Contractor’s Corner: Building a sales and income stream - July 2020
By Dave Stafford
Here we are in July. The year is half over, and we’ve got a backlog of business in spite of the shutdown uncertainty of the last three months. We’ve been fortunate, but in reviewing sold projects and having fewer bids pending, I wonder what we’re going to do next year. Receiving the money after project inception may be six to 12 months. That lag is always painful, especially with an uncertain economy.
To build that cash-flow stream, begin reviewing sales focus and market strategy for 2021 and 2022 now. Get started the right way by having sales and project personnel do some research for you. Have your team leader give out assignments to personnel; the more you require, the better feedback you’ll get in return. As a rule, we had each salesperson prepare a list of ten prospective targets to contact. Mix this up between business niches.
We kept it simple by also preparing a list of questions they were to ask. By being focused, most were able to get much greater detail than through a casual conversation.
Questions could include some of the following, adjusted for the business niche or reworded for clarity:
• Over the next 12 months, how many projects do you see moving beyond the planning stage?
• Do you feel that budgets have been compromised or reduced or are being increased?
• Over the next six months, how many new projects do you see being awarded?
• Are project approval times about the same, becoming shorter or longer?
• Do you feel that new health and security requirements will cause a small or large impact on project completion times?
• Would you say that money is available for worthwhile projects, or is it being diverted to other areas?
• Would the total amount you’ll spend on flooring projects next year be about the same as last year? Approximately how much would that be for products and installation?
• Are you finding it easier or more difficult to get qualified bids on your projects?
• If you could change the behavior of a contractor, bidder or supplier to make your life easier, what would it be?
• How often should I check back with you on upcoming projects?
Set a specific time for your strategy meeting, at least ten days after the assignment is made so that everyone has a deadline to complete their research. Let them know their feedback and information is vital. Make the meeting a big deal and allow about 90 minutes, perhaps with lunch provided.
Take each niche and explore the feedback from clients and prospects. Are there going to be reorders or add-ons to ongoing projects? Are new projects in the planning stage, and if so, how many months until award and project inception? Is there a sense that new projects may be further delayed or that funds have been diverted? How many projects do you expect to land?
Ask that the questions and answers on each client or prospect be in writing, legible and turned into the team leader after the meeting for review and feedback.
CONSIDER NEW TERRITORIES
Commercial opportunities over the next year will appear in all market segments; the real key is to recognize those that fit with your company. Whether it be quick-turn property management with “cookie-cutter” move-outs and flooring replacement or larger tenant jobs as leases expire, it can all be profitable. In spite of the move to telework and office downsizing, most workers will continue to maintain a physical office presence. Perhaps you can help them with modernizing to maintain the proper social distance requirements or creatively expand those break areas.
What geographic area are you covering with 70% of your business volume? Is it time to expand or reduce that area? Perhaps there is a large potential client just a few miles away that you’ve haven’t considered or that has recently been discussed in your salesperson strategy meeting. Or is there a high-volume-low-profit account that has been costly to maintain that should be jettisoned?
Whether it be a large corporate client, a financial institution or some planned expansion in healthcare, there will be chances for you to either add another niche or expand within one. Whatever the case, do a thorough cost-and-labor requirements analysis.
Term contracts with certain corporate clients, healthcare, property management and federal, state and local governments can be lucrative. This type of contract is usually one where the client has a continuing need and wants to simplify his life by issuing one bid document and award.
Most contracts are to single or multiple bidders on an “if-, as-, or when-needed” delivery basis at a specific price point for a range of products, unit prices and basic installation. The term is for a specific time period, perhaps one year with a renewal option (for good performance). Astute managers for schools, universities, city, county and state government usually do something like this. Federal government agencies including the Department of Defense and General Services Administration also use such a purchase vehicle.
If you do not work in this niche now, you should consider it. It may require 12 to 18 months or longer to land such a term contract. Pick a fertile area where there is a need and do your research. Find out when an existing contract is coming up for renewal or rebid. Is the client happy or unhappy with his current award to the bidder? Are they excited about your interest and willing to make a change? If you see some gritting of teeth and an eagerness for you to bid, then get more details. Often, you are able to retrieve a copy of the existing contract under the Freedom of Information Act for public awards to see how that might fit with your company. The best thing about these contracts is that a profitable one can be a guaranteed annuity; the worst is when you have misunderstood the parameters of the bid and have a mis-priced unprofitable contract for a year.
DO MORE RESEARCH
When preparing to bid a menu of products and services, it is critical to understand the basis upon which the award will be made. In some cases, each line item has a “weighting” based on usage by the client; in others, the line item unit prices are added up to arrive at a total score. Proper research and questions to the buyer may expose a pattern of awards and where specific items are significant. While I would never suggest “low-balling” a bid or counting on change orders, you may want to adjust certain items to improve your overall score.
A term contract becomes a performance and service issue rather than one of price or sales acumen. This can lower your sales cost. You’ll be able to assign a project coordinator and/or project inspector rather than a higher-paid salesperson. The sale has already been made.
Risk management means different things to different people, but my focus here is collecting your money and avoid spiraling accounts receivables. Bids, offers and volume of delivery should all be weighed against your cash in the bank, the extent of your supplier and bank credit lines and current average accounts receivables. It does you more harm than good to land a huge six-month term project when you know the receivables may run 90 to 120 days, and you’re tying up a large number of your premium installers.
I make those points to illustrate a very bad decision from my past: a hotel building had suffered some fire damage, and the owner took this opportune catastrophe to use the insurance settlement to remodel. The general contractor asked me if “we’d be interested in providing a bid on floor prep and to furnish and install some 6,000 yards of carpet over pad; the job has to be completed in eight weeks, and we do have other trades doing some touch up. Give us a great price, and you’ve got the job.”
The proffered contract seemed to be pretty standard terms with “completion of work to be within eight weeks, all change orders must be approved by the project manager, invoice for materials to be paid within ten days upon receipt, monthly requisitions and a 10% retention.” When asked about payment for the stored materials, he responded, “Sure, no problem on accelerating payment on that. As soon as you order, send us an invoice.” With pressure to get them a price, I faxed in a bid based on their parameters, and they immediately accepted.
I learned too late that the “touch-up” by other trades was in fact an all-out remodel and rebuild of the interior and exterior; debris was extensive. Unfortunately, the contractor’s field supervisor was inept and disorganized, and the project manager was not on site but stuck in an office in town. Other trades meant that our production was about half the rate we expected. Despite complaints, nothing improved, and we had to bring in an extra crew to avoid the deadly liquidated damages provision (buried in a sub-paragraph in the contract).
Our experience in getting paid was an adventure every month. One time they “lost” our requisition; another, it was approved but the “checks had not been signed”; I blew my top when told, “Hey, we had extra expense this month, so we held over your requisition until next month.”
Change orders were an aggravating problem. The field supervisor would only acknowledge extra work being done but could not approve a change involving extra money; the project manager who could approve was adept at questions and delay tactics. We ended up doing extra work with no hope of getting paid just to keep the job going. By the time we finished the job, we learned their definition of “substantial completion” was different than ours. They had used us as a “bank” by delaying payment or withholding extra amounts on most requisitions and checks. At one point, our accounts receivable was 150 days.
There was so much frustration and effort in dealing with them that I was willing to follow a “scorched earth” philosophy to collect. Cooler heads prevailed, and we had our attorney check them out. He found out the contractor was underwater on the job, had made major mistakes and was being sued by the owner who had stopped progress payments. With the threat of other lawsuits, we reluctantly accepted final settlement on the job at about sixty cents on the dollar. I found out that other holdouts ended up with a third of that a year later.
So, why am I making such a big deal of my sad experience? I didn’t do my usual research and check this contractor’s reputation or run his Dun & Bradstreet report. I was steamrolled into being a banker for a quagmire-type project. There may come a time in the next year where a job falls in your lap; be suspicious and ask questions. Let my mistakes and failure to thoroughly read the contract be a lesson to you. The last thing you need is an unprofitable job on which you’ll make a marginal return or never collect.
If it looks too good to be true, it probably is, unless you’re collecting cash in advance. The best-looking contract cannot trump slow or no payment. When offered a high-profit deal, it may not be your sterling qualifications but that the buyer hasn’t paid his last flooring contractor.
Copyright 2020 Floor Focus