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Ten Reasons Contractors Fail Presented by: Aaron Cohen Product Manager Estimating

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Ten Reasons Contractors Fail

Presented by:

Aaron Cohen Product Manager Estimating

ineight.com

Construction Market Outlook

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Construction Market Outlook

• Most Companies will fail during the

recovery, not during the recession

• All the issues that cause failure are

• Identifiable

• Predictable

• Within the Contractors Control - Avoidable

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Ten Reasons Contractors Fail

• Increase in Project Size

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Increase in Project Size

It can be done, but can it be done profitably?

• Need more resources - you don't know what you

don't know

• Longer time to turnover job

• In beginning cash flow is good (mobilization/front

loading) but back-end retention strangle the cash

flow

As jobs (volume) gets bigger, margins get smaller.

10% withheld on a small job (15%-20% margin) has

less of an impact than 10% withheld on a large job

(3% - 5% margin)

• More supervision is required

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Ten Reasons Contractors Fail

• Increase in Project Size

• New Geographic Area

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Change in Geographic Area

It can be done, but can it be done profitably?

Little differences can be big problems

• Methods, procedures, inspections,

regulations, labor conditions (union)

• Dewatering for utility construction

• Crewing up during hunting season

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Ten Reasons Contractors Fail

• Increase in Project Size

• New Geographic Area

• New Type of Construction

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Change in Type of Construction

Contractors are more specialized than they realize.

• Because they are good at bidding and executing a

certain type of work, they tend to win and

successfully execute that type of work.

Learning curve for new types of

work may require having a few

loosing jobs

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Change in Type of Construction

Public Work vs. Private work

• Many companies start with public work to build

their experience and reputation

• As they grow they get more invitations to bid on

private jobs

• Private work tends to be higher initial price but

allows for less change orders

• Going from public work to private -> bid too low

and irritate the owner with Change Orders

• Going from private work to public -> Bid too high

and can't be competitive, put too much quality in

the work.

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Ten Reasons Contractors Fail

• Increase in Project Size

• New Geographic Area

• New Type of Construction

• Change in Key Personnel

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Change in Key Personnel

Successful construction companies 1. Get the Work (Sales & Estimating)

2. Do the Work (Operations)

3. Get Paid (Admin/Accounting)

You can’t just be good at

building things, you need

to be able to manage the

business of construction

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Ten Reasons Contractors Fail

• Increase in Project Size

• New Geographic Area

• New Type of Construction

• Change in Key Personnel

• Lack of Managerial

Maturity

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Ten Reasons Contractors Fail

• Increase in Project Size

• New Geographic Area

• New Type of Construction

• Change in Key Personnel

• Lack of Managerial

Maturity

• Poor use of Accounting Systems

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Poor use of Accounting Systems

• There is a misconception that accounting

is too confusing

• Gets delegated to a bookkeeper

• The biggest accounting/reporting issue

facing contractors is that its NOT Timely.

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Ten Reasons Contractors Fail

• Increase in Project Size

• New Geographic Area

• New Type of Construction

• Change in Key Personnel

• Lack of Managerial

Maturity

• Poor use of Accounting Systems

• Failure to Evaluate Project

Profitability

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Failure to Evaluate Project Profitability

• PM is responsible for profit margins through his estimated costs to

complete

• Only once the job is finished can reasons the job is loosing money no

longer be hidden

• Trick is to identify it throughout the

process

• Accountants need to be specialized

in construction

• Percent of Completion

revenue recognition

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Failure to Evaluate Project Profitability

Projects typically span fiscal periods

Most accountants can verify the accuracy of the books for manufacturing

(widgets) as long as everything contributing to a unit occurs in a single

period

• Raw material purchased

• Manufacturing

• Inventoried

• Shipped

• Sold

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Ten Reasons Contractors Fail

• Increase in Project Size

• New Geographic Area

• New Type of Construction

• Change in Key Personnel

• Lack of Managerial

Maturity

• Poor use of Accounting Systems

• Failure to Evaluate Project

Profitability

• Lack of Equipment Cost Control

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Ten Reasons Contractors Fail

• Increase in Project Size

• New Geographic Area

• New Type of Construction

• Change in Key Personnel

• Lack of Managerial

Maturity

• Poor use of Accounting Systems

• Failure to Evaluate Project

Profitability

• Lack of Equipment Cost Control

• Poor Billing Procedures

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Poor Billing Procedures

• Cash Flow challenges are

a big risk for contractors,

poor billing/collections

make it worse

• Late payment is the norm

in construction

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Poor Billing Procedures

• Bigger jobs pay slower

• Retainage is wrong but is a way

of life for the contractor

• Growing companies become too

busy to chase money

• Cash flow is the life blood of a

business and

without it, small problems

become magnified

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Ten Reasons Contractors Fail

• Increase in Project Size

• New Geographic Area

• New Type of Construction

• Change in Key Personnel

• Lack of Managerial

Maturity

• Poor use of Accounting Systems

• Failure to Evaluate Project

Profitability

• Lack of Equipment Cost Control

• Poor Billing Procedures

• Problems with Computerized

Accounting Systems

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Problems with Computerized Accounting Systems

• When installing or upgrading,

should run duplicate systems

until the new one has proven

effective

• Often the new, young people

are running the systems who

know more about computers

than about construction

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Ten Reasons Contractors Fail

• Increase in Project Size

• New Geographic Area

• New Type of Construction

• Change in Key Personnel

• Lack of Managerial

Maturity

• Poor use of Accounting Systems

• Failure to Evaluate Project

Profitability

• Lack of Equipment Cost Control

• Poor Billing Procedures

• Problems with Computerized

Accounting Systems

ineight.com

Construction Market Outlook

• Most Companies will fail during the

recovery, not during the recession

• All the issues that cause failure are

• Identifiable

• Predictable

• Within the Contractors Control - Avoidable

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Thomas C. Schleifer, Ph.D. Tom Schleifer joined the construction industry at age 16 and brings more than 45 years of contracting and consulting experience to his

presentation. He has Bachelor of Science and Masters of Science degrees in construction management from East Carolina University, and

a Ph.D., also in construction management, from Heriot-Watt University, Edinburgh, Scotland. Dr. Schleifer’s experience includes serving

as foreman, field superintendent, project manager, and vice president of a construction company which he owned with his brother. From

1976 to 1986 he was the Founder and President of the largest international consultancy firm serving the contract surety industry. During

this period, he assisted in the resolution or salvage of hundreds of distressed or failed construction firms and projects.

This combination of practical, hands-on experience as a contractor and assisting financially distressed companies has given Dr. Schleifer a

unique perspective on the causes of business failure and how to avoid them. He wrote the book Construction Contractors’ Survival Guide

which has been acclaimed by thousands of contractors and used as a text in numerous university graduate and undergraduate courses and

for many years published Schleifer’s Construction Forecast newsletter. Dr. Schleifer, sometimes referred to as a “turn around” expert

because of the number of companies that he has rescued from financial distress, advises contractors on organization, structure, and

strategic planning while he also writes, lectures, and teaches.

The importance of education in the construction industry is one of Tom Schleifer’s favorite themes. He is a former chairman of the

continuing education committee of the Associated General Contractors of America and has lectured extensively at universities, professional

and trade associations, and authored numerous articles and publications on construction and business management. Dr. Schleifer has

been listed in “Who’s Who in Finance and Industry” , “Who’s Who in America and “Who’s Who in the World.” He was the first Eminent

Scholar of the Del E. Webb School of Construction, Arizona State University in 1993 and currently serves part time as Visiting Eminent

Scholar

Books by Dr. Schleifer include: Construction Contractors’ Survival Guide, John Wiley and Sons; Glossary of Suretyship and Related Terms,

CMA Press; Schleifer’s Construction Profit Series, video and audio tapes; Schleifer’s Construction Forcast newsletter.

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Thank You!

Questions?