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Are your construction purchase orders correct?
Have you ordered a product only to find it hasn’t arrived when expected, it wasn’t exactly what you thought you had ordered, or there were additional extra costs that you had to pay? In construction the same often happens. Materials arrive late, are delivered to the wrong address, come in the wrong quantity or are of the wrong specifications. The contractor often suffers delays and additional costs. How can we avoid these problems? Construction projects require materials and equipment which the contractor purchases from suppliers. Smaller items may be purchased from local shops, or suppliers, and are usually paid for at the time or are put on account. Major items, or items in large quantities, are ordered with purchase orders which are basically a promissory note to pay for a particular item when it’s delivered, or within a period of time after its delivery. Sometimes a deposit is paid for the item before it’s delivered. What’s written on these purchase orders should specify exactly what you want, when you want it and how much it will cost. Get it wrong and you may receive the wrong item, or the right item at the wrong time, or you may end up paying more than you bargained for! Ensuring the purchase order is correct Unfortunately some construction purchase orders are poorly written which results in the supplier delivering the wrong item, or delivering the items to the wrong address or at the wrong time. Sometimes the price isn’t clear or what’s included in the quoted price isn’t included on the order. This can lead to misunderstandings, additional costs and even delays to your project. If you issue an order to the supplier it should:
This article was first published on the ClockShark website. To visit this website and continue reading the article click on the link above. Please share this post To read more about the author’s books and find out where you can purchase them visit the pages on this website by clicking the links below: 'Successful Construction Project Management: The Practical Guide' 'Building a Successful Construction Company: The Practical Guide' 'Construction Claims: A Short Guide for Contractors' 'Construction Book reviews' To read more about the author visit the page 'Paul Netscher' Want to contact Paul Netscher please enter your details on 'Contacts' Find out how Paul Netscher can help you Order your books from Amazon Order your books from Amazon UK © 2016 This article is not to be reproduced for commercial purposes without written permission from the author.
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 Image courtesy of fantasista at FreeDigitalPhotos.net Is your project losing money? Do you know why? Unfortunately some contractors lose money on construction projects. Sometimes these losses are huge (recently Samsung announced they had lost a billion dollars on a project in Australia – yes that’s right one billion Australian dollars or over seven hundred million US dollars). The question to be asked in these cases are; when did the contractor realise the project was in trouble and what actions did they take. Could they have reduced the losses by implementing timely interventions? Of course equally important is what mitigating actions should be taken to prevent another loss occurring in the future. Reasons projects lose money There are many reasons for projects losing money. These may include:
Completing monthly cost reports for each project enables the contractor to become aware that the project is losing money. Unfortunately often these cost reports aren’t completed correctly so they aren’t accurate and give misleading information. Often these reports are prepared nearly a month later meaning that the information produced could be nearly two months old. Sometimes the information from the reports is ignored by the project team – they can’t be bothered to take action, the project team believes everything will eventually work out or the team is quick to make excuses and slow to take action. All too often when action is taken the wrong action is implemented. Managers are quick to cut costs such as cutting the number of people or equipment on the project to save costs. Sometimes this is necessary, but without properly investigating the reason for the losses cutting resources, or cutting the wrong resources, can exacerbate the problem and the losses continue and even worsen. The other excuse for project losses is to blame the estimator and point out all the errors in the price that are causing the losses. Unfortunately these actions often fail to highlight the good work the estimator has done or even the errors that are in the contractor’s favour. In some cases there are errors that have contributed to the project losses, but often these losses only contribute a small part to the total losses and there are other underlying causes for most of the loss. It’s important to investigate the reasons the project is losing money and not focus on the first and most obvious excuse. The project team shouldn’t be focussing on finding an excuse for the loss, but rather be looking for the cause so that appropriate action can be taken to prevent further losses and, if possible, to recover the money lost. Of course the fundamental lesson is to prevent losses occurring in the first place. This is done by ensuring:
Early detection of losses can enable the contractor to take preventative measures to prevent further losses, and even possibly recover the losses. Knowing early that the project will make a loss will allow the company to take action to ensure the negative cash flow and losses don’t destroy the company. There is often more than one reason that a project is losing money so losses need to be thoroughly investigated to uncover the true underlying causes so that they can be addressed. Don’t wait until your project is in serious trouble before realising it is losing money. When a loss is discovered take the correct actions to stop the loss. Have you had a project lose money? What were the reasons? If you found this article useful please like it and share it with your connections.
Paul Netscher is the author of the popular books 'Successful Construction Project Management: The Practical Guide' and 'Building a Successful Construction Company: The Practical Guide'.'Construction Claims: A Short Guide for Contractors' has just been published. These books are available on Amazon and other online book stores. Paul publishes articles regularly on LinkedIn and his website. Read a preview of Construction Claims Paul writes regular articles for other websites, gives lectures, mentors, and is available for podcasts and interviews. © 2016 This article is not to be reproduced for commercial purposes without written permission from the author. 11 reasons why increasing a construction company’s sales often don’t translate into bigger profits.12/10/2016 Increasing sales volume in a construction company can often lead to failure or poor profitability. Why?
All too often, we see construction companies that grow spectacularly. Their names suddenly appear at new construction projects, their new vehicles seem to be everywhere. We hear of improved profits and new projects in the media. And then, just as suddenly, the tide seems to turn. They are in trouble – sometimes even going bankrupt. How do these construction companies go from small company, to overnight success, to total financial disaster in such a short time? Recently I heard of a successful family business that was growing and profitable. They went from 15 employees to 40. The sky seemed to be the limit. Then, it all went wrong. A profitable company became unprofitable, bringing the company to its knees. With hard work, guts, determination and lots of pain, the company was saved. Now that it has been scaled back to 15 employees, the company once is again making profits. Many contractors think that growing sales automatically adds profits. Unfortunately, this isn’t always the case, and many contractors have come unstuck. Few have even gone bankrupt. Why growing sales doesn’t automatically equal growing profits So, why doesn’t doubling sales automatically translate into twice as much profit? Why do construction companies that appear to be profitable and growing suddenly become bankrupt? Here are 11 reasons why increasing a construction company’s sales often don’t translate into bigger profits: No. 1 Previously, the owner or senior managers had tight control over the day-to-day management of the company and individual projects. They make all the decisions and, in many cases, carry out a multitude of duties, including ordering materials, pricing new work, writing letters, signing payments, dealing directly with customers, etc. As the company grows, they try to do the same duties, but because of the increased workload they cannot get to all the tasks they were doing. This overload creates bottlenecks, and even mistakes. If the company is going to grow, it needs management that can take on the additional duties, and those who were in control must delegate some of their responsibilities. Running a big company is a lot different than running a small company. Capable managers in construction can be difficult to find and hire, leading to improper management hires or promoting team members to managers who are not capable of performing the role. No. 2 Some people aren’t used to working in a larger team or just aren’t capable of taking on additional responsibilities or completing larger projects. Small companies often have employees who have worked for the company for many years. They almost are part of the owner’s family. The owner has accepted their little quirks and imperfections. When the company grows, they no longer report directly to the owner, but to a new manager who probably is not going to cut them the slack the owner did. They’ll take all of their complaints back to the owner, bypassing the new manager. Often, the owner over-rides the new manager and allows the old worker to continue with their special arrangements – a recipe for conflict and discontent. To grow, a company must invest in systems that are suitable for their industry. These systems must allow for the future growth of the company and employees must have the required training to operate them. No. 3 In the pursuit of growth, the company employs new construction workers. Usually, a small company can’t compete with bigger companies in what they can offer, both in monetary terms as well as reputation, so small companies sometimes employ people who aren’t the best or the most qualified. In the quest for growth, small companies often employ the wrong worker, one who doesn’t have the required skills and knowledge or just doesn’t fit in. No. 4 Cash flow is one of the biggest problems stopping many companies from expanding. Ironically, more revenue doesn’t equal more cash. In fact, the opposite occurs and there is less cash. Increasing revenue means construction companies must take on more and bigger projects. Most construction customers hold retention monies which could be as much as 10 percent. More and bigger projects means more money is withheld. In addition, these bigger projects usually are of a longer duration, which means the retention money is held for longer. Contractors typically have to pay their employees and suppliers before they receive payment from customers. Sometimes, payments are received 30 or more days after invoicing. Again, bigger and more projects means the contractor must pay more money out before being paid themselves. All this stretches cash flow – often to a breaking point. When employees and suppliers aren’t paid, it disrupts progress on the project and damages reputation. For a look at the first blog in Paul Netscher's "Becoming Great at Helping Your Construction Clients Succeed" series, check out "Mastering Construction Project Cost Reports – The Good, the Bad and the Ugly." No. 5 Smaller companies frequently don’t have systems in place. I’m referring to systems like accounting, pricing, timekeeping, safety, quality, environmental, invoicing and even filing. I’m sure we have encountered those mom and pop businesses where everything still is done by paper (or worse – by telephone call or text message). Desks are a heap of cluttered papers. Well, you can’t operate any business like that, especially a large business. Even those who are invested in computers often still use Excel spreadsheets they set up themselves. There are smarter ways of doing things. There are smarter systems and software apps to help automate things. To grow, a company must invest in systems that are suitable for their industry. These systems must allow for the future growth of the company and employees must have the required training to operate them. No. 6 Growing means the company has to work for new customers. Often, the company has previously worked with the same customer for years. Business may have been done on a handshake. Your word was your bond. Everyone trusted everyone else. Paperwork was non -existent. Unfortunately, most customers aren’t like that, and the company must change the way it operates. Working for the wrong customer or not having everything in writing could mean the contractor isn’t paid. Bad debts inevitably destroy companies. No. 7 To grow and then maintain growth, companies must take on projects with new clients, in different locations and, sometimes in a different field they are most experienced. Often, this entails taking on more risk. Unfortunately, smaller contractors don’t always appreciate these additional risks so don’t allow for them. Then, when things go wrong, the company is too small, or its capacity already is under pressure, so it cannot withstand the shocks that a bigger and stronger company could. Construction companies need to grow. Doing so provides opportunities for employees and owners alike. No. 8 Growing the company usually means increased overhead. The company often has to take on new people, which include estimators, accountants, payroll administrators, quality managers and HR people. These people need office space so the company moves into a bigger office, often bigger and flashier than needed. With new people comes computers, software licenses, bigger server, email accounts, telephones, etc. Some businesses become overconfident and splash out purchasing new construction equipment (some equipment is second hand, which can bring its own set of maintenance and downtime problems). The equipment sometimes is unsuited to the long-term needs of the company and is mismatched, with no common manufacturer or spare parts. Maintenance and repairs can become a nightmare and a money sink. Of course, this equipment must be examined, mechanics must be employed, workshops set-up and service vehicles procured. No. 9 The growth is done at any cost. The construction business is a cyclical one, as I will discuss in the third part of my series, "Managing a Construction Company through the Good and the Bad Times." Some companies become greedy when there are lots of work opportunities, and they take on too many projects, employ more people and purchase new equipment. Unfortunately, the good times always end and the number of projects shrinks. In the lean times, companies usually have to downsize. And downsizing costs money. The bigger the growth in the good years, the bigger the downsizing. Companies that haven’t built up a reserve in the good years and made a sustained growth will end up in difficulties. Growth must be controlled. No. 10 Growth is done by purchasing other companies. Purchasing new companies can be a risky way of achieving growth. There always are additional costs of merging new companies. There also is the risk of finding skeletons in the closet later. A proper due diligence of the new company’s operations is required to ensure there are no hidden liabilities, the accounts correctly are stated, the equipment and employees will add the expected value, and the current projects won’t turn bad before they are completed. No. 11 ......Continue Reading...... Visit the link to read the rest of the article on the Insightful Accountant Website. This blog was written for ClockShark and published as the 2nd of a 4 part series on helping construction companies Succeed. Visit ClockShark for your time recording solutions  "Sure we can add... dragons... to the pole lights..." An alternative to "hard sell" tactics If a client say's that you were competitive but they can't make up their mind, it's time to get curious about that. Inquiring about your performance in the market is a modest recompense for the effort to deliver them a bid. Rather than "hard-selling" the client, I recommend professional inquiry to figure out what "doors" of lingering concern are open. What's driving their decision? Narrow it down with helpful options like duration, budget, experience, competence, etc. Once you have an area of focus, you can reference your proposed answer to their concern. Very valuable feedback is often provided at these junctures. The purpose isn't to argue or cajole the client, it's to determine how your bid compares to your competitors*. *Note: Bid scope comparison is not to be confused with bid AMOUNT comparison. Sharing, conspiring, or otherwise conveying the monetary amounts that are not read aloud at a public bid reading constitutes bid shopping which is definitely unethical and potentially illegal. Sometimes a difference in proposals is easily explained. Offering polite and restrained suggestions about what your competitor did differently might help shed new light on your proposal. If your competitor's approach on some issue was superior to yours, you have an opening to admit it. Often we're forced to decide between options relating to scope or schedule. If the client prefers your competitors choice, you might be given an opportunity to revise your proposal because you were reasonable. Walking the client through their concerns might open an opportunity to address something they hadn't mentioned previously. Factor this feedback into the new opportunity so you can capitalize on it. Present a revised proposal that's worded with sensitivity to the client's concerns. This communicates a commitment to resolving the clients concerns. With all their concerns met, you can then follow-up and simply ask for the job. Leadership I hear a lot of folks shy away from sales because they don't want to pressure people into a decision. If sales was strictly about approaching people at random, they'd have a point. In the context of a bid, the client extended a Request For Proposal or an Invitation to bid through their Architect. Their proposition, greatly simplified is; be the best bidder and you'll be awarded the job. It's therefore expected that the client will award the job to the best bidder. Clients may be overwhelmed by the amount of information to compare. They're rarely trained estimators who are used to scoping proposals in terms of potential risk and profit. The situation demands leadership. Staying on the sidelines because you're too polite to provide follow-up means you'll be awarded fewer jobs than you won. Trust is a powerful thing. A knowledgeable and seasoned professional can assuage anxiety and establish trust with a client. Clients sometimes award their project to a higher cost bidder, this is how and why that happens. Holding ground You won't always be the low bidder. In some ways that's as much an asset as a liability. I've heard it put succinctly like this : It doesn't matter whether you win everything you bid or lose everything you bid, you'll be out of business eventually. Knowing that some folks take longer to learn than others, it stands to reason that eventually you'll be bidding against someone who hasn't figured out why they're on such a winning streak. Your bid should ALWAYS be representative of your best effort to profitably win the job. Let nature take its course with reckless bidders. Let the buyer beware.  Taking the outside line brings its own risks... Clients that indulge in "comparison shopping" by crowding the line or stepping over into bid-shopping are doing so to gain a better deal for them. Many business owners view this as an opportunity to "trim some profit" to land a contract. In doing so, they invariably look toward gouging on change orders to recoup their "investment". It really doesn't take much life experience to see how this ends up. The client is reluctant to hire that GC again because they were so aggressive with change orders. The GC's potentially recovering from an unprofitable job and a scarred reputation with the client. Often they're looking to "make it up on the next one". The legitimate low bidder might well have built the job for less simply because their bid included sufficient funding to keep their operation running smoothly without needing to gouge on change orders. It's a chain reaction of dishonest actors trying to out-fox one another to the detriment of all. Life becomes parody when such a client calls you to say they need your help because they don't want to hire their low bidder. If they didn't want to contract with that GC, they could have excluded them from the bid. The client started the problem by cheating the last time, now they're doing it again. Dishonesty calls everything into question. The client's premise is based on dishonesty, so it's reasonable to suspect the story is false. In fact the only thing you know for sure, is that the client is willing to be dishonest wherever it benefits them. Diseases like Yellow Fever, Typhoid, and... Greed, need to be quarantined before they spread to others. Setting a precedent The answer is to hold the line on your price. If you did everything properly, your proposal is as close to market-leader as you could make it. Bids are a lot cheaper when you've missed something important, like paying your overhead. That doesn't make them market value. If the client was bluffing and your proposal was already the lowest legitimate bidder, they may award to you anyway. You can't cheat an honest person. Setting this precedent with the client at the outset reduces trouble down the road. Reinforce the precedent Entering into a contract with a dishonest client doesn't improve their character. It merely binds you to a client who will cheat you every chance they get. The most common tactic is to demand changes to the scope right now because they're in a hurry, verbally (off the record) promising to sign your change order. Once the extra work is done, they're suddenly interested in disputing the change order price. Again the solution is to hold the line*. Extra work requires contract modification, full-stop. Be friendly, be motivated, be firm. You'll be amazed at how fast they can get a change order processed when they really need to. *Note: there are RARE times where extra work must happen without a change order first. For example if the building is flooding, you must shut off the water main THEN ask to be paid for your trouble. Dishonesty is a form of laziness, cheaters quickly tire of losing arguments with honest professionals. Another thing to consider; additional work takes time. In the eyes of a contract, if you were late because you were busy with not in contract work, it's your fault even if the client benefits from your extra work. Simply put, if freebie extras make you late, they'll punish you all the same. Little things add up quickly, especially when the client's getting them for free. Negotiations are rarely simple When negotiating, remember that completed work doesn't get cheaper after the fact. Discounting, bargaining, and horse-trading are all better done BEFORE resources have been consumed. Value reflects the balance of perceived asset and liability to a given party. If the client already has the asset, all you have is the liability. This means the client has leverage in negotiating the value because you aren't even breaking even (earning back your liability) if they refused to pay altogether. The whole reason that market value persists is because it's beneficial to both parties. Looking at negotiations requires a willingness to be macro and micro in your perspective. Doing some portion of the scope at a loss is a micro perspective, doing the whole job at a profit is a macro perspective. Micro relates to Macro, because herd of little parts done for free can push the profit out of the whole job . Understanding what the client values provides a basis to work from. As silly as it sounds, a lot of clients get hung up on the value of something small. They may want a "victory" to report back to their superiors. Keep a rolling total in your mind of where things are headed. It might make sense to do something at cost to move on from a minor issue. Some clients mistakenly believe that breakout pricing is how they'll succeed in lowering prices. This transparent effort to demand the means to bludgeon contractors isn't successful because it's unfair. They can't expect competitive bidders to reveal how they arrived at their price. Contractors proved they were market value by competitively bidding. Now they'll prove their savvy by providing breakouts intended to diminish the appearance of profit. It's simply a story that amounts to their total, that gives the client what they asked for without giving them anything worth taking away.  "Competition was fierce but you'll see everything's still in order..." Clients should be encouraged hold up their end of the deal and work with, rather than against, the winning bidder. In a typical hard-bid, the final budget is the market-price of the project. There's more than just labor and material going into that market price. Project risk from schedule, site logistics, seasonal workloads, worker shortages, design shortfalls, working conditions, labor disputes, insurance and bonding requirements, etc. The client may not realize that their project would be much cheaper at a different time of year, or that their project requires specialty products that are in short supply. Very often GC's will try to accommodate budget over-runs with Value Engineering which sadly translates to "substitute cheaper materials and cut scope". From the client's perspective, this is an extremely frustrating solution. They've paid to develop the design of their project vision. Along the way they've become attached to the look and feel of the design. Amputation and substitution are hardly welcome solutions to their budget problems. Presenting options to change things like; timing, site logistics, bonding requirements and design shortfalls could potentially solve their budget problem without affecting their vision of the project.  "My architect is confident there are no design shortfalls..." At a minimum, providing a sense of how these issues have calculable monetary impact on their project shows that you're not taking advantage of them.
In my experience most GC's resort to metaphorical hand-waving when it comes to costs outside of material and labor. Get solid on what's going into your total and you'll have a distinct advantage making your case to a client. There is no substitute for knowing what you're talking about. When clients understand the risk their project presents to a GC, they regard bids with greater circumspection. The best jobs for clients and contractors are those where everybody wins. Winning bids profitably demands that you stay committed to being the best in your field. Get in there and make your victory count. Because losing what you've won is being the best, undone. Thanks Anton for your valuable insight into construction estimating © Anton Takken 2015 all rights reserved For more articles like this visit estimators playbook |
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