1. There is a serious (perhaps even fatal) flaw in the estimating system regarding: General and Administrative (G&A) OVERHEAD recovery, stimating and tracking EQUIPMENT use, and/or Estimating and handling FIELD LABOR.

2. PERSONAL PRIDE (ego) interferes with the daily implemen-tation of sound business principles and practices.

3. Someone is simply NOT PREPARED to be in business for him-self. They are overwhelmed be-cause: He does not have the know-how (at this stage of his life) and TRAINING; and/or He lacks the emotional STAMINA required to meet and to address the challenges of running a business.

THREE SCENARIOS

The following three of seven scenarios will help illustrate the most common mistakes made by contractors when they bid for a project. Read on to see which scenario describes your business best.

1. "Iron Man" Mike (Mike is not his real name)

There was a construction company that intended to employ enough field labor to total approxi-mately 50,000 field-labor hours for the year. Total equipment costs were estimated at about $450,000 for the year. Indirect G&A overhead was estimated at another $300,000.

For bidding purposes, direct costs (material, labor, labor burden, and subcontractors) were in-cluded in the bid at cost. Equipment costs were combined with G&A overhead and added to the bid at $15 per estimated field-labor hour ($450,000 equipment costs plus $300,000 G&A over-head, both divided by the 50,000 projected field-labor hours). Sounds simple enough, but there was a fatal flaw in the process: equipment costs were not bid based on what would be needed for a particular job. All equipment costs were averaged and bid into all jobs the same regardless of how much or how little equipment was required on each particular job. Jobs requiring nothing more than pickup trucks and wheelbarrows were charged the same ($15 per hour) as ones needing bobcats, trenchers, and backhoes.

It is not uncommon for contractors to estimate their jobs in this manner. The consequences are subtle and eventually can be disastrous.

Labor-in-tense jobs, requiring only pickup trucks and wheelbarrows, are estimated far too high with inflated equipment costs. Subsequently, you do not get these jobs in a competitive market, because your price for the job is too high.

Jobs that are extremely equipment-intense are charged too little for equipment costs. Because the bids are underpriced, you get these jobs. And you keep getting these underpriced projects. The result is that you are using all of your equipment but you are charging your customers for only a fraction of its actual cost.

A. Equipment bid into every job should be bid the same as you would bid labor. Equipment should be included in bids only as the job requires.

ACTUAL USAGE, in hours, should be multiplied by a predetermined cost per hour (CPH) figure.

B. Equipment usage must be MONITORED through job costing on a job-by-job basis. This will ensure that equipment costs bid into specific jobs are compared to equipment costs actually in-curred on the job.

2. The Sugar Daddy High

A commercial landscape and irrigation contractor and a large homebuilder developed a close rela-tionship. The homebuilder provided the landscape and irrigation contractor with over one million dollars of work a year.

This contractor was the envy of other landscape and irrigation contractors in his market. The pricing of the work was reasonable. The builder paid the contractor within ten days of being in-voiced. Yet, the contractor managed to go broke. Why? For a couple of reasons.

A. There were no Internal Controls. Jobs were bid accurately and competitively, but they were not job costed. There was no effective planning or quality control in the field. The crews were not directed properly and the client's problems were not addressed quickly and effectively. As a result, jobs would drag on as the crews did not develop a "sense of urgency" to complete the jobs.

The company kept digging itself a larger and larger hole as it scrambled to "rob Peter" (bill new work) to "pay Paul" (pay off old bills for jobs completed six to twelve months prior).

B. The landscape and irrigation firm became a "CAPTIVE" subcontractor. It was subtle at first, but in the end, the consequences were inevitable. Eventually, the contractor relinquished control of his company to the builder.

The builder began to dictate schedules and precluded the landscaper from working for other cli-ents. The homebuilder began to ask the contractor to do a few free "favors" ( i.e. landscape his home, his secretary's home, his purchasing agent's home, a local church, etc.). The homebuilder also did not expect to be charged for legitimate extras.

When the economy in that area began to go into recession (in 1990) and the home builder had no work to give to the landscaper, the landscaper, who had not pursued other work, had no other clients to turn to. His cash flow stopped but past-due payables and payroll taxes did not. Because of his entrenched bad habits, he was unable to turn his business around. He skipped town owing over $145,000 to suppliers, the IRS, etc.

My point is this: Do not get intoxicated on a "sugar daddy high". It is not a question of IF you will lose your sugar daddy but WHEN.

3. Too much caffeine

A few years back, a hard-charging, concrete contractor in the Southwest was feeling pretty good about having a year that saw $1.5 million in gross sales with a net profit of well over 10%. He decided to "put the pedal to the metal", so to speak, and grow even more.

He had office help but he decided that he needed a full-time estimator. So he hired one, one with very little experience. Over the next twelve months, his sales increased to $2.5 million. Unfortunately, his bottom line went from a 10% net profit for the year to a 10% loss even with the increased sales. What went wrong?

A. Bids were not REVIEWED. The new, unproven, estimator was allowed to bid work without the owner or someone else re-viewing his work. This cost the company about $150,000.

B. Field COMMUNICATION and AUDIT TRAILS were not in place.

People in the field made decisions and changed the product without proper approval or docu-mentation from inspectors or the owner. One retaining wall had to be replaced and this cost the contractor over $50,000. Other similar mistakes cost another $40-50,000.

C. Proven SYSTEMS and office STAFF were not in place prior to growth. This company could just about handle the pace of $1.5 million in gross annual sales. There were problems (the flow of paperwork would become congested, job costing would be late or not done at all, change orders would not be adequately documented, etc.), but these problems were not in-surmountable.

Unfortunately, the owner did not try to resolve these problems in his systems before he decided to increase sales. Management was soon overwhelmed. Lack of documentation, litigation, and dis-organization cost another $150,000-200,000. The owner and the company never did recover.

Simply put, the owner did not manage either himself or his company. He thought that he could run his company on adrenaline, of which he had plenty.

The moral of the story is: "You take care of the systems and the systems will take care of you." Or "You take care of the business and the business will take care of you." If you don't, it won't. LCM