This Podcast Is Episode Number 520, And It's About The Problem With High-Profit Jobs In The Construction Industry Many problems can be traced back to the "Halo Effect," which happens when a contractor thinks, "We are so good at (fill in the blank) we should expand into (fill in the blank)." The most common situation is when a residential remodel contractor with a reputation and a substantial company generating 15% or more profits decides to start building custom homes. Or the opposite, a home builder who decides to branch out into residential remodeling. Residential Remodel Contractor Building A Home The processes, tools, equipment, materials, skills, and invoicing procedures required to build a house from the ground up differ entirely from modifying a home with people living there. The remodeling contractor uses a form of "Cost Plus" or "Not To Exceed" to provide the homeowner with the scope of work and a contract price the bank needs to finance the construction. That process can work for a residential remodel because the house is already in place, which helps define the size and scope of the project. The size and scope of the homeowner's dream house are limited only by what the building codes will allow. When the labor, material, other costs, and subcontractor bills pile up, the remodeling contractor asks for a construction draw and is told the bank needs a filled out and submitted. Then it will take a while for the bank inspector to review the project and approve the draw. This is when the remodeling contractor figures out they are providing all the labor, material, other costs, and subcontractor expense up front and getting paid only when and if the building inspectors, architect, bank, and the client agree to the draw request. Home Builder Doing A Residential Remodel The processes, tools, equipment, materials, skills, and invoicing procedures required to modify a home with people living in it differ entirely from building a house from the ground up. New construction workers are more like cave dwellers with a brute-force mentality. If something doesn't fit or will not work the way they want, they use more brute force until it does. Every problem has one answer "Brute Force." The same goes for managing sub-contractors and suppliers. The home builder bids on a residential remodel project using the exact square foot costs they have continuously operated in building houses and quickly discovers the meaning of "Hidden Costs." These costs include dry rot, cracked foundations, broken plumbing, bad wiring, worn-out HVAC, and other unpleasant surprises. Homeowners living in the house while the remodel is happening do not ever want to be without water, lights, heat, and privacy, and they don't know how much debris, dust, and noise is involved in a remodel. Homeowners want to believe everything is included in the original contract price, including the little extras they think of along the way. When it comes to change orders, that is something most home builders do not understand. They don't have a process for tracking them, let alone pricing and getting paid for doing them. Most trade contractors and subcontractors working on residential remodel projects understand change orders and how to pressure the builder to get paid. Too often, this is the main reason home builders go bankrupt - cash flow issues. The Solution Most construction business owners who use accounting software quickly master the basics. They automate processes like invoicing and payroll, track expenses, and view real-time financial reports to manage cash flow and make better business decisions. The problem is that high-profit jobs have a way of turning into low or no-profit jobs, and in some cases, they can bankrupt your construction company because you bid on the project using whatever model you are accustomed to using, and in the end, you wind up with cash flow problems. But what many business owners don't take advantage of are key insights that...