Today we continue to explore common mistakes that Rookie Contractors make in their first year. In our last post we looked at rookies who lack vision and fail to provide accountability. Today we will discuss credit lines, hiring character guys, and clients who seek to rob you blind. Here are three more mistakes Rookie should avoid.
Mistake #3: Not Having a Large Enough Credit Line
Bootstrapping a contracting business is scary. If you’re not scared, you aren’t paying attention to the real risks you face. No one likes seeing their savings dwindle away while profitability remains elusive. When starting out, expenses start immediately and profits do not. The commercial construction industry is known for delays in payment, often close to 60 days. At times you will most certainly need credit to bridge the gap. Many a contractor has been sunk due to not having a large enough line of credit. As a general rule, you need to have a credit line equal to 10% of your annual sales. You(or your CPA) need to create a 12 month cash flow budget that projects sales, labor/overhead expenses, cash, monthly deficits and year to date cash flow. Take this information to the bank and ask for the credit line that you need. It takes money to make money.
Mistake #4: Being a Poor Judge of Talent and Character
Start-ups are stressful and require you to juggle several skills. You won’t be good at everything and will need sub-contractors with time and skills you don’t have. You will need subs that actually show up. Right or wrong, most clients will see sub-contractors as an extension of your business. If you hire a motley crew, you can expect your reputation and referrals to suffer. Be a talent scout, never stop looking for the best, more reliable workers. Pay subs on the high-end of the pay-scale knowing you get what you pay for. It can take years to build a good reputation and only minutes to destroy one. Many rookie contractors fail because they aren’t careful to surround themselves with good people.
Mistake #5: Allowing Bad Clients to Slowly Rob You Blind
Rookie Contractors often have a bit of “people pleaser” affecting their judgment. You reason that saying “yes” means happy clients which leads to referrals and business growth. This makes you vulnerable to manipulative clients who want you to agree to more, while paying you less. So a job that should be quite profitable experiences margin shrinkage at an alarming rate. How does the rookie contractor see this coming? Some bad clients will withhold payment until you meet demands outside the contract. Others will make “verbal” requests for more work but refuse payment later because it was never “in writing.” Do a little homework, ask around and find any information you can on a prospective client before submitting a bid. Whenever possible; check their construction history, check their credit score, and trust your instincts. You will save a ton of time, money, and heartache. Be as specific and detailed as possible in the bid process. All ambiguity can and will be used against you. The bid on day #1 should mirror the work and payment on the final day of the project. Any changes need to be in writing and adjusted to account for the extra expense and labor. Stand firm and memorize 12 words “I-could write-you-up-a-bid-on-that-if-you-like.”
What wisdom would you pass along to rookies in the construction contracting business?