9 Contractor and Client Strategies for Protecting Your Project

The Big Risk

Recent news stories of local contractors facing criminal charges highlight the unfortunate consequences of financial mismanagement in the construction industry. The reality is there are even more of those of stories that have not made the news. Unfortunately for the reputation of the construction industry, we regularly must come behind a defunct or “vanished” contractor and finish the project at the client’s expense.

Just this past month, a client hired a contractor to install a larger interior door into a room. The contractor disappeared mid-project, left his tools onsite, and never returned. The owner was speaking with us regarding a larger renovation in another part of the house and asked us to take a look. What did we find? We found the door was removed, and the opening was indeed made larger. We also found the header (a board above a door) that was cut and removed to accommodate this larger opening. That wall was a load-bearing wall, and cutting this board was a big mistakes for the structural integrity of the home. To top it off, the owner told us they even questioned the contractor about cutting that header while he was there.

Earlier this year, I spoke with a contractor who didn’t bid a job well and didn’t see a path to finish the project he had started. He wanted to make good on his obligations, but could not because he didn’t have enough money to cover the costs to complete the project. He was desperate. Credit cards maxed out, vendors wanted to get paid, and his integrity was at stake. He felt his only hope was to hang on long enough for the deposit of a much larger project coming in so he could finish.

While it's easy to point fingers, the truth is that both clients and contractors play a role in preventing projects from spiraling out of control. Let's explore some actionable steps both Clients and Contractors can take to protect themselves and their projects.

Client Strategies for Choosing the Right Contractor & Safeguarding Your Investment

1. Thorough Research and Due Diligence:

• Don't just go with the lowest bidder. Thoroughly vet potential contractors: check references, review their portfolio, and verify their licenses and insurance.

• Look for signs of financial stability: inquire about their experience, their current workload, and their ability to handle your project without overextending themselves.

  2. Clear and Comprehensive Contracts:

• A well-drafted contract is essential. Make sure the scope of work, payment terms, and change order procedures are clearly defined. If the contract is one page, it is too short.

• Include provisions for handling disputes and unexpected delays.
  

  3. Open Communication and Collaboration:

• Maintain regular contact with your contractor throughout the project.

• Address any concerns or issues as soon as they arise. If your gut is telling you something is wrong, it probably is. Don’t ignore it.

• Foster a collaborative relationship built on trust and transparency. You must be able to approach your contractor with issues you see and the contractor must be able to also approach you with issues. That’s two way street is essential.
  

  4. Payment Management:

• Negotiate a payment schedule that aligns with project milestones.

• Avoid large upfront payments. While some deposits are unavoidable, heavy upfront deposits are a red flag. (At MCG- We don’t charge an initial deposit on work.)

• Consider using escrow services or retainage to protect your investment.

  5. Red Flags:

• Be wary of contractors who:

  • Pressure you for large upfront payments.

  • Offer unusually low and vague bids.

  • Have a history of disputes or unfinished projects.

  • Lack clear communication or transparency.

  • Are not active in the community and, therefore, not held accountable.

Contractor Strategies for Maintaining Financial Health & Avoiding Pitfalls

1. Sound Financial Management:

• Develop detailed budgets and forecasts for every project.

• Maintain accurate records of income and expenses. Job Costing is foundational to successful expense reporting.

• Establish clear invoicing and collection procedures.

• Regularly review your financial statements.

• Consider seeking professional financial advice. Outside accountability is essential.
  

2. Effective Project Management:

• Clearly define the scope of work and set realistic expectations with clients.

• Maintain open communication throughout the project.

• Utilize project management software to track progress and manage resources.

• Identify and mitigate potential risks. Don’t ignore them.
  

  3. Strategic Business Development:

• Bid selectively on projects that fit your expertise and financial capacity. It’s easy to overextend when you are in demand.

• Qualify potential clients thoroughly.

• Diversify your client base to avoid over reliance on a single project or client.

• Invest in marketing and sales to ensure a steady stream of new business.

  4. Professional Development:

• Join industry associations and participate in continuing education programs.

• Stay up-to-date on industry best practices and new technologies.

• Seek mentorship from experienced contractors. Believe it or not, there are people who love to talk about the business part of our construction business. Many of us are an open book.

Conclusion

Preventing project failures and financial difficulties in the construction industry requires a collaborative effort from both clients and contractors. By following these strategies, both sides can protect their interests and ensure successful project outcomes. Remember, open communication, financial responsibility, and a commitment to best practices are key ingredients for a thriving and sustainable construction business.

Additional Resources:

• Associations: https://nefba.com/, https://fhba.com, https://www.nahb.org/, https://nkba.org/,

• Construction Management Software: https://www.jobtread.com,

• Financial Advisors Specializing in Construction: https://ccifp.cfma.org/, https://anabpd.ansi.org/, https://builderbookkeep.com,