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Home » Eight Stupid Things Contractors Do to Commit Financial Suicide
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Eight Stupid Things Contractors Do to Commit Financial Suicide

February 1, 2005
Monroe Porter
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I would like to write about eight mistakes we see over and over.

Through the years I have coached and counseled thousands of contractors. Most contractors do not call you up one day and say, "I am making a lot of money and I'm not sure why." Rather they are seeking advice to get themselves out of some type of hole or problem. I would like to write about eight mistakes we see over and over.

Expanding Nationally

Most contractors fail when they go outside of their geographic marketing area. An exception to this is a situation where one customer asks you to work on their property on a national basis. This type of out-of-town work succeeds because it is not really an expansion of your business but rather an expansion with one customer.

Some contractors expand because they think the grass is greener somewhere else. Many simply let their egos get in the way of their good judgment. Expansion outside of your local market is difficult, particularly for a subcontractor. Subs must build a local labor force. My advice is pretty simple, if you are not making money, fix what is wrong with your business and make money in your own market. If you are not making money and plan to relocate as a cure, do so as a tradesman.

For those of you who are making money and are tempted to expand geographically, think of it this way: Contracting is a risk, why expand? Consider taking money out of the contracting business and diversify. Hire a good financial planner. If you are bored, find a hobby or use your business skills to help a charity. Don't let your boredom destroy your business.

Build Your Own House or Office

Most contractors already have a full-time job. While I have written about this in the past, I want to reiterate what a financial disaster this can be. Building your own house or office can be a huge business distraction. We estimate it costs our average customer $100,000 in lost profits. Are you in a financial position to take such a financial hit? If not, hire someone else to do it. It will be a much better use of your time.

Don't underestimate the impact of having your own crews work on your magnificent dream house. It is difficult to explain to a $12 an hour guy why you are not made of money when you are building a million dollar house.

Using the IRS as a Bank

No matter how bad of a cash crunch you are in, always pay your payroll taxes and income taxes first. The government is the most expensive bank in the world.

Improper Insurance

When you have an accident and are sued for millions, it is too late to find out you are not properly insured. Insurance is a complex legal issue. The purpose of insurance is not to protect you from day-to-day mishaps but rather to ensure that a disaster will not wipe you out. Make sure you have a professional multi-line business agent who is an expert in insurance-not a salesperson- review your insurance needs. Review all your coverage. If need be, increase your deductibles but make sure you have adequate disaster coverage. Incorporate and make sure your corporate structure is clean with no games. Remember, you may be able to hand them the keys to your shop and still keep your house and personal wealth.

Make sure you are covered for incidents such as embezzlement, employee non-owned vehicles, etc. Consider having an umbrella that covers your personal worth. I am not an insurance expert (so don't follow my advice); hire someone that is. I know insurance is expensive and a hated word to contractors, but if you ever need it, it will save your butt. Make sure your coverage is adequate to save you.

Real Estate Mistakes

Many contractors dabble in real estate and this can be a great strategy but don't do so until you are ready. Trying to cut deals in real estate when you are in debt as a way to get out of debt can be a huge distraction. Only do such things when you have the time and capital to do so. And don't mess around in real estate until you have met other basic financial needs such as an IRA, a rainy day bank fund, etc. Once you begin to make a little money, develop a plan, not just a haphazard deal approach to managing your wealth.

Doing the Wrong Job and Having a Big Loser

This is a biggie for many contractors. Taking on a risky job in hopes of making a lot of money can sink your ship. Don't let the excitement of the big score cloud your good judgment. Some warning signs of a big job are:

If an unknown customer or out-of-town company calls out of the blue and has a "too good to be true" job, well, it probably is. Even if you can do the job, conduct an extensive credit check.

The job stretches your abilities and is not only large but also difficult in scope and will require most of your best people.

The job is more than 20 percent of your total sales volume for any given year. How are you going to keep your other customers happy while you work on this "home run" miracle?

The job is a large new construction job. New construction is almost always harder than working directly for a property owner. It can take longer to get paid; you have other subs and trades in your way. The list goes on.

Last but not least, if something goes wrong on this job and you are not paid a substantial portion of what is due, will it destroy your lifestyle and business or just hurt you short term? Think of it this way: staring at a pretty girl may not be cool with your wife but even if she gets angry, she will probably get over it. Sleeping with that pretty girl may cost you half your net worth and your relationship with the family. Is it worth the risk? Don't let the "pretty girl" job destroy your company.

Start a Retail or Distribution Business

You are a contractor. To be a successful contractor requires a certain set of skills. Selling material retail or wholesale requires another new set of skills. Selling a product can also require huge capital expenses such as inventory and location. Buying power also plays into the equation and such businesses have gone national and may buy product much cheaper than a local competitor. Think twice before getting into a retail or distribution business. I recommend you stick to what you know.

Having a Dysfunctional Partnership

Partnerships are like marriages and 50 percent of the marriages in the United States result in divorce. People form partnerships for many reasons. Possibly, you and your partner are brothers or cousins. Maybe one is the field guy and the other an office person. Over time, it is very difficult to keep those partnerships focused where both partners are bringing the same value to the business.

People's lives and goals also change over time. Maybe when the business started, one of you was a $50,000-a-year foreman and the other a $50,000-a-year salesperson, so all was OK. Now one partner runs the business and is a $150,000-a-year owner and the other is a $150,000-a-year foreman, which is not so OK. If you are going to have a partner, you both must act and communicate like partners.

While the above list does not necessarily represent all of the stupid financial mistakes I see contractors undertake, it does represent a pretty good cross section. Avoiding some of the issues will probably save you a lot of heartache and money.

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Recent Articles by Monroe Porter

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Monroeporter
Monroe Porter is the president of PROOF Management Consultants. He can be reached at 804-267-1688.

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