Nobody wants to lose money on a job, but it’s an unfortunate reality in the construction industry. There are things you can do to minimize the damage and avoid losses in the future. This week, we’re sharing triage strategies for a job that has gone off the rails.
Considerations we cover in this episode include:
- Review the contract and any change orders
- Determine when the job will be finished and liquidated damages
- Who should you talk to about a job that’s losing money?
- Document the issues that are occuring at the time they’re happening
- Get all hands on deck
- Pay your materials and suppliers on time
- Analyze and communicate what happened
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[00:00:00] Rob Williams: Welcome to the Contractor Success Forum! Today we are talking about emergency triage checklists when your job is bleeding profits. Because here on the Contractor Success Forum, we discuss how to run a more profitable, successful construction business– or today, how to run it when you’re not profitable, when you have a big loss.
And it’s amazing that Stephen Brown from McDaniel-Whitley Bonding and insurance agency has got a triage checklist for you today if you’re having some losses there. But we’ll talk about that. And we also have Wade Carpenter with Carpenter and Company, CPAs. And I’m Rob Williams with IronGate Entrepreneurial Support Systems throwing in, and also author of the Pumpkin Plan for contractors.
[00:00:53] Stephen Brown: There it is.
[00:00:55] Rob Williams: There it is. So what is this? And why are we talking about a triage checklist? Stephen, do you have clients that lose money on jobs? Get behind?
[00:01:08] Stephen Brown: It has happened before, unfortunately. Hopefully you never lose money on a job. That’s what I prefer. But say you got a job and you call an ambulance on it. You’re carrying that job on a gurney into the emergency room. That job is bleeding profits. It’s hemorrhaging, guys. This is a big deal. So.
[00:01:30] Rob Williams: Hemorrhaging.
[00:01:31] Stephen Brown: So what do you do? What do you do as a contractor to stop it from getting worse? How do you turn it around and check that job back out of the hospital and put it back into society? A healthy and happy project? What do you do? That’s the question. What do you do?
[00:01:49] Wade Carpenter: Guts and gore–
[00:01:49] Stephen Brown: Yeah.
[00:01:49] Wade Carpenter: Right?
[00:01:49] Stephen Brown: Yeah. Yeah, it’s gory. It’s bloody, it’s nasty. Nobody wants to deal with it. Nobody wants to think about it. Nobody wants to talk about it.
But guys, especially on commercial projects that have a lot of moving parts to it, you never know when that job is losing money.
How do you keep losses from happening?
[00:02:08] Stephen Brown: So first of all, how do you keep it from happening? Listen to the Contractor Success Forum. Have your systems in place so you are warned ahead of time, at least from the financial records, that a job’s losing money.
And of course the second thing is– and I’ve seen this in a lot of claims, unfortunately, since I’m a surety bond agent, we have bond claims. And we have a bond claim, it’s the worst possible scenario because it means a job is losing or has lost money.
And the question is, are you gonna lose your shirt over it? Is it that bad that the bonding company’s been called in? That’s a job that’s right in line to sink your ship. So what do you do?
[00:02:50] Rob Williams: Yeah, can you do anything? And most of the time when I’ve had losses, it’s just, suck it up and keep working every day. And I guess that’s assuming you have a balance sheet that can finish the job. You may not be able to finish the job.
[00:03:04] Stephen Brown: Well, that’s just it. Don’t talk about it. Fire a bunch of people.
[00:03:07] Wade Carpenter: Well, I think one of our points today, just throwing this out, like Generally Accepted Accounting Principle says if you’re on percentage of completion and you got a loss job, you’re supposed to recognize it immediately for financial statement purposes. Now, tax purposes, it doesn’t mean you’re supposed to, you’re not allowed to do that.
But the reason I’m bringing this up is this kind of conservative approach is, the fact that they’re recognizing a financial statement, but you should be recognizing it’s happening to you and paying attention what to do about it. That’s when you should be hyper aware and really paying attention to these things Stephen’s gonna go over today.
[00:03:46] Stephen Brown: Yeah. And guys, we’re gonna post this Triage Checklist on our website if you’d like to get a copy of it. And also along with that checklist is a postmortem. Things to think about after you got the job finished.
[00:04:03] Rob Williams: And the website is Contractor Success Forum dot com.
[00:04:06] Stephen Brown: Well, I mean, all our listeners know that. Everybody.
[00:04:09] Rob Williams: We may have some new guys that just Google this for this amazing triage checklist, so they gotta know. They gotta know.
First, review the contract and any change orders
[00:04:17] Stephen Brown: Okay. So, you know, what happens? You find out you’re losing money on a job and it’s not going in the direction you want. The first question that’s gonna pop into your mind is, did we miss a major line item in our original bid? That’s the first thing. What did we miss? The problem is you wanna do the postmortem first and you obsess about that, but what you really have to do is the triage work. You gotta stop the bleeding.
So the first thing to do is get a copy of your contract with any change orders in front of you. You got to have that. You’ve got to have it in front of you, you’ve got to review it, and you’ve got to determine when the project starts according to the contract and when it’s finished. That’s very simple, but you gotta have that.
Determine when the job will be finished and what liquidated damages are in the contract
[00:05:08] Stephen Brown: And then the next thing you gotta do is you have to determine, based on the current situation, when the job’s gonna be completed. When you think it’s gonna be finished and when, in a worst case scenario, it may be completed.
And you’ve gotta get from the contract what liquidated damages are in there. On commercial contracts, you’ve got liquidated damages, and if it’s a private multi-use project, they’re usually huge liquidated damages, because there’s all these other players involved with the project being done by a certain timeframe and they manage that through liquidated damages. So you have to know what that is.
[00:05:42] Rob Williams: That could get ugly. That always got me really scary. I hated those contract provisions, like in the number, if you’re one day late, it’s $10,000. I had one client with that line item that just scared the heck outta me.
[00:05:54] Stephen Brown: Well, it should.
[00:05:56] Rob Williams: Per day.
[00:05:57] Stephen Brown: If it’s $300 a day and it goes over 60 days, that may not bankrupt you, but $10,000 a day could eat your lunch.
[00:06:07] Rob Williams: Oh yeah. That was very scary. I did very few jobs for him. He was a good friend, but I was like, whoa, I don’t know if I’m gonna bid your jobs or not.
[00:06:15] Stephen Brown: Well, don’t think the owner isn’t gonna excess it. Don’t assume that they’re gonna look the other way on that. So what percent of the job is complete? How do you think you figure that out, Wade?
[00:06:28] Wade Carpenter: Well, obviously it’s like percentage of the costs done to date, divided by the total estimated costs. But you know, just to get where you’re going here, I believe this is the time you need to be really hyper aware of your job costs. Knowing where you are.
A lot of times contractors don’t have very good job information. Or if they do, they’re getting, not getting it timely. On a job like this, this is the time you really gotta make sure all those costs get in as soon as possible so you can finish the job as soon as possible. If you got these late completion clauses and penalties, that’s the time you need to really focus on that.
[00:07:05] Stephen Brown: All right. And is the job overbilled or underbilled? Why does that matter?
[00:07:10] Rob Williams: Yeah. That’s a really good point, Wade. Most of my jobs when I was way over or under, I really didn’t panic in the beginning because my first inclination is, okay, somebody’s got something in the computer wrong. Something’s just messed up on the data entry, or they got the quantity, or they shipped a truckload to a wrong job or something happened funny, so I didn’t panic in the beginning. It’s like, okay let’s sort all this out. But then that does cause a delay. I guess it depends on the accuracy of your systems and your confidence, which I guess that meant I was confident in our overall system.
But our day-to-day as we went, when I saw a big error I, mildly panicked. But usually nine outta 10 times, it was just a key punch problem. But getting that sorted out was I guess our first problem was going to our spreadsheets and whatever else we were using to get some of the detail.
[00:08:06] Wade Carpenter: Right. Well, I think where Stephen was going with that over and under billing is are you way out in front of the billing, and you spent all your cash and you’re still bleeding? That’s when the bonding company is gonna get nervous.
And I guess Stephen can talk to this, but if you’re underbilled, you probably need to be billing as fast as you can. Make sure you get that cash flowing and go ahead and do what you need to do to get the job done. Is that where you’re going with it?
Who should you talk to about a job that’s losing money?
[00:08:34] Stephen Brown: That’s exactly right. And the question is, who should I tell about this? Well, the first person is your accountant and then your attorney, and then your bond agent. What advice do they have?
As a bonding agent, I can tell you that the first thing they’re gonna look at is, get us a current WIP. Show us how all the other projects look right now. Show us exactly how much cost you have to date and your estimated cost to complete and the estimated completion date. Lay all the facts out, and then I think you’d be amazed at the good advice you’d get. You might say, well, that’s dumb. Why would I tell my bonding company I’m losing money on a job?
Well, you can wait until the fiscal year end comes out and let them find out then. And then, you know, the standard answer is, why did that job lose money? Is, at least this is what we used to joke about telling our contractors to say is, oh, it was weather related.
[00:09:28] Rob Williams: Yeah.
[00:09:28] Wade Carpenter: No, it’s the CPA’s fault.
[00:09:30] Stephen Brown: Unless you get a Farmer’s Almanac out–
[00:09:33] Rob Williams: Wade did it.
[00:09:34] Stephen Brown: Hard to dispute.
Yeah. Wade. I don’t know why–
[00:09:37] Wade Carpenter: All this overhead.
[00:09:38] Stephen Brown: That, even though he’s posting something. I– Wade.
But, the point is you get a current WIP together and you know the answers before you talk to your bonding agent. And at one time, if all the other jobs are doing good and this one job is losing money, there’s nothing more powerful than having a quick sit down with your underwriter and your agent.
Or do it online as to, here we are right now, just wanna make you aware of it. That’s what we’re doing about it. There’s nothing that builds faith better than that. Remember, the bonding company wants to be your team. They do not want you to go out of business. So, open that up.
Second thing is the lawyer. Lawyer might tell you, well, there’s some force majeure language, price escalation things. So, carefully document what your costs were and the problems you had obtaining it at the price you originally bid. Take that to the owner for an argument. They may not reimburse you. They might say, well, I’ll tell you what, we’ll give you some relief on the liquidated damages. But either way it’s a help.
Document the issues that are occuring at the time they’re happening
[00:10:40] Stephen Brown: And what are your rights? See when you’re losing money, your fault, my fault, nobody’s fault. It could be you, it could be your subcontractors, it could be the other folks on the job that you have no control of that are slowing you down. And in that situation you gotta go back to the contract and at that time enforce in writing with the owner, architect, engineer, this is the problem we’re having. You’ve got to document it at the time it happened. Or if it ever goes to arbitration or lawsuits, you have zero chance of getting your money back. So that’s one thing.
All hands on deck
[00:11:14] Stephen Brown: But the next most important thing to do, and we’re talking about triage guys, is that old Navy expression, all hands on deck. Your ship’s getting attacked and you blow that “Aooga” and then everybody runs out on deck, and starts firing. Well, all hands on deck means put your best hands on deck, so that’s gonna cost you money.
You’re gonna spend more time, your best hands are gonna spend on time. But this is a situation where you have all hands on deck and you make sure they have everything they need to finish the job. So if you’re documenting the things that are not your fault, if you are having copies of all your change orders properly executed, If you’re abiding by the contract and you finish the job, then you’ve got some legal repercussion on the liquidated damages and getting reimbursed for other things.
So it’s an option. It depends on how you bid the job. Was it cost plus? Was it a certain percent profit with a estimated cost, a maximum cost not to exceed? I’ve seen all kind of contracts like that. So get your contract out, all hands on deck.
[00:12:30] Wade Carpenter: You brought up a good point there. If you’re up to date on your costs and stuff like that, and you get your WIP up to date, you can see what you’ve got left to do. And sometimes, as you said, sometimes it’s, it’s a change order, it can turn things back around. But the other thing is, hey, you gotta look at the remaining items. It’s hey, where can we cut costs? Where can we cut time to get this thing done? Minimizing the bleeding is where I was going with it.
[00:12:56] Stephen Brown: Right. We did a podcast on WIP, Work in Progress reports. It’s everything. It’s everything to increasing your bonding. It’s everything toward projecting cash flow, and it’s everything to communicating what happens when a job is losing money and what you’re gonna do about that cash flow to make up for that job losing cash. Cash comes out of your cash reserves to pay that loss. It comes out of future profits to pay that loss. Right guys?
Okay. Speaking of cash, this is the most important— well, it’s not the most important. All right? They’re all important. This is triage guys. We’re trying to bring this project back to life, but it’s hugely important.
Pay your materials and suppliers on time
[00:13:40] Stephen Brown: Pay your materials and suppliers on time. When you’re losing money on a job and you have the materials and the suppliers worried that they’re not gonna get paid, then they start gossiping. And when they start gossiping, that affects other jobs. And when it affects other jobs in this job, I’ve seen chain reactions happen where the contractor did not have the cash and stopped paying the materials and suppliers on time.
So you may have a situation where you’ve got to make a hard decision on what’s most important. I’ve seen it happen more than once, so that’s why we put it on the list.
[00:14:21] Rob Williams: Yeah. I was recently talking to somebody about that, that was unsure of their future cash flow projections and just wasn’t sure if they were gonna have enough for this and that. And I’ve been in the same position before. Not sure if I should pay this bill today because what’s coming up in the next week or two and I’m not really sure where I stand with all that when you get into these cash crunches. And so sometimes you don’t do anything, like you just said, you don’t pay the vendors because you’re just not sure. So you may not have a CFO onboard, you may not have that projection done yet. Because we’re not talking about a normal cash flow report. We’re talking about a detailed day-to-day.
I can remember at times where every day I had them, it was like 2009. You know when it got really bad, every day there was a cash flow projection spreadsheet put on my desk. These are the ones that we’re gonna do. It was ugly, you know, so having that to make a real big decision.
But when you don’t have a plan, sometimes you just stop doing everything. You don’t pay anybody, and then you just say, well, I’ll deal with it tomorrow. And then a week goes by, or 10 days go by, then you hadn’t paid anything and then it really starts getting ugly. You think you just wait for a couple of weeks and then you’re gonna figure them out rather than doing that proactively.
Wade, I don’t know what you see happening, because you’re the guys that, that I would usually have figuring this out for me.
[00:15:45] Wade Carpenter: Yeah, to that point, you know, what Stephen was saying, keep the material suppliers paid, the subs paid, because number one, I’ve seen them walk off the job or not deliver materials because they’re afraid they’re not gonna get paid or COD and that can make the bleeding worse if you’re gonna extend it out because you can’t get it done because the people won’t show back up.
[00:16:09] Stephen Brown: That’s exactly right, Wade, and you know, I would say after reviewing the contract and getting an idea of where you stand on the project, get an accountant to help you. It should be all hands on deck to get the WIP put together, the current balance sheet, income statement, and WIP and here’s why.
Because your first reaction is max out your bank line, get as much cash out of as you can and sit there and use it for paying everyone. That’s something that if you don’t have the cash in your financial statement, it’s why bonding companies want you to have a bank line of credit. But then again, if you have a WIP, you know whether you have some backlog gross profit coming in to pay that off. That’s the worst case scenario.
So say you don’t have a bank line of credit, say you’re losing your shirt, and say you don’t have any cash. What do you do? Still talk to your bond agent about it because there are things that you need to do. And you need to understand what the repercussions of what you do and you don’t do, how it may affect your company or your ability to be a contractor in the future.
Then, after you get everything going and you’re on top of it and you complete the job, but then just, find a bag, that’s the next thing on the list, paper bag to breathe into. Just slowly, just calm down. It’s gonna be okay. You know, Information is power.
Analyze and communicate what happened
[00:17:32] Stephen Brown: And then that’s when after this is all over, you know, you do the postmortem stuff. Exactly what happened? You have to study it and then you have to communicate it to your project managers and key employees. And guys also, a lot of folks just don’t spend enough time with their project managers or on the job site. And project managers like anyone else, like you, me, anyone else, there may be some huge personal issues going on in their lives that you’re not aware of that affect their ability to manage that project. So you need to know what’s going on and know when they might need help or exactly what buttons you need to push to get them focused.
[00:18:15] Wade Carpenter: Yeah, that’s where I was gonna go with it is sometimes the PMs need to have somebody to say, hey, this is really important that we go ahead and take care of this and put as much focus on it as we can.
[00:18:26] Stephen Brown: I wanted to as an after effect before we finish this thing up, unless y’all have some other questions, is it’s very interesting that bonding company claims adjusters, they come in when they have to finish the job. You can’t finish it and they have to finish it. The one thing that they’re most preoccupied at, beside getting some accurate data: how much of the work on the project is good? Has anybody that’s called back in to finish a bonded job that hadn’t been complete, any new contractor wants to demo everything and start from scratch. Because you know, I gotta warranty it. I’m not gonna warranty their work.
So you wanna see how much of the work is good? Is the job close to being punched out? Where do we stand? But the most importantly is, they wanna know how technical was the job and how savvy is the owner and architect engineer? Are they smart? Are they idiots? Are they jerks? That’s the most important thing the bonding companies worry about.
Sometimes you hit a perfect storm of a bad job. An architect and engineer that helped make the job lose money without a doubt, and an owner who’s ripping off the contractor and every way they can contractually. And believe me, I’ve seen that too.
Okay, well, hey, not to be on a downer. We don’t want this to happen to you, but what do you do if it happens? What triage. Get that job checked out of the hospital. Wheel them out the hospital. Put them in your truck, take them home and move on. Learn from it.
[00:19:56] Rob Williams: Yep.
[00:19:57] Stephen Brown: Because you’re gonna lose money on some jobs. I hope it’s not you, listener.
[00:20:02] Rob Williams: Yeah, so, so don’t freeze. Like I said, a lot of times I see people just freeze, so get this checklist out and that gives you a good start to something that you can be doing. Doing nothing is not the answer, and that’s what we see happening a lot. You just go into shock and fear and. Gotta do something, gotta work on it. And this is a good place to start having a list.
[00:20:23] Wade Carpenter: Yep,
[00:20:24] Stephen Brown: Yeah.
[00:20:25] Wade Carpenter: I agree.
[00:20:26] Stephen Brown: Hey, talk to your professionals. Talk to your team. And trust advice you get from them. That’s all.
[00:20:33] Rob Williams: Yep. Get that team together. Alright, well this is great. So, Wade, I appreciate that and I guess you’ve seen some guys going through this and I guess Stephen too, and–
[00:20:41] Wade Carpenter: Yeah, absolutely. I guess before we go, I was hoping Stephen would do that navy horn again thing, so.
[00:20:48] Rob Williams: Alright, well that’s a good way to end the show today on the Contractor Success Forum. So–
[00:20:54] Stephen Brown: Hey, maybe that’s from the submarines dive. I don’t know. I’ve–
[00:20:57] Rob Williams: Yeah, that’s right. That did kinda–
[00:20:59] Stephen Brown: I wish I had been.
[00:21:01] Rob Williams: So, yeah, go to Contractor Success Forum dot com to download this or however our people have put these links in. Wherever you’re watching us.
Watch us on YouTube, watch us on your podcasts or listen to us. So, we appreciate you tuning in and listen to our next show. Thanks. At the Contractor Success Forum.
[00:21:21] Stephen Brown: We’re rooting for you.
[00:21:23] Rob Williams: All right.