5 Torpedoes That Sink Builders
Murphy’s Law was probably written by a home builder. Yet, clients expect a good project that is on time and on budget. Therefore, most of the upside in a project is written into the expectations. That means most of the upside is capped, yet the downside (things that could go wrong) are are almost unbounded.
Sure, we could sandbag our time and budgets a little, but not too much without risking losing the client to a competitor. Just performing to expectations means a lot of things going right, and not much going wrong. And that’s a hilarious notion. Even the best builder can’t completely eliminate problems. In one sense, it’s what we are paid for…to solve them. We can eliminate many of them though, using strong systems and processes. We can also devote extra attention to the big ones, the torpedoes that can sink the ship.
Here is a short list to help avoid a watery grave, so you can keep doing what you love and keep the money you make along the way:
Title Issues (Unknown Easements, Restricted Use, Etc)
This is especially relevant for a builder who buys land to build spec homes. You don’t want to close on a property that has *unknown* easements, deed restrictions, flood plain, or city/neighborhood development criteria.
Guard against it: Get a good surveyor to produce a title survey reflecting all easements and setbacks on the survey. Hire a local permit consultant or architect to perform a feasibility study on the property before purchasing it. If nothing else, they serve as another set of eyes.
Mechanic’s Liens
Your trade partners can file liens for amounts they are owed or believe they are owed. This will cloud the property’s title until the issue is resolved, and that can be expensive and take time. Additionally, many builders don’t know that the suppliers of the trade partners can place liens on the property if the trade partner doesn’t pay them. So, people you don’t even contract with can cause a costly mess.
Guard against it: Work with well-reputed trade partners. Sign ongoing base agreements with them, and don’t permit work without a signed bid (or better a PO). Also, have them sign lien waivers for all payments issued (ideally notarized, as places like Texas don’t recognize them unless they are).
Clients Holding Final Payment
At the end of a project the client may very well be low on funds or out of them. This can create some adverse incentive between the builder and client. It’s not uncommon that clients withhold or negotiate the amount of the final payment for X,Y, or Z reason. In a low margin business such as home building, much of your profits may be contained in that final payment.
Guard against it: Collect change order fees before you perform the work (don’t do it like a bar tab). Sign a contract that allows final payment at substantial completion rather than completion of final punch work. Choose to work with clients who seem ethical and reasonable…your client selection is key to your business.
Expensive Warranty Callbacks
These can often end in lawsuits because the costs can be larger than you can afford. A liability policy or a third-party warranty company should not be blindly relied on here. They may not cover the issue, and even if they do, you will be spending time and deductible payments, not to mention dealing with unhappy clients.
Guard against it: Implement quality control inspections and structured oversight for expensive items like foundation and waterproofing. Hire a consultant if necessary. Go above and beyond, as the downside risk is enormous.
Flaky Insurance
Just as we discussed in Episode 39 with Treacy Duerfeldt, insurance is very misunderstood. There’s a good chance you don’t have a super knowledgable agent, as builder insurance is highly specialized. And even if you do, that doesn’t guarantee that your agent has you insured with a very good carrier, or that your policy covers the things you “assume” it does. There are lots of outs for carriers in anything less than a very strong policy. And with those outs, you are left out in the cold.
Guard against it: Listen to Episode 39. Find a good agent. Educate yourself and read your policy documents. Get added as an Additional Insured with all your trade partners.
Bottom Line
Invest in a solid defensive strategy. It’s not just signing new contracts and marketing for new business. It’s protecting your business and reputation from the myriad things that sink you if you aren’t watching.
BTW, if you are looking to improve some of your company’s systems, head on over to the Building Optimal Shop to check out some of our swag to build a better business. Proceeds go to benefit, Exponencialistas, my non-profit investing in entrepreneurs transforming their communities in Latin America.