Construction Accounting
Editor's Note: Dan de Roulet, co-founder and partner program manager for Knowify, is back with his series on insights for working with clients in the construction nice.
Want to know one of the first things you, as an accountant and business advisor, should review when taking on a new construction client?
Their purchasing process.
Why? Because in many cases there’s a giant sack of gold waiting to be found there.
Subcontractors
Too many residential GCs have their “guys” – subs that they use over and over for certain types of work. This is a mistake. GCs should put work out to bid whenever possible, not only to ensure that their preferred “guys” stay honest with their prices, but also to build and qualify a broader collection of service providers. More qualified subs means more flexibility when things get busier.
For GCs working with semi-captive subs, getting them to qualify new vendors may take time. Propose that they try a new guy on a small job, and, if they like him, include him in future bids. Keep going until you have relationships with at least three or four vendors from each of the major trades (plumbing, HVAC, electrical, painting, etc.).
Materials
For jobs with over $10,000 in materials, contractors (especially subs) should be sending out a materials list for quote. We know that many contractors like to fall back on, “I order from Larry at XYZ Supply – he knows my business, and that’s the way we do things around here.”
You need to help these contractors see that this phrase actually translates to: “I don’t want to make more money.”
Materials costs can be more than half the total costs of a construction business (depending on the trade). Even if we only assume a modest 5 percent savings, using a simple RFQ process can save a $1,000,000 construction business more than $25,000 every year. I’m sure Larry is a great guy, but something tells me your construction client would rather have the $25,000.
To get started with RFQs, compile a spreadsheet or use Knowify to create a purchase order listing the materials you need (choose “do not display prices”). Make sure you include things like the manufacturer’s part number where applicable. Send the sheet to two or three vendors, and invite them to quote – then wait for the response.
As tempting as it will be for your subcontractor to take a lower bid from a new vendor back to his buddy Larry, try to stop him; giving the order to the new vendor will ensure he’ll continue to respond to your RFQs in the future.
There’s an added bonus here: By doing a careful itemization of expected materials, you should be able to reconcile at the end of the job to see how well your client did with his initial estimates.
So, not only will you be saving him money, but you'll also be helping him improve as an estimator.
Welcome to Super Hero status.
Dan de Roulet Knowify
Dan de Roulet is co-founder and partner program manager for Knowify LLC. de Roulet, who has a long history as an entrepreneur and business developer, strongly believes in the potential of the Knowify software to significantly streamline construction company operations.