How to Open & Operate a Financially Successful Construction Company With Companion CD-ROM

By Tanya R. Davis

How to Open & Operate a

Financially

Successful

Construction

Company

By Tanya R. Davis

How to open & operate a FinanCially SuCCeSSFul

ConStruCtion Company — witH Companion CD-rom

Copyright © 2007 by Atlantic Publishing Group, Inc.

1405 SW 6th Ave. • Ocala, Florida 34471 • 800-814-1132 • 352-622-1875–Fax Web site: www.atlantic-pub.com • E-mail: sales@atlantic-pub.com SAN Number: 268-1250

No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without the prior written permission of the Publisher. Requests to the Publisher for permission should be sent to Atlantic Publishing Group, Inc., 1405 SW 6th Ave., Ocala, Florida 34471.

ISBN-13: 978-1-60138-017-3

ISBN-10: 1-60138-017-8

Library of Congress Cataloging-in-Publication Data Davis, Tanya R., 1962-How to open & operate a financially successful construction company : with companion CD-ROM / by Tanya R. Davis.

p. cm.

ISBN-13: 978-1-60138-017-3 (alk. paper)

ISBN-10: 1-60138-017-8 (alk. paper)

1. Construction industry--Management. I. Title. II. Title: How to open and operate a financially successful construction company.

HD9715.A2D33 2008

624.068’1--dc22

2007052812

LIMIT OF LIABILITY/DISCLAIMER OF WARRANTY: The publisher and the author make no representations or warranties with respect to the accuracy or completeness of the contents of this work and specifically disclaim all warranties, including without limitation warranties of fitness for a particular purpose. No warranty may be created or extended by sales or promotional materials. The advice and strategies contained herein may not be suitable for every situation. This work is sold with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional services. If professional assistance is required, the services of a competent professional should be sought. Neither the publisher nor the author shall be liable for damages arising herefrom. The fact that an organization or Web site is referred to in this work as a citation and/or a potential source of further information does not mean that the author or the publisher endorses the information the organization or Web site may provide or recommendations it may make. Further, readers should be aware that Internet Web sites listed in this work may have changed or disappeared between when this work was written and when it is read.

COVER & INTERIOR LAYOUT DESIGN: Vickie Taylor • vtaylor@atlantic-pub.com Printed in the United States

Printed on Recycled Paper

We recently lost our beloved pet Bear, who was not only our best and dearest friend but also the Vice President of Sunshine here at Atlantic Publishing. He did not receive a salary but worked tirelessly 24 hours a day to please his parents. Bear was a rescue dog that turned around and showered myself, my wife Sherri, his grandparents Jean, Bob, and Nancy and every person and animal he met (maybe not rabbits) with friendship and love. He made a lot of people smile every day.

We wanted you to know that a portion of the profits of this book will be donated to The Humane Society of

the United States.

–Douglas & Sherri Brown

The human-animal bond is as old as human history. We cherish our animal companions for their unconditional affection and acceptance. We feel a thrill when we glimpse wild creatures in their natural habitat or in our own backyard.

Unfortunately, the human-animal bond has at times been weakened.

Humans have exploited some animal species to the point of extinction.

The Humane Society of the United States makes a difference in the lives of animals here at home and worldwide. The HSUS is dedicated to creating a world where our relationship with animals is guided by compassion.

We seek a truly humane society in which animals are respected for their intrinsic value, and where the human-animal bond is strong.

Want to help animals? We have plenty of suggestions. Adopt a pet from a local shelter, join The Humane Society and be a part of our work to help companion animals and wildlife. You will be funding our educational, legislative, investigative, and outreach projects in the U.S. and across the globe.

Or perhaps you'd like to make a memorial donation in honor of a pet, friend, or relative? You can through our Kindred Spirits program. And if you'd like to contribute in a more structured way, our Planned Giving Office has suggestions about estate planning, annuities, and even gifts of stock that avoid capital gains taxes.

Maybe you have land that you would like to preserve as a lasting habitat for wildlife. Our Wildlife Land Trust can help you. Perhaps the land you want to share is a backyard — that's enough. Our Urban Wildlife Sanctuary Program will show you how to create a habitat for your wild neighbors.

So you see, it's easy to help animals. And The HSUS is here to help.

The Humane Society of the United States

2100 L Street NW

Washington, DC 20037

202-452-1100

www.hsus.org

table of Contents

IntroductIon...................................................21

chapter.1:.GettInG.Started.–.the.

entrepreneur.MIndSet..................................25

What You Will Do All Day .............................................................26

Beginning a Business .......................................................................27

About Your Personality ....................................................................30

Initiative ..........................................................................................30

Drive ...............................................................................................30

Leadership .......................................................................................31

Confidence ......................................................................................31

Belief in the Product ........................................................................32

Communication Skills .....................................................................32

Willingness to Take Risk .................................................................33

Detail-Oriented ...............................................................................33

Stress Tolerance ...............................................................................33

Leave Your Ego Somewhere Else ......................................................34

Integrity ..........................................................................................35

A Strong Support System ................................................................35

Desire for Knowledge ......................................................................36

Knowledge of the Industry ..............................................................37

Ability to Manage ............................................................................38

Self-Assessment Questionnaire ........................................................39

Why Some Contractors Fail ............................................................41

chapter.2:.the.BaSIcS.of.StartInG..

a.new.coMpany...............................................45

Location ..........................................................................................46

The Portable Office .........................................................................46

Choosing a Business Name ..............................................................48

Your Business Structure ...................................................................50

The Sole Proprietorship ...................................................................51

General Partnership .........................................................................51

Limited Partnership .........................................................................52

Subpartnership ................................................................................53

S Corporations ................................................................................54

LLCs ...............................................................................................55

The Joint Venture ............................................................................56

Bank Account ..................................................................................56

Licensing and Permits .....................................................................57

Licensing .........................................................................................58

Building Codes................................................................................59

Who Is Responsible? .......................................................................60

Bonding .........................................................................................60

Using Computers for Your Business ................................................60

What Computer Equipment Might You Need? ...............................60

Being an Owner ..............................................................................62

Duties for the Owner ......................................................................63

Duties for the Accounting Department ...........................................64

Duties for the Procurement Department .........................................64

Duties for the Estimator ..................................................................65

Duties for the Engineering Department ..........................................66

Duties for the Construction Manager ..............................................66

Duties for the Yard Manager ...........................................................67

Owner or Manager?.........................................................................69

chapter.3:.BuIldInG.your.teaM....................71

Worksheet for a Successful Partnership ............................................72

Job Site Safety Checklist .................................................................74

Repairs ............................................................................................75

Training ..........................................................................................75

First Aid ..........................................................................................75

Key Employees ................................................................................75

Should You Partner With Your Spouse, Friend, or Cousin? ..............76

Employees .......................................................................................78

Hiring Practices ...............................................................................79

Prequalification Form for Potential Key Employees .........................80

Conducting the Interview ...............................................................85

About Checking References .............................................................87

Subcontractors ...............................................................................88

Company Policies and Procedures ...................................................89

The Employee Handbook ...............................................................91

Payroll .............................................................................................92

Company Policies ............................................................................92

How to Hire and Keep a Qualified Staff ..........................................92

Outsourcing ....................................................................................94

Training, Motivating, and Evaluating Employees .............................95

Evaluations ......................................................................................96

Letting Employees Go .....................................................................97

chapter.4:.BIddInG..........................................99

A Few Don’ts ...................................................................................100

The Difference Between an Estimate and a Bid ...............................101

Bidding Is a Logical, Step-wise Process ............................................101

Component #1: Gather Information ...............................................102

Information .....................................................................................102

To Do .............................................................................................102

Questions ........................................................................................103

Estimate ..........................................................................................103

Building Notes ................................................................................103

Designer Plans .................................................................................103

Contracts and Change Orders .........................................................103

Subcontractor Bids and Contracts ...................................................103

Component #2: Direct Costs ..........................................................104

Component #3: Overhead ...............................................................105

1. As a uniform percentage of direct costs .......................................105

2. Overhead costs as a gross profit margin ......................................106

3. Different-size project markup .....................................................106

Component #4: Profit .....................................................................107

Uniform Percentage .........................................................................109

Markup as a Proportion of Labor ....................................................109

Marketing to Meet Markup .............................................................110

Gross Profit Margin Method ...........................................................111

Adjusting Bids .................................................................................113

Creating a Project Plan ....................................................................114

The Schedule ..................................................................................114

The Budget .....................................................................................115

Logistics ..........................................................................................115

Quality Control ..............................................................................116

Warranties .......................................................................................116

Reverse Bidding ...............................................................................117

Web Referral Services ......................................................................118

chapter.5:.contractS.....................................119

The Structure of a Contract ............................................................119

Before You Sign ...............................................................................122

Contractual Terms to Watch Out For ..............................................124

Hold-Harmless Clause ....................................................................124

Right of Rescission ..........................................................................124

Arbitration ......................................................................................124

Lien Rights ......................................................................................125

General Conditions .........................................................................125

No Damage for Delay Clauses .........................................................125

Time Is of the Essence .....................................................................125

Owner’s Right to Stop Work (or Owner’s Right to

Carry out the Work) ........................................................................126

Terminate for Cause ........................................................................126

Common Grounds ..........................................................................127

Types of Contracts ..........................................................................128

Pay When Paid ................................................................................128

Lump Sum ......................................................................................129

Unit Price Contract .........................................................................129

Cost-Plus-Fee Contracts ..................................................................130

Cost-Plus-Percentage-of-Cost Contracts ..........................................130

Cost-Plus-Fixed-Fee Contracts ........................................................131

Incentive Contracts .........................................................................131

Cost-Plus-Award .............................................................................132

Guaranteed Maximum Cost ............................................................132

Delays, Extra Costs, Dispute Resolutions ........................................132

Special Costs ...................................................................................132

Mediation .......................................................................................134

Arbitration .....................................................................................134

Responsibilities ................................................................................135

Responsibilities of the Project Owner to the GC .............................135

Responsibilities of the Contractor to the Owner ..............................136

Responsibilities of the General Contractor to the Subs ...................136

Contract for the Subcontractors ......................................................136

chapter.6:.leGalItIeS.&.MInIMIzInG.rISkS....139

Attitudes .........................................................................................140

Job Site Theft ..................................................................................141

Resolving Conflict ...........................................................................141

Company Structure .........................................................................142

Agreement Between Partners ..........................................................142

Use an Employee Handbook ...........................................................142

Contractual Language .....................................................................143

Notice to Proceed ............................................................................143

Hold-Harmless Clauses ...................................................................143

Contracts With Cost Errors .............................................................144

Substantiating a Claim ....................................................................144

Safety Issues ....................................................................................145

Asset Protection ...............................................................................146

Bonding Requirements ....................................................................147

Mechanic’s Liens, Lien Wavers .......................................................148

Insurance .........................................................................................149

Government Regulations .................................................................152

Labor Law .......................................................................................152

Labor Relations ...............................................................................154

The IRS ..........................................................................................155

Environmental Issues .......................................................................155

chapter.7:.BuIldInG........................................157

Registration and Licensing ..............................................................157

Environmental Studies ....................................................................158

Other Preconstruction Activities ......................................................158

Team Structure ................................................................................159

Small Businesses ..............................................................................159

Larger Volume Models ....................................................................160

Managing Overhead ........................................................................161

Checklist for Project Overhead Items ..............................................161

Project Setup ...................................................................................162

Scheduling the Project .....................................................................164

Creating the Flowchart ....................................................................165

Sub Special Orders ..........................................................................167

Inspections ......................................................................................167

Setting up the Site ...........................................................................168

Summary of Steps to Production .....................................................168

What Is in Your Shirt Pocket? ..........................................................168

How to Give Great Customer Service ..............................................169

Bills and Budget ..............................................................................171

A Guideline for Change Orders .......................................................171

A Summary of Good Customer Service ...........................................172

Closing out the Project ....................................................................173

The Warranty Period .......................................................................174

chapter.8:.accountInG.&.recordS...............175

Accounting Terms ...........................................................................175

Bookkeeping ..................................................................................177

What Are Financial Statements? ......................................................177

Accounting Methods .......................................................................179

Cash versus Accrual .........................................................................179

Percentage of Completion ...............................................................180

General and Administrative Expenses ..............................................180

Reports That Are Part of Your Financial Statements ........................182

The Income Statement ....................................................................182

The Balance Sheet ...........................................................................183

Current Contract Status Report ......................................................184

My Current Status Report ...............................................................184

Financial Ratios ...............................................................................185

Other Ratios That Matter ................................................................187

Gross Profit Margin .........................................................................188

Overhead ........................................................................................188

Callbacks .........................................................................................189

Taxes ...............................................................................................190

Tax Deduction for Construction Companies ...................................191

Cost Segregation Studies .................................................................192

Hidden Tax Refunds .......................................................................192

State Sales Tax .................................................................................193

Company Assets ..............................................................................193

Company Liabilities ........................................................................194

Finding Capital and Financing ........................................................195

chapter.9:.capItal.&.coSt.control..............195

Applying for Financing ....................................................................199

When You Visit a Bank or Other Lender.... .....................................200

How to Apply ................................................................................202

Anatomy of a Bank Loan .................................................................208

Leasing and Purchasing Equipment .................................................209

Lease-to-Own ..................................................................................210

Buying Equipment ..........................................................................210

Cost Controls ..................................................................................211

Improving Cash Flow ......................................................................213

Billing .............................................................................................214

Collections ......................................................................................214

Financing ........................................................................................214

Operations Reviews .........................................................................215

Tracking Smaller Costs ....................................................................215

Out-of-Town Expenses ....................................................................216

chapter.10:.SaleS.&.MarketInG....................217

Market Positioning ..........................................................................218

Create Your Market Position ...........................................................220

Develop a Marketing Plan ...............................................................221

Stress the Benefits ............................................................................222

Keeping ahead of the Competition ..................................................223

Must-Have Marketing Materials ......................................................224

Publicity ..........................................................................................226

Tracking Results ..............................................................................227

Using Press Releases ........................................................................227

Radio ..............................................................................................227

Be an Author ...................................................................................228

Media Planning and Pricing ............................................................228

High-Profile PR ..............................................................................230

Attracting New Clients ....................................................................232

Community Service.........................................................................233

Marketing to Public Agencies ..........................................................234

Networking .....................................................................................234

Free and Low-Cost Ways to Generate Business ................................236

Advertising Online ..........................................................................238

Getting Past the Initial Contact .......................................................239

Meeting in Person ...........................................................................240

Creating Repeat Business .................................................................241

Telephone Interview Checklist ........................................................243

concluSIon......................................................247

Learn to Flow With Market Trends .................................................247

Put the Money in Your Pocket .........................................................248

Never Forget That People Are Key ...................................................249

appendIx.a........................................................251

Construction and Business News and Data .....................................251

appendIx.B........................................................255

Industry Associations and Government Information .......................255

Information for Minority- and Women-owned Businesses ..............257

Places to List Your Business .............................................................258

Bidding Opportunities ....................................................................258

Periodicals .......................................................................................259

Construction Books ........................................................................259

Training and Educational Opportunities .........................................259

Other ..............................................................................................260

Industry-Specific Associations .........................................................263

appendIx.c........................................................271

Free Software for Business Owners ..................................................271

Office Products ...............................................................................271

Web Site and Domain Name ...........................................................271

E-Mail Hosting ...............................................................................272

appendIx.d........................................................273

Items that Might be Reimbursable ..................................................273

Reimbursable Items .........................................................................274

Books ..............................................................................................275

GloSSary...........................................................277

author.dedIcatIon.&.BIoGraphy.................285

Index.................................................................287

introduction

We are builders. As long as man has been on this earth, he has found ways to create structures — buildings to live in, meet in, and work in. Also, buildings to play in and buildings for storage. Man had a desire to build and he has continually increased the complexity of the structures he is compelled to build. They have become taller, bigger, and made from increasingly different materials. These structures, such as highways, airports, bridges, and dams, are so pervasive that we hardly even notice them anymore.

The construction industry in our country is huge; it corners 12 percent of the United States business market and employs 6.6 million workers in the U.S., according to the U.S. Census Bureau. In 2005, $1.1 trillion

— which is about 12 percent of the gross domestic product — came from the construction industry. Obviously, starting a contracting business is a terrific field.

The industry affects the economy in other ways as well. The Associated General Contractors of America states that for every $1 billion in new construction, 47,000 jobs are created. These are in the construction field and also in the related supply and service industries.

The industry is diversified between public and private, residential, commercial, industrial, heavy construction, and specialty trades. This

22

How to open & operate a Financially SucceSSFul conStruction company allows a contractor to choose from a wide variety of fields for his own area of specialization.

But the picture is not entirely positive. The U.S. Bureau of Labor reports that only 43 percent of the U.S. construction startups that began in the second quarter of 1998 were still in business four years later. That means there is plenty of room for missteps, poor management, and financial risk.

The projects are expensive and time consuming. They must meet codes, standards, and specifications. They must be built in a particular order and in a certain pattern. Plus, many people begin a business without knowing whether they are in actuality cut out to own and run a business.

Most startup construction companies in the U.S. are small firms — only about 8 percent have more than 20 employees. They are started by smart, ambitious people from surprisingly diverse walks of life — construction tradesmen, project managers, business executives, and recent college graduates who have majored in construction training. These people are proficient in their trade but may lack the management, leadership, or organizational skills to help them run a business successfully. More often than not, they struggle from year to year because they do not have the tools to manage risk to achieve a reward for their efforts. They live almost exclusively in crisis management mode.

This book was written with those people in mind; in an industry that constantly changes its demands as a response to the ever-changing market conditions, a business owner needs to devote some time to assessing goals, capabilities, and even personal issues that might get in the way of success.

Every construction project is different — designed for a certain taste, function, and environment. Even the most routine building is created through a new and unique process, which allows for an exciting business for people who love change and creativity. If construction is your craft and your passion, it is possible to grow it into a lucrative business.

introduction

23

Most new business owners find that entrepreneurship is extremely people intensive. A great deal of communication is required between the owner and his employees, as well as with other contractors, subcontractors, manufacturers, vendors, the government, and regulatory agencies. A self-assessment questionnaire at the end of Chapter 1 will help you confirm your ability to meet these and many other needs as a business owner.

This book attempts to share not only the basics of business ownership, but also ways to work with partners and employees, create company policies, methods of figuring and presenting bids, contracts, minimizing your risk, and more. One of the main things I noticed in interviewing construction companies was that the successful ones have a marketing plan in place at all times, so Chapter 10 reveals ways to create your marketing plan. There is also a section on customer satisfaction and building sales.

In interviewing people who are involved directly and indirectly in the construction management business, I have repeatedly asked them to share the risks and the ways to avoid the risks or pain they have encountered along the way. A business or engineering degree does not guarantee success; several years of experience of project management does not guarantee success; even running another business will not guarantee that your construction firm will be financially successful. This book cannot eliminate all your risk, of course, but it attempts to give you as much information as possible to identify possible hurdles and even roadblocks to running your business.

By the time you finish this book, you should have learned numerous ways to make your operation run more smoothly. You will use these ideas to cut out wasteful methods that are not working, thereby reducing your costs and increasing your profits. You will have learned about niche contracting, also referred to as specialization, a strategy that many contractors are using to become larger, more profitable contenders for contracts in the business.

The ideas, principles, and techniques presented here are given in order, so

24

How to open & operate a Financially SucceSSFul conStruction company that if you are just starting a business it is possible to start at the front of the book and use it as a step-by-step guide. But even if you are a contractor, employee, subcontractor, or business person, you will find that you can use the book to further your management and leadership skills.

1

Getting Started – the

entrepreneur

mindset

When considering various startup business ideas, most people see that construction is easy to get into. It does not require special degrees or training. And business is always good; even when the market is soft, construction still takes place. The nature of your niche might change with the economy — for instance, when people are not building new homes, they are more apt to remodel, upgrade, and repair.

Some people get into construction after having built their own home,

usually meaning that they hired a contractor to oversee the job. It looks simple enough, so the person might decide to start his own business. If this describes you, that is terrific — but be sure to take the self-assessment quiz at the end of the chapter. After all, most professionals make their own job look easy. The reason that the contractor’s job looked easy to you might be that it is a good fit for you or it could be that he has experience, and he was doing it right. People who do things well often make them look a lot easier than they are.

Anyone who has been around construction has probably heard the 4 Ms

of the business: men, machines, materials, and money. Using these four resources in a balanced, efficient way is the key to success in construction.

But when considering going into business alone, there are many more

26

How to open & operate a Financially SucceSSFul conStruction company things to think about. Most of these things deal with your personality.

Do you have what it takes to run a business? Are you prepared to handle the day-to-day pressures? Can you stand to work all day every day while

everybody else is out playing? These are the things we will consider in this chapter.

Some of the reasons people have for starting their own business are:

• I have the knowledge and expertise to do it better.

• I have new ideas that