the marketing step. Knowing how to write proposals for customers or respond to a request for proposal (RFQ). What makes your company different than the competition? What are your strengths, weaknesses, opportunities and strengths? Perform a SWOT Analysis. Never ever bad-mouth your competition; it's temping but unprofessional and they might actually do a better job than you do.

  • Join Trade Organizations - This is a great place to meet new customers and get lots of referrals because construction is deep and wide and no company does it all. The best one we have found is The Master Builders Association. And spend time learning about Networking For Contractors. This organization is good for all construction and related industries.

    MBA Member Application

 

  • Labor - Can include yourself in the beginning, construction workers, subcontractors and labor pools like Madden Industrial Contractors. Subcontractors are specialty trade contractors that you can delegate certain portions of the work you intend to perform. Make sure they have appropriate experience, properly licensed, bonded and insured. It is important in order to maintain future long term relationships that pay dividend to pay your subcontractors on time and treat them well.

  • Employees - Bring lots of flexibility and responsibility. Flexible because you can allocate resources as need and scheduling is in your direct control. Responsibility because someone has too process payroll and the payroll tax returns. You need to manage cash flow to have money for their wages, benefits you offer and any applicable state and federal withholding taxes related to their wages, such as Social Security, income tax withholding, workers Compensation and unemployment insurance. In addition you may be responsible for employee benefits such as vacation pay, health insurance, and contributions to a retirement program. With labor Pools they take care of all of that and you pay a fixed cost per hour or whatever you negotiate with the service. Check with your construction attorney and your liability insurance agent to make certain you are covered.

Lessons You Will Learn The Easy Way

Or The Hard Way

Lesson #01 - A new contractor meets an experienced customer and money changes hands and not the way you expect it

The Contract Screwing - This is typical of what happens when you first get started. You bid on a project and you are the low bidder. You are given the client's standard contract, which contains the client's favorite set of commercial terms and conditions, to sign as a condition of getting the project. You close your and sign the contract because you don't want to ask for changes in the terms or consult your construction attorney. You put the signed contract in your bottom desk drawer and pray hard nothing will happen during the course of the project that will cause you to ever have to read the contract again.

That Is Not What Happens This Is What Usually Happens:

  • Poorly defined scopes of work create claims and disputes.

  • The completion schedule is too short and exposes you to monetary damages for failure to finish on time.

  • Payment terms put you in never ending negative cash flow by loaning the customer money at 0% and borrowing on your credit cards at 24%

  • The customer keeps 5% to 10% of the contract price as retention for up a year or more after the entire project is finished which could be all your profit in the project.

  • Indemnity clauses could make you financially responsible for bodily injury and property damage claims caused by customer negligence.

  • Indemnity clauses could make you pay the customer's attorney fees and costs.

  • Your insurance company may be required to provide additional insured coverage for the project giving the customer free insurance and full access to the policy coverage and limits.

  • Oftentimes the term and coverage of the warranty is beyond normal industry standards.

  • Dispute resolution clauses that require arbitration first and then litigation, probably the two worst ways ever invented to resolve disputes.

  • The client's pre-printed final waiver of lien document (necessary for contractor to receive final payment) waives all contractor's rights to recover unpaid extra work and to pursue any claims that arose during the course of the project.

Your Construction Attorney - Is your friend and ally and can save you a lot of grief. Most contracts are easy to read and understand.

Scope of Work - Description in the contract is of key importance and a well-defined scope of work with details that outlines specific work to be performed by you, the contractor.  The scope of work needs to also define work that is excluded and all work to be done by others, including the owner, which may interface with the contractor's scope of work. Never worry about too much detail; that detail will significantly help with the avoidance or resolution of claims and disputes that may arise out of the scope of work.

Schedule And Gantt Chart - Make sure you have enough time in the schedule to perform the scope of work. This is where every minute spent developing your Work-Breakdown-Structure (WBS) is worth an hour or more in time needed to do the work.

Simple Work Break Down Structure

Add Contingency To Your Schedule - Minor delays, weather, equipment problems, etc. always happen and do not expect the customer to be sympathetic and allow more time for delays. This is extremely important if the contract has liquidated money penalty damages for late completion.

Payment Terms - Should need to add positive cash flow. Get cash coming in early and often. Paid when paid and paid if paid terms are ridiculous and we recommend not signing them ever! Clients who want these types of payment terms all have access to plenty of money and can pay you. Remember cash is king!

Retention - Instead of retention being withheld from your progress payment invoices consider providing a warranty guaranty instead but check with your construction attorney first! 

Indemnities - Can be an open door to your cash reserves and everything you own, be careful! Indemnities typically cover claims for bodily injury, death of persons and property damage. The broad and intermediate form indemnities may require you to pay for bodily injury, death and property damage claims caused by the client, and you could be liable for the customer's attorney's fees and costs. Indemnity in contracts can be a dangerous risk transfer if enforced in a court of law could possibly bankrupt your company for something you didn't do. Again your construction attorney is the person to ask and don't be afraid to walk away from a project. Three types of indemnities: 

  • Broad Form:  A broad form indemnity contractually obligates you, the contractor, to be responsible for claims arising out of any amount of the client's negligence, including his sole negligence.  The 100% indemnity.

  • Intermediate Form:  An intermediate form indemnity contractually obligates you, the contractor, to be responsible for claims arising out of the client's negligence, excluding only those claims arising out of the client's sole negligence.  The 99.9% indemnity.

  • Limited Form:  A limited form indemnity contractually obligates both the contractor and the client to be responsible only to the extent they are negligent for a claim.

Additionally Insured - Is a typical requirement in a contract that means something like: "Contractor will name customer as an additional insured on his General Liability Insurance policy." Understand that when you name your customer as an additional insured to your general liability insurance policy (bodily injury and property damage coverage) he receives full access to the policy monetary limits and coverage provided by the policy at no cost, FREE, $0.00! The customer may also receive the legal defense of a claim because your general liability policy for FREE!

Warranty - Is a good thing because it shows your commitment to stand behind your work and fix or replace defective parts or workmanship. Standing behind your work with a good warranty will give you a very good reputation. However, warranties don't have to go on forever and you don't need to marry the project, one year is about right and perhaps you could offer extended warranties as well. Your warranty should exclude things like normal wear and tear, corrosion, improper usage, etc.  Make sure your warranty is specific as to what it includes and excludes, when it starts and when it ends.

Dispute Resolution- Well defined and documented dispute resolution clause in all your contracts that outlines the process to try and resolve disputes with negotiation as the starting place and if negotiation fails, then mediation. If that will not work provide for a senior executive in each organization to try and resolve the dispute. If all else fails arbitration and/or litigation is the end and both parties will lose.

Lien Waiver - Do not ever give a lien waiver in advance of the check clearing the bank. All 50 states have lien laws that provide contractors with some limited protection against customers that refuse to pay. Make sure your construction attorney reviews the original contract looking for the customer's final lien wavier that could be hidden deep in the contract documents. Some final lien waivers also waive your rights to collect outstanding change orders and/or bodily injury or property damage claims against your employees or property caused by the negligence of the customer so be careful.

Board Of Advisors - Finally one of the best things you can do at very little cost is put together your own Board of Advisors to help guide you. 

Finally Find A Mentor - Someone who has been were you want to go and can guide you. We would like to be that person for you. Fill out the form on the right or call Sharie 206-361-3950 or email sharie@fasteasyaccounting.com and schedule your no charge one-hour consultation

For Construction Company Owners who do not need the full power of QuickBooks for contractors and want 24/7 online access we offer Xero Accounting Online and we have custom setup for construction companies. Click Here For More.

This Is One More Example of how Fast Easy Accounting is helping construction company owners just like you put more money in the bank to operate and grow your construction company. Construction accounting is not rocket science; it is a lot harder than that and a lot more valuable to people like you and me so stop missing out! Call Sharie 206-361-3950 or sharie@fasteasyaccounting.com and schedule your no charge one-hour consultation

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About The Author:

Randal DeHart, PMP, QPA The Construction Accountant Randal DeHart, PMP, QPA is the co-founder of Business Consulting And Accounting in Lynnwood Washington. He is the leading expert in outsourced construction bookkeeping and accounting services for small construction companies across the USA. He is experienced as a Contractor, Project Management Professional, Construction Accountant, Intuit ProAdvisor, QuickBooks For Contractors Expert and Xero Accounting Specialist and Bill.Com Certified Guru. This combination of experience and skill sets provides a unique perspective which allows him to see the world through the eyes of a contractor, Project Manager, Accountant and construction accountant. This quadruple understanding is what sets him apart from other Intuit ProAdvisors and Xero accountants to the benefit of all of the construction contractors he serves across the USA. Visit http://www.fasteasyaccounting.com/randal-dehart/ to learn more.

Our Co-Founder Randal DeHart - Is a Certified PMP (Project Management Professional) with several years of construction project management experience. His expertise is construction accounting systems engineering and process development. His exhaustive study of several leading experts including the work of Dr. W. Edward Deming, Michael Gerber, Walter A. Shewhart, James Lewis and dozens of others was the foundation upon which our Construction Bookkeeping System is based and continues to evolve and improve. Check out our Contractor Success Map Podcast on iTunes and Follow Randal on Google+Follow Randal on Google+