My mom loves to play slot machines. She saves her quarters for a year or two and then we take her to Nevada to let her gamble. We took her this year and after two days of gambling, my 80-year-old mother left Nevada $400 poorer and feeling a little depressed. On the other hand, my wife spent most of her time reading, shopping and people watching. Finally, Karen (my wife) saw a quarter slot machine with an Elvis Presley video playing. She sat down and listened to “Love Me Tender” and put in three quarters.
As she pulled the lever my mom walked up and lo and behold, Karen hits the big one! I was off in another part of the building and my cell phone rang. When I answered I could hear jackpot bells, and coins hitting metal in the background, while my wife laughed, she said, “I have three buckets of quarters and they’re still coming out, come help me?”
I walked at a pretty fast clip to the other side of the casino to find her. When I walked up the quarters were still coming out and she was still laughing and Elvis was still singing. By the time she was done playing she had won 2,400 quarters and listened to all of Elvis’s greatest hits including my favorite, “Hound Dog.”
To help me evaluate gambling, I looked at the big beautiful buildings and furnishings in today’s casinos. I can’t help but think that there must be big profits in gambling. In my overall evaluation, the majority of people who gamble lose and very few win. Otherwise, who would pay the electric bill in Vegas, not to mention the mortgage? For that reason I would think it wise to gamble only what you can afford to lose.
Evaluating the risks associated with gambling is easy for a contractor. We see the risks pretty clearly. However, it is difficult for a gambler to evaluate the risks of gambling because a motivated gambler believes he will win. Likewise, it is difficult for contractors to evaluate the risks associated with contracting because they are contractors and they have bills to pay.
To evaluate is to assess, appraise, or calculate someone or something. To evaluate the risks associated with contracting, a contractor may want to look through the eyes of his or her spouse or children knowing that whatever decision the contractor makes could have a good or bad effect on the family. Although there are many risks associated with contracting, it’s important to evaluate and identify the highest risks.
Business structure risk
Different business structures offer different levels of personal liability protection. Ask your attorney if your current business structure is the best for the type and size of your business. Maybe it’s time to become incorporated?Review your insurance coverage and limits with professionals who can advise you if your coverage and limits are reasonable.
As new projects are bid and one continues to do work, keep in mind that the insurance renewal date will come around. When that happens one can find himself paying much more for insurance coverage. If insurance jumps from $10,000 per year to $50,000 per year, your overhead expense went up $40,000. One’s basically stuck with new work at old insurance rates.
Pricing material for future jobs can be risky. Material costs can increase 5, 10 to 20 percent in a short period of time. Consider asking suppliers for price protection on specific jobs.
It is so easy to overlook something on the plans or specifications. As well, it is easy to make a math error or simply mix up numbers. One may have thought he wrote down or typed 10,234 square feet but somehow it ended up being 1,234 square feet. Consider allowing someone else the chance to review estimate.
Today’s contracts are very complicated. I believe contracts carry the greatest amount of risk next to embezzlement issues. Find a qualified construction attorney who can advise you on changes you should make to a contract, proposal or quote form.
Evaluating the risks associated with bank financing is difficult because people sometimes look at the bank or banker as someone who is going to help them, or someone who will always be there. Banks have the same option as insurance companies. If they want out of a certain market they can choose not to renew one’s loan. Banks are very different from contractors because they don’t wait for their money. Banks have various methods of financing your business. The trick is to determine which type of financing is the most cost effective while meeting needs. I like lines of credit in which every payment received pays down the line of credit first.
Tax risk
There are so many different taxes that have to be paid. All of them are important to pay when due. Payroll taxes in my opinion are the most important of taxes to pay in full and on time. Payroll taxes belong to employees (so to speak) because one is depositing this money on their behalf. It’s a serious responsibility. Having to pay taxes before getting paid by a customer can put one in a very difficult financial situation. Before paying taxes late, evaluate how much it’s going to cost. Also, consider creating an emergency credit line. However, the best protection is to make sure customers pay on time so you can pay taxes.Consider that as a job is completed there may be liability associated with warranties. Also, keep in mind that warranty covers material and labor. It’s important for contractors to evaluate the state laws governing warranties in a particular state. One can contact his state attorney general’s office or contact an attorney for this information. Evaluate manufacturer warranties, as well. If a manufacturer provides a better warranty than another and the price and product are the same, use the manufacturer that provides the better warranty. Also, consider language in a proposal and contracts, which require that that a subcontractor be paid in full for contract work plus any changes before warranty work is performed. In other words, a warranty is not valid unless paid in full. Again, check with an attorney about this type of warranty language.
Keep in mind that many manufacture’s warranties are limited warranties. Many of them limit the amount of recovery to the total amount of the invoice paid for the material. Negotiate a better warranty with the manufacturer.
There is always the chance that a customer could terminate the work your doing before your done. I’m considering adding a schedule of values to all of my contracts, which indicate the value of the metal framing, drywall, and taping separately. In the event I’m terminated for ‘whatever’ reason the values are already separated and better defined. I would think you could do this on residential projects. However, I would only separate the prices after receiving the contract award.
Payment risk
In contracting, payment risk in my opinion is not in itself the highest risk. However, because many of us agree to a “paid-when-or-paid-if” contract clause the risk of non-or slow payment becomes a very high risk. If contractors did not agree to “paid-when” or “paid-if” clause payment risk would not be as high. Contractors have the option to cross out these clauses. As well, residential contractors have the option of setting specific payment language in their proposals. Like a bank, consider making a company policy relating to payment. It’s important to get advice from an attorney on payment issues and payment language.In my opinion, it is easy for a bookkeeper or controller to embezzle money. Employee embezzlement has become a serious issue because it happens so often. Ask an accountant what can be done to prevent embezzlement. There are simple things that can be done, such as being the only person who gets and opens the mail or those that handle company checks. One can do many things to protect against embezzlement, however it all starts with hiring the right person.
I believe there are more risks associated with contracting than any other business because we are so highly contractually controlled.
I haven’t mentioned safety risks or employee risks. There are so many risks as well as many rewards in owning a business. Yet, I don’t think contractors really understand the extent of risk they are taking every time they sign a contract or offer a proposal.
I think subcontracting and gambling have a lot in common. In most cases, contractors have a tendency to accept things the way they are and are unwilling to make contract changes or proposal changes. Most contractors are willing to gamble that everything will work out in the end.
Subcontractors are a loose-knit group whose associations offer little protection from contract and insurance issues. We are not a united group nor does it seem we are willing to spend the money it takes to change the industry. However, we can make changes to our contracts as individual companies. We can get the advice we need from attorneys and accountants.
It’s a matter of gambling. One can throw three quarters in the slot machine and win or throw in $400 worth of quarters and never win. It’s a gamble but one can increase his chance of winning if he evaluates risk and makes the proper changes.
Remember: Teamwork begins with a fair contract!
