Re: Business 101
I posted this reply earlier to a fairly obscure topic, so probably few saw it. The guy was considering moving from residential to commercial work. I am posting it again here, as this seems the most appropriate topic. I hope it helps someone. I'm sorry it is kind of long, but I'm trying to cover a lot of the basics, and save someone from some big losses.
3/23/05 ? reply posted to Topic title - "Dabbling into other parts of the market":
Getting into commercial work can be a big step, depending on what kind of work that you do and how large it is. It can become a giant game of "chess" where actually doing the electrical work is only a small part of the time and effort that you eventually devote to a particular project.
The business aspect of it is at least as important as being able to perform the actual electrical work. I've seen many good commercial electricians try their hand at being an electrical contractor, and fail. It was almost always because they thought that is was enough to just be able to install the electrical work. In truth, that is only one part of what is required to be a successful commercial electrical contractor.
To start with, the estimating and bidding technique is much more involved.
You should first do a detailed review of the complete plans and specs to determine exactly what your scope of work will be -- and sometimes that scope or work can hinge on just a few key words.
Generally, in the event of a conflict in requirements, the specs will overrule the plans. In the real world, this is usually backwards -- the plans are usually drawn for the specific project, but the specs are often "canned" and will have stuff in them that shouldn't apply or that contradict the plans. Be sure you understand the hierarchy of how conflicts in "requirements" are decided.
Be sure and look at the architectural and mechanical drawings and specs, too, since they sometimes have electrical stuff shown there. Also read the "General Conditions" (Division 1) of the Specs, as this will set many of the ground rules for the project, and will directly affect you.
The estimate will be a detailed bill of material of everything that is required to install the project. Then labor units are applied to that bill of material to determine the "book labor" (i.e. the man-hours) that normal conditions will take for the installation. That book labor is then factored up or down to adjust for specific job conditions (like a compressed work schedule, etc.).
If you miss some of the materials required, you miss both the cost of the materials and the corresponding labor hours in your estimate. But you have to furnish them anyway.
You have to look at the total estimated man-hours compared to the time frame that you will have to perform the work within to see what the man loading will have to be. I've seen a lot of small contractors just look at the plans and say "I can do this work in this many days". They were almost always wrong, and underestimate how long it would take them.
Unless they have direct experience at it, no commercial/industrial electricians are qualified to put together a bid. That is a very specialized skill.
Are there some large commercial electrical contractors in your area? One of their estimators might be willing to do estimates on the side for you if it doesn't conflict with the work his company does. Also, a lot of retired estimators do small estimates and bids after they retire. Find one and get him to teach you the ropes. You'll find that it's much easier to find qualified commercial electricians than it is qualified estimators.
There are some quality estimating services available. They will cost less than a bad bid will cost you.
It's not unusual for a GC to try to tell you how much the electrical work should run on a particular project. They will tell you that you should be able to do the work for $X and make money at it. Never fall for this. If you don't know pretty accurately how much it should cost you to do a particular project, then back away from it. The odds are the GC will bait you (they learn to read when a sub doesn't know what they are doing).
Timely payment is often a problem. You are usually only paid monthly, and retainage (typically 10%) is usually withheld. Work that you do in March will be billed around the end of the month. You will usually be paid around the end of the next month (in this example the end of April). That is if you and the GC are getting along -- they can/will use your payments as leverage against you.
I've seen EC's be 3 months into their work before they ever get paid anything. On some small jobs, their work is finished before they are ever paid anything. Make sure that you have the capitol to handle that type of cash flow (or lack thereof).
Contract language, provisions and requirements can differ widely and can kill you. Most GC's use their own standard contract -- guess whose favor that is written in (hint, it ain't in your favor). Use a standard AIA or AGC subcontract if you can. Those are reasonably balanced. The AIA form is probably the most evenhanded. I recommend that you qualify in your bid that your price is based on the use of a standard AIA subcontract. If you don't know how to read and understand contract language, then go over the contract with an attorney that is experienced in construction law and litigation. Construction law is a very specialized field, and an expert in it is worth his weight in gold -- a general purpose attorney will get you into trouble.
Be sure that the scope of work that was in your bid actually ends up in your contract. The GC will typically write your scope such that you will do all of the electrical work required on the project. This contract language will supercede your "bid" scope of work. If you sign a contract like that, you will be responsible for all of the electrical work on the project, whether it was in your bid or not.
Be sure and look for insurance requirements (Owners and GC's often require that you carry them as an "Additional Insured" on their policy.) They often also have a clause in their contract that makes you responsible for their mistakes and negligence as well as for your own. In many states, this clause is legal and will stand up in court. Review insurance requirements with a good insurance agent that is a specialist in construction work. A general purpose agent will get you into trouble.
A good Commercial General Liability policy is essential. If someone gets hurt or something gets damaged and you are named in the lawsuit, your insurance company will have to pay for your legal defense. Without liability coverage, you will have to pay for your own legal defense. You can be included in a suit and have to defend yourself, even if you did absolutely nothing wrong. You will have to pay for the legal costs just to prove that you shouldn't be a party to the suit.
Be sure and verify that someone is providing "Builders Risk" insurance coverage, and that you are an "Additional Insured" on that policy. Builder's Risk is what pays to have a job rebuilt that is 90% complete when a tornado blows it away or a fire burns it down. Otherwise, you can be obligated to do your work over again without any additional payment.
Find out if the GC is providing a "Payment Bond" to the Owner. Is it a partial bond or a 100% bond? Make sure that you clearly understand everything that you must do to obtain payment protection under that bond. Simply not providing a timely written notice to the bonding company when it is required will cost you payment protection under the bond. To keep bond protections in place you must do everything precisely as prescribed by law -- ignorance of the requirements will not help you collect. Bond protection detailed procedures vary from state to state, so know the rules in the state you are working in.
Also be sure that you understand the lien laws in your state as they apply to commercial construction. If you miss a filing deadline - too bad! If you don't file the proper documents in the proper form - too bad.
Be sure and clarify if you do or do not have temporary power and lighting included in your contract. This can cost a bundle.
Be sure and look for specified performance time frames and "Liquidated Damages". Remember that the EC performs most of his work in the last half (or less) of the building process (and schedule), and you and the painter are always the last guys on the job. Slow progress at the start of the job will mean you are working under a compressed time schedule to make the deadline -- that may well mean multiple shifts and/or overtime (at your own expense) or you'll pay big "LD's".
Don't do any changes on a verbal agreement -- if you do, you'll end up donating that work. Get it in writing first before you do it (at an agreed price, with extra time added to you contract time).
Watch for a trash, site and building cleanup sharing clause. It isn't unusual for the GC to split up all of his building and site cleanup costs and dump fees between all of the subs, even if you took care of all of your own trash.
Good documentation will eventually make or break you. Learn to be good at paperwork or stick to small stuff.
Make sure that the owner is solvent and has the money to pay for the project. They can go bust leaving you with an unpaid billing.
Make very sure that you thoroughly check out a GC (especially if they're from out of state). Do they have a reputation for slow pay or no pay? I've seen many small electrical contractors go under from underhanded GCs that give them work, pay them just a little, string them along, and end up paying just part of their contract amount. Usually, the small EC goes bust because he doesn't have the money to pay the legal costs to collect. Lack of capitol usually puts them under before the GC has to worry about them.
Some of these things may not apply to small work with people that you know. But if you get into any larger work with GC's that you don't know, all of them will eventually matter and other things that I haven't thought to mention, too.
My advice to a number of small contractors has always been -- don't risk more than you can afford to lose. Never take on a single project that could bankrupt you if it goes badly or if you don't get paid.
Also, consider how this project will affect your ability to do other work for clients that you already have. Don't overload yourself to the extent that you lose the business that paid for your current success.
Stick with small projects until you learn the ropes. Don't try to grow too fast. Don't take on too large of a single project - one that can break you if it goes wrong. Often it goes wrong for reasons that are completely out of your control. You can do good work and the project still turn sour. Limit your risk to what you can afford to lose without going broke.
The main problem areas aren't new, just bigger and more complex:
1. Is your price high enough to actually do the work that is in your scope of work?
2. Will you get paid? How fast, how often, or ever? Do you have the cash set aside and available to cash-flow (i.e. bankroll) the project if your payments are delayed or withheld? Borrowing money to do it is very risky.
3. Do you understand your contract requirements and provisions and do you agree with all of them?
4. Will your scope of work remain what you intended and planned for, or will there be more work added that you didn't anticipate and that you'll have to perform without any additional money? Remember that if the GC is obligated to include some electrical work that isn't included in your bid, they will try to force you to do it. If it's a choice between their pocket or yours, it will be yours.
5. If things go bad, what recourses do you have? Are those recourses practical, or will they cost you more money than you stand to collect? Attorneys cost a lot of money and don't usually take on construction suits on a contingency basis, so you're paying by the hour. If you win, you may still not recover all of your legal costs.
6. Are you inadvertently taking on liabilities that you didn't recognize and never anticipated?
7. Are you technically qualified to do the work involved? Do you have enough experience and knowledge?
8. Do you have the manpower, tools and equipment and other resources required to perform the work in the time-frame required without holding up job progress?
No answers to any of these questions are big red flags.
Nine times out of ten, everything will go OK -- pretty much as you planned. But sooner or later, the tenth one will arrive and you will bite a sour project. If you plan ahead and are prepared, you'll probably survive it. If you're too trusting and just assume everyone will treat you honestly and with honor and will always tell you the truth -- prepare to have your pocket picked.
Are you performing as a sole proprietor or are you performing as a corporation or other legal entity that will shield you personally from big liabilities? Be sure that you understand all of the pros and cons of each form of business entity, including their different tax structures.
Sorry if I rambled a bit here, but there is a lot to learn about commercial/industrial/governmental/military construction in general, and the associated electrical work in particular.
Also remember that if a job looks too good to be true, then it's probably not true. Fish are caught every day with nice smelling (to them) bait. GC's are not in business to knowingly give you high profit jobs -- they plan to keep as much of the money as they can (sometimes including yours, if you let them).
I'm not trying to scare you away from doing commercial work -- it's good work and there is money to be made there. But there is usually a lot of competition, so it's no gold mine. I'm just trying to forewarn you about some of the traps and pitfalls to watch out for -- forewarned is forearmed!
Posted on 3/29/05:
For those that aren't familiar with "Builders Risk" insurance (I mentioned and described it above) -- A normal policy will also cover on-site vandalism repairs, on-site stored materials that are stolen or damaged, and in-transit materials that are lost or damaged. It will NOT cover your lost or damaged tools or equipment -- for that, you will need an "equipment floater" policy.
The cost of a Builders Risk policy is small -- For a $300,000 building (the electrical would probably be about $30,000 to $50,000 of that), it would cost the Owner or the GC about $500 (a one-time premium) to take out a policy that would cover a year-long construction schedule. Everyone, including all of the subs, would be covered by the policy as long as all of them were listed as "Additional Insured" by whoever (Owner or GC) took out the policy initially (you can also be added after the fact if you got left out).
To make sure that you are covered by a policy, get a standard "ACORD" "Certificate of Insurance" directly from the insurance agent that issued the policy (not from the Owner or the GC). The Certificate should come directly from the Agent to you. It should be an original certificate. It should show that you are an "Additional Insured" on the policy, and should name the Project. It will have the name of the insurer (i.e. the insurance carrier) and the policy number. Look up the insurer on the "A.M. Best" website to verify their financial rating and that they are a real company. Since you are an "Additional Insured" you can even get verification directly from the insurance carrier that the policy is real (fake documents do happen).
If anyone finds this useful, I can post more stuff later, like things to watch for in subcontracts, clauses and terms that you should make certain are in your subcontracts, estimating tips, etc.
