When in Over Your Head, Pause ... and Consider

You may call Todd Craig any number of things. Felon is what the court calls the 31-year-old Bucks County, Pa., home improvement contractor who ruined a client’s septic system, stole rental equipment, lifted the household silver, and wrote bad checks. But in explaining his actions and attempting to avoid a prison term, Craig, through his attorney, reached for the description that is no doubt most true, at least to Craig. He found out, he told the judge, that he wasn’t capable of running a business. He was in over his head. And once that was apparent, all else followed.

The judge, unfortunately for Craig, wasn’t buying it. He sided with the prosecutor and his argument that the fact of dishonesty and theft trumps the excuse of incompetence. He sentenced Todd Craig to two-to-seven years, plus probation and $90,000 in restitution.

Moment of Crisis

This type of ending to once-aspiring entrepreneurial efforts in contracting happens more often than you may think. Search “contractors convicted of theft” on Google and half a million links pop up. Craig only did what a small minority will choose to do in a business where survival rates—as compared with industries such as mining, manufacturing, transportation, and distribution—fall lowest. A study released on 2012 found that 36.4 percent of construction companies founded in 2005 were still in business in 2010.

Why would anyone choose this for a career? Probably for the simple reason that many know how to do the work—a seemingly foolproof advantage. Craig could do the work. He insisted to the sentencing judge that he was a competent construction worker. And he may well be—if he were working for someone else. He could even manage a job, up to a point. But managing others, and handling money, overseeing the business of a company with obligations to suppliers and clients, was more complex and many-sided than he had foreseen or was prepared for. On one of his jobsites, police found expensive rental equipment with identification numbers filed off, concealed under tarps. “Obviously I am not very good at multitasking,” he told victims, in an apology statement. “I am a horrible business owner, and will never own a business again.”

Alternatives to Disaster

The irony is that Craig’s story might have had a different outcome—something well short of the disaster that ensued—if he had chosen to do a few things differently. Home improvement contracting may be “a hard way to make an easy living,” as an old industry saw has it. But solo operators are not forced to go it completely alone. A number of options exist when it comes to business advice and assistance specifically for residential contractors. Some of these cost serious money, some (for example, membership in professional associations such as the National Association of the Remodeling Industry) are inexpensive, some are even free. Tales of contractors sharing their hard-won experience with novices and asking nothing in return abound. Peer networking groups consisting of successful contractors who regularly meet and share tips, techniques, business insights, even confidential financial data, include Remodelers Advantage and Certified Contractors Network, both with decades of history and many seasoned members who’ve seen it all, weathered it all, and made a lot of money in the process. These organizations have helped dozens, if not hundreds, of businesses survive. There are also freelance experts who are former or current company owners well versed in the hazards of company ownership, such as Mark Paskell and Shawn McCadden, who blogs regularly on hiring, taxes, backlog, subcontractor management, and just about anything that could trip up someone trying to run a successful contracting business.

Any of these groups or people would have suggested that Craig get an immediate handle on his finances. That doesn’t mean drawing up the kind of complex, multi-page business plan required for a loan application. It means developing an informal plan for internal purposes using job costs to set quarterly and annual sales and margin goals as well as other benchmarks (marketing expense, for example), and constructing an incremental chart to gauge future progress—or lack thereof.

 “Writing out your business plan forces you to review everything at once: your value proposition, marketing assumptions, operations plan, financial plan and staffing plan,” notes Steve Robbins. “You'll end up spotting connections you otherwise would have missed.”  

Taking Care of Details

The other course that can reduce the chances of failure is hiring a non-industry specialist, particularly an accountant, to manage some specific aspect of the business—especially finances. Many small-company owners, struggling to get new jobs, would ask themselves how, if they can barely afford to keep up with supplier and subcontractor invoices, they can afford to pay for the services of an accountant.

But, notes business website Xero.com, that’s the wrong way to pose the question. Instead, ask yourself what your time is worth and how much of it you’re spending trying to do something you’re not really trained or fully equipped to do well. “For example,” notes the website, “let’s say it takes you 10 hours to do your taxes, and your time is worth $100 an hour. That’s a cost of $1,000 to do your taxes yourself. And there’s always the risk you’ve made errors—especially if you’re multitasking like most business owners."

However, if you get an accountant to take care of time-consuming tasks such as taxes, it’s quite likely they will cost less per hour than you would pay yourself. You’ll not only have extra time to free you up to generate revenue, but you’ll have peace of mind that an expert is taking care of the details.”

The Cost of Walking Away

The inability to manage the money coming in and out of a business, that is, cash flow, to pay suppliers in a timely manner and collect from clients, trips up more contractors than anything else. According to Marcus Towner at LinkedIn, the No. 1 reason why contractors go broke is cash flow. "More specifically," he writes, "not receiving payments when they are due. This can send any business to the wall very quickly.”

In the home improvement business, where short-cycle jobs such as roofing, siding, and windows, turn quickly and payment is often collected within 60 days of contract signing, financial ineptitude can take other forms. Either contractors don’t charge enough because they don’t know their expenses, or they spend the deposit money they collected for the job on personal items or use it to pay bills and other expenses. Then they end up short when it comes time to buy materials and hire labor, turning the job into a nonstarter for the one-truck operator. Not showing up can result in any number of problems, from civil to criminal action. Angie’s List notes that there are three charges a contractor who walks away can face: theft by intent, fraud, and property damage. Penalties are prohibitive. Ask Joseph Petrick, who collected $6,700 from a Scranton, Pa., couple for home renovations, then did no work. He faces seven years in jail and $15,000 in fines. “The prosecution will be requesting that he also pay restitution,” notes the Scranton Times-Tribune.