Contributors

How to make money and get paid

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28Following on from the previous issue, Brian Seymour focuses on the basics for going it alone as an electrical contractor. Here he outlines how to get the money flowing.

During my years of mentoring, I came across so many lone contractors who completed a small job then told the customer an invoice would be sent.

This usually became a challenge, because there was rarely enough time to sit down and write out the bill.

I advised contractors to take a leaf out of the appliance service sector book and tell the customer they expected to be paid before leaving the premises.

Even if the invoice isn’t straightforward, the basics are simple enough once you have an invoicing system in place. Even if you have a material item with an unknown price, you can call the supplier immediately and complete the invoice.

You can accept cash, credit card or EFT, making the transaction simple and flexible.

If you leave invoicing until you ‘have time’, or until the end of the month, customers will think there is no urgency. Your invoice will be relegated to the bottom of the list and they will pay the urgent ones first.

Overdue invoices

This is related to the previous point – time is always at a premium in a busy small business.

Once again, the squeaky wheel gets the most oil. If you don’t keep up the pressure, an unpaid account may become a troublesome debt.

 

Final payment

Some jobs last for weeks or months and incorporate progress payments.

In such cases it is often difficult to secure the final payment.

This can be made easier by ensuring that all progress payments are right up to date and the final payment is shown as a minimal amount.

 

Profit is not a dirty word

Many people (customers) believe that because you own a business you have a licence to print money.

They don’t understand the different dynamics of a trade reliant mainly on the construction industry compared with a retail business.

Operating an electrical contracting business involves many challenges, including unforeseen problems, bad estimates, cyclical construction cycles, weather and a difficult labour market.

What happens when profitability is inconsistent? It’s crucial to invest in recruiting and training, especially with today’s tight labour market. This will allow you to compete on price and site delivery.

Electrical contractors tend to have cyclical work schedules. If you haven’t saved enough from profitable times to carry you through downturns, your working capital will fall short.

This leads to a tendency for cuts and other short-term decisions that will harm the business in the long term.

 

Customer service

Good customer service and profitability are closely related.

Businesses that provide top-quality customer service also tend to have a good profit record.

It’s a fallacy that the customer cares only about price – quality service trumps price.

 

Construction contracts

Different contract types have different profit outcomes.

In a fixed-price or lump-sum contract, the contractor agrees to perform a specific scope of work for a set price, which can be modified only through a variation order.

The elements of profitability include:

  • Accurate estimating. A good profit is unlikely without a thorough and accurate estimate. Good feedback between site staff and the estimating department is crucial for adjusting the estimating process.
  • Early Purchasing. Materials and services acquired early in the project can often return savings.
  • Well-defined scope. With a fixed price, it is crucial to be clear on exactly what is and is not covered. The site team must understand the scope. It’s not uncommon for site personnel to carry out work because ‘we did it on the last job’.
  • Close supervision. It is essential to monitor site works to ensure the job stays within the estimate. Any variations must be dealt with immediately to avoid antagonising the customer.

Constant upgrading of the final contract value is vital, and this can be done by regular inspection of the site. The final cost must be constantly compared with the estimate to ensure all variations are approved.

A cost-plus contract is common for certain variations, or when the scope of the work is not clearly defined.

This type of contract is often used for fast-track work. The contactor is paid for all material, labour and other site expenses plus an agreed profit margin.

Fixed-price or lump-sum contracts can be very profitable if you have an accurate estimate and can complete the work sooner than the estimate allows. The profit margin will increase, and there will be a greater advantage with cost savings on overheads and expenses.

Set your labour rates to cover all costs. These rates – which will dictate profitability – must include on-site labour plus indirect costs such as travel, material handling, safety equipment, vehicles, machinery, tools and accessories.

Non-productive labour such as supervisory staff (and a partly productive foreman) should be allowed for in the estimate.

 

Monitoring financial claims

The details of site costs and progress claims should be checked daily.

Every time a site worker forgets to write up materials or labour, it eats into profitability and the cost is rarely recovered. Site staff should be trained to record any variations as soon as they occur.

Profitable companies re-invest in the company, which can then provide the best working environment, equipment, training, compensation and support for employees.

This approach ultimately produces a satisfying result for customers and generates repeat business.

About Brian Seymour

Brian Seymour

Brian Seymour MBE, industry consultant and author of 'Electrical Estimator's Labour Unit Manual' and 'Starting Out', conducts regular industry training programs throughout Australia on behalf of the electrical and air conditioning industries.

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