|Author:||Craig Pierce||Created:||1,024 days ago||Updated:||34 months ago
Increase Profits, Minimize Risk
What is the best way for a contractor to improve their profits? Minimize risk. Let's face it, contracting is another form of gambling. When we look at all of the stipulations placed upon subcontractors from paid if paid clauses to loose lien rights to un-executed change orders for work already completed, the practical business is more of a gamble than we would like to admit. So how do we take this gamble and make it into a sure bet? One way is to rewrite the rules as Vegas has done with games they offer. The house as a whole always wins. For years I thought this may be a possibility, but let's face it, the current contract climate and competitive atmosphere will not allow a single or group of subcontractors to significantly change the rules. The best we could hope for is trade organizations moving the needle a little in our favor.
So what is the other avenue? Minimize risk. Several months ago I wrote an article on general roles in risk management (I highly recommend you take a look at it). Each player in the company is performing critical functions, each with a positive and potentially negative results for the company. Estimators are taking quotes from vendors that may be deemed later to be incomplete, project managers are making decisions on proceeding with additional work, superintendents are deciding where to move crews. Each of these activities has a certain risk factor. The consequences of a bad decision will have negative impacts and to varying degrees upon the company.
One way to ensure not too much risk is borne by the company is to set-up strict rules. I am not sure if this is the best single answer to the problem. I have seen companies generate very strict rules that eliminated all forms of risk, but in the end the company could not operate as a subcontractor, because the day to day activities of the people were impossible to perform. The rules became so strict it even became difficult to operate within the contractual requirements of the projects (assuming the contract could be signed given the many rules restricting risk taking).
The best way to solve risk. Review, review, review. The end report on the BP disaster is probably months or years away, but I can guarantee to you now that one of the most critical solutions that it will offer is independent reviews. Human beings cannot be trusted entirely with their own work. Not because they lack ethics, but it is in their nature. When an estimator finishes a bid and is ready to send it to a client, he or she is 100% confident that what they did is right. They looked at it through their eyes and saw it a specific way. It may be right, but most companies have others review the bid. Great companies have open dialog about the bid, the pricing, the risks, and the rewards. No one should operate without some form of review on their activities. The review ensures that the risks being taken are reasonable and the potential rewards offset the risks. That no single risk being taken can undermine the viability of the company.
So does your company have appropriate review? Not just on bids, but on every activity in the company? Is it happening regardless of past performance or problem. If you are only reviewing the "bad" jobs or ones that have major problems, you are not getting out ahead of the problems and being proactive. I highly recommend that you review your business and make sure that there is adequate checks and balances, because doing so will identify the risk and assist everyone in making decisions that minimize the risk in contracting.
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29 months ago
According to our statistics in receivable management for subcontractors, the companies that paid attention to our guidance and actually took the time to implement the tools and techniques we provided them, were so successful that we had worked ourselves out of a job 62% of the time in 2009 and 2010 combined! That's right! One of the most important aspects of being a successful subcontractor is becoming a successful businessman!