October 17, 2016

It is not easy running a construction business. There are many pitfalls and ways to lose money but if you follow some basic steps you can not only make a living but become very wealthy. Many successful construction contractors have learned there are certain things you absolutely must do right all the time and certain skills you must have or acquire in order to make it in this very competitive industry. In this article I will summarize what it takes to be a successful construction contractor in their order of importance.

Most Important Factor: Hands On Experience

Do not even think about starting a construction contractor business unless you have at least five years of broad (meaning general, not specialized) construction experience. The only exception to this is if you intend on specializing in one area and one area only. We call this a niche. Niche’s can be very profitable, but they can also go away, change or be replaced by technology, new products, changes in the industry or societal changes. The best chance for success in the general contractor business is to gain experience doing everything. This general experience has many benefits. It gives you the ability to identify and hire competent individuals, fire incompetent ones, evaluate good work product and identify poor work product. Probably the most important thing it gives you is the ability to transition from being a technician to being a manager. The best experience comes from small to mid-sized construction companies that require you to be a jack of all trades. Larger companies have a tendency to pigeonhole you into niches. That is fine if your business model is a niche, but if you start a general contractor construction business with skills in only a few niche areas, you will fail unless you hire to your weaknesses.

Second Most Important Factor: Outstanding Accounting System

If you do not have a sound accounting system your construction business will eventually fail. This CPA has witnessed this too many times than I care to recount. Sound accounting systems allow you to evaluate whether or not you make a profit on a job by job basis. Going with gut instinct is dangerous and fraught with risk. A sound accounting system helps you identify those things you do right on each job as well as the mistakes you’ve made. Numbers don’t lie. Unfortunately, my experience has shown me that most construction contractors pay little attention to their system of accounting. There is a fear that proper accounting will set the business owner up for higher taxes. Thus, cash received on a job and cash disbursed go unreported in an effort to avoid tax. What a mistake. I don’t care how great your gut feeling is on each job, if you don’t have an accounting of every penny on each job, you can rest assured you are flying blind and losing money on each job. You will go out of business and your family life will suffer. If you decide …

Public liability insurance is an important insurance policy that protects your business during the time of adversities. Especially, if your business handles risky activities like construction, plumbing, etc., or if the public enters into your business premises like in retailing, then this insurance plan is a must have. Owing to the uncertainty of accidents and the huge costs of legal claims, your business may run into crisis if you are not properly guarded by the right insurance plan, i.e. public liability insurance.

This article gives you a little insight into the consequences your business might face, if you do not have public liability insurance coverage.

Financial burden: Depending on the damage or loss caused to the third-party, the amount claimed may vary. But the third parties generally sue the company for heavy amounts as small amounts do not matter for both company and the sufferers. These claims will add up to the company’s existing costs and become a financial burden to the company. Managing the finances between the company’s needs and legal claims is not wise as it halts the business operations.

Legal battles: Apart from the amount to be reimbursed, a company has to face legal battles which occur as a result of lawsuits filed against the business by the third parties. The legal costs and expenses are generally high. You need to deal legal authorities with utmost care. These legal battles are hectic. The time and effort required to fight these legal battles is also high. It diverts you from your core business. But if you have a public liability policy, the insurance company assists you and takes charge in fighting these legal battles till the case is closed, besides paying the legal expenses.

Chances of bankruptcy: Inability to pay the outstanding charges claimed by the third parties may lead the business to go bankrupt. Unless a business has outstanding capital, it cannot afford to pay these legal expenses. Moreover, you are needed to provide additional financial assistance in the form of medical aid as in case of accidents and repairing charges in case of property damage, besides paying the lump sum amount and the legal costs.

Investment at risk: In case your business is facing a third-party legal claim, and if you are in a position where you cannot pay the claimed amount instantly, then, the bank or the court gives permission to seize your various monetary investments or fixed assets such as land, furniture or machinery to cover the legal expenses and the claimed amount.

Lack of mental peace: With the all the above issues, you will surely lose mental peace. These legal claims not only eat away the business’ time and effort but in some cases may ruin the business’ existence. Legal claims should be dealt instantly; any delay will only aggravate the tension and loss.

A good business will always be prepared for the future crisis. Having a public liability insurance policy is a wise decision. It provides timely financial help to pay the …

The analysis of a real estate investment calls for an understanding of the time value of money. Primarily because real estate investors are aware that possessing $100 right now is preferable to acquiring that same amount of money in one or more years due to the fact that inflation erodes purchasing power over time.

The significance of time value of money can be illustrated this way.

Imagine that you just won a $1,000,000 lottery and will be paid in equal $50,000 payments over the next 20 years. If each future payment is reduced 8% annually the present value of your twentieth payment is worth just $11,586; the sum total of all your winnings after the 20 years has a present worth of about $530,180.

So it is with the value of money collected over time-its power to buy things becomes less and less as time goes by. Fair enough.

So let’s consider the basic concepts and definitions behind time value of money.

Present Value The value or worth (today) of a cash flow or series of cash flows that will be available at a specified time or times in the future. For example, our lottery winnings have a present value of $1,000,000.

Future Value The future value or worth (tomorrow) is what a cash flow or series of cash flows will be worth at a specified time in the future. In this case we saw that the sum total of our lottery winnings, when collected over the twenty-years, have a future value of $530,180.

Compounding This is the mathematical procedure for determining future value. When money is placed in an interest-bearing account, for instance, it is compounded by some rate that grows it to a larger amount up to some specified time in the future.

Discounting This is the mathematical procedure for determining present value. In this case, we saw that the final $50,000 payment we collect in 20 years, when discounted back annually at a rate of 8.0%, has a present value of just $11,586.

Annuity This concerns a series of equal cash flows made at equal time intervals. The $50,000 lottery payment we collect each year for each of the next twenty years, for example thanks to our good fortune, would be an annuity. It would not qualify as such if it were varying amounts of cash or at irregular intervals.

Annuity Due This constitutes a series of uniform cash flows that are made at equal intervals with the payment being made at the beginning of each interval.

If we collect a $50,000 payment immediately along with a payment at the beginning of each future year, for instance, then our winnings would fall in this category.

Ordinary Annuity This constitutes a series of uniform cash flows that are made at equal intervals with the payment being made at the end of each interval. In this case, say we don’t collect our first $50,000 payment for twelve months and each of our other payments every twelve months thereafter. Then …