With razor-thin margins and delayed payments as the norm, being financially meticulous is a must for any business in construction. However, due to the always-changing nature of projects and processes in construction, many roofing contractors are caught up in the cycle of “making things work” and falling for these easily avoidable financial mistakes.
Many companies can survive this over several projects throughout the years. However, this spells doom to a roofing company’s longevity and financial health, and can ultimately lead to closed doors.
Any business owner in construction with the goal of sustaining a long-term profitable business must be prudent in managing finances and facing the harsh realities of working in construction. It’s important to know what you must be mindful of.
Here are some of the financial mistakes roofing contractors need to watch out for:
Making accurate estimates is a challenge for any contractor. Many contractors lose out on profits due to inaccurate estimates, what with price fluctuations and cost variance. Usually, this results from basing costing on previous dealings, whereas prices in the market have already changed.
Roofing contractors might do it for simplicity or the desire to submit a bid swiftly. However, it ultimately fails a business in its goal of being profitable for every project.
Some resort to padding estimates which can be financially rewarding in the short-term–if a contract is awarded–but can cause a lot of muddiness in a business’s financials, which ultimately lead to poor money decisions that cloud the actual picture of the state of a business.
Contractors often have to front a lot of the costs associated with projects–materials, upfront labor costs, and other expenses at the beginning of the project.
They rely on the final payment to get their profit covered or may already have the payment for the current project earmarked as capital for the next one. This poses a tight cash flow situation that can be a significant challenge whenever there’s a delay in payments or an unexpected bill comes up.
Not having cash reserves forces businesses to take on debt that is either unnecessary or expensive. Getting a sizeable downpayment at the beginning of each project can be a good stopgap if you’re finding yourself in this situation.
However, putting together a plan to increase liquidity and create a sizeable cash reserve can spell wonders for your business’s financial health and longevity.
3. Change order documentation can lead to financial mistakes
Change orders are part of most construction projects, and they are often decided on the fly, with a handshake agreement with the client. Even if the initial discussion and understanding are through informal channels, ensuring that the additions for labor, materials, and overall work are documented and signed is necessary for any roofing contractor.
You might end up having to cover the cost of additional work and spend time and resources on something that is not profitable or, worse, end a project at a loss.
Before commencing any new work outside what’s contractually outlined, you must ensure the details have been ironed out with the client and that there is a signed agreement. Don’t fall into the financial mistake of wanting to hasten the flow of the project to the detriment of your business goals.
4. Not protecting lien rights is a financial mistake
Mechanics liens are a potent tool that roofing contractors can rely upon to recover funds if a client is unable or refuses to pay despite having received what’s agreed upon. Unfortunately, these incidents are not uncommon in construction.
There are many reasons why a client cannot complete a payment, but thankfully, lien laws protect the contractor. However, the right to file a lien usually comes with responsibilities, the chief of which is the commonly required preliminary notice.
There are variations in the requirements state-to-state, so ensuring that you’ve filed the required notices in the manner and timing detailed in the laws covering the project’s location is crucial in protecting your right to lien. Failing to satisfy these requirements usually results in losing your right to file a lien.
Using lien management software that ensures the accuracy and timeliness of preliminary notices can save you from heartache when faced with a delinquent client.
5. Poor invoicing practices lead to financial mistakes
Sending invoices on time and regularly throughout the construction project allows you to stay top of mind, especially important for clients who deal with multiple projects and suppliers and vendors to pay. These bigger clients likely have pay cycles with cut-offs.
Regular invoicing allows you not to have too wide a gap between payments and increases the likelihood of getting paid on time. Missing a bank draw can mean a delay of almost a month.
Regular invoicing also allows the client to report and address any disputes earlier in the project, avoiding clogging up billing.
It’s also vital that you ensure that invoices are accurate and correctly put together according to their specifications so that regular payments are made.
Using the same markup for every job is the go-to of many contractors. Sure, it makes the job of writing up contracts and invoices easier. But you might be leaving money on the table and could even lose out on customers because of this approach.
There are cases where a lower markup is justified–maybe it’s a more prominent customer who has the potential to give you a steady stream of projects. Big projects can sometimes make lower margins worthwhile because of their size and the client’s stability. Varying the markups in your projects must be part of your overall revenue strategy.
If this sounds like a complicated process, that’s because it is. However, the right roofing software can definitely make it easier.
Set up processes to avoid financial mistakes
Facing financial mistakes earlier on and setting up systems to streamline financial management will pay off in the long run. These processes must be in place to ensure that each project serves the roofing company’s revenue and profit goals.
Relying on short-term views and improvised decisions can trick you into having a warped sense of your business’s financial position. Roofing contractors can avoid most pitfalls by being conscientious about company finances on the same level as their commitment to meeting clients’ expectations.
Hi! I'm Patrick Hogan
Patrick Hogan is the CEO of Handle.com, where they build software that helps contractors and material suppliers with lien management and payment compliance.