Lots of careers are risky and frankly, no career is risk-free. But when it comes to a business that can fail seemingly at the tip of a hat, for any number of reasons, real estate contracting sits at the top of many people’s list. Some of the reasons behind such failures are obvious and others fester and grow over time, only revealing themselves once it’s too late. While the size and scope of the failings may vary, oftentimes, the reasons behind them fall into one of three broad categories.
Failure #1: Overextension
Contracting firms are always hungry for work; after all, it’s the lifeblood of their business. Accordingly, a tendency is to take on too much work, and not have the requisite resources to complete it.
Firms also can take on projects outside their scope of experience. Entering new specialty areas is both difficult and risky; it can expose contracting firms to a number of potential liabilities that may ultimately be their undoing.
There are several warning signs that point to overextension:
Consider the following solutions:
Failure #2: Operational Deficiencies
These types of problems generally manifest themselves in one of two ways:
If possible, contractors should strive for contractor-friendly billing contracts that allow them to bill work early. This means the client’s or customer’s financing pays for the work to be done—not the contractor.
Additionally, performing job costing correctly is essential. When it’s not done properly, it can be difficult to identify poorly performing jobs and being able to consistently bid work correctly. For example, when the project manager doesn’t get accurate costs into the job, the result can be missing costs and the evaluation of results based on bad data.
So, how can contractors address operational challenges?
Failure #3: Lack of succession planning
Fewer than 33 percent of businesses survive a second generation. So often, this is because they did not devise and implement a proper succession plan that ensures the firm is in good hands when a transition ultimately occurs.
When it comes to proper succession planning, there’s a multitude of questions and issues to consider, including what type of succession plan to use (e.g., Employee Stock Ownership Program (ESOP), sale of stock, new company, buy-in).
Some strategies for contractors to consider when it comes to succession planning:
Set key milestone dates for implementation of a succession plan (e.g., research exit strategies, identify potential successor, set up training for successor, meet with advisors) and communicate with stakeholders regularly.
For more ideas on succession planning with buy-sell agreements, click the following link: https://blog.lgt-cpa.com/the-importance-of-buy-sell-agreements
Do you have questions about ensuring the success of your contracting business, or other contracting challenges? We are happy to help your business.
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