You could probably come up with plenty of tangible
milestones in the growth of your business: hiring your first
office person, your first lead carpenter, or your first
salesperson; deciding to hang up the toolbelt and leave the
field; moving your office out of your home and setting up shop
in your own rented office space.
But if these changes aren't initiated and supported by
underlying attitude shifts, your business may not be truly
maturing. Having an office, office personnel, and salespeople
doesn't make a business mature and successful any more than
dressing up in grown-up clothes makes a child an adult.
As long as you see yourself as a person who remodels —
rather than as someone who runs a business that delivers the
service of remodeling — you run the risk of viewing your
business situation as so unique that you do not institute best
Here are some common examples of this attitude, drawn from my
experiences working with dozens of construction
• "If I used that kind of markup in my area, I'd
lose all my customers."
• "My guys just won't fill out timecards
• "I'm not good at paperwork, so I don't keep
• "I can't leave the field because I don't have anybody on
my crew who can take over."
• "I can't do change orders that way because my
customers wouldn't accept it."
These are all familiar traps. But once you figure out that you
have to make decisions based on the needs of your company
— an entity separate from yourself — then you can
reach a degree of objectivity that will help in situations
where waffling would otherwise prevail. For example, as an
owner, you may decide to do an unprofitable job ("it's my
friend, it's just a small job, it'll be a good filler"), but
it's harder to justify committing resources to an unprofitable
project when you think in terms of what's best for the
Divorce the challenges your business is
facing from your own shortcomings.
Recognize That Your Business Is Not an
Extension of Yourself
As soon as you begin to see your business as a component of a
larger entity (the remodeling or custom-home industry), you are
more likely to become open to and interested in learning how to
do things better. Owners who believe that their companies are
extensions of themselves tend to take things personally, as if
the problem is with them instead of their business. That's why
it's so important to divorce the challenges your business is
facing from your own shortcomings (and there's nobody out there
who doesn't possess personal shortcomings that have the
potential to adversely affect his business). Then you can look
for help from industry trade shows, books, and consultants as
ways to stop reinventing bad wheels.
Chase Profit, Not Dollars
When they start out, many builders and remodelers look at sales
instead of profit. Their solution to any cash crunch is to sell
more jobs. Recordkeeping for job-costing purposes is frequently
sketchy at best, and because the profitability of individual
jobs isn't analyzed, unprofitable practices — poor
estimating and job management, endless punch lists, unrecorded
or uncharged change orders — get ignored and
Jobs may be sold to "keep the crew busy," as if that's
sufficient reason to remain in business. Owners often talk
about sales rather than profit, and are proud of being "booked
for the next two years," without knowing whether the jobs
they've signed will be profitable or will just "keep them busy"
(and therefore unable to work on profitable jobs) for the next
Once owners figure out they must focus on profit, however, they
become motivated to do whatever is necessary to produce
accurate job-cost reports. This allows them to identify the
kinds of work their company does well, reliably, and profitably
— and, even more important, which jobs are losers. They
can then feel more confident about passing up duds and pricing
their "niche" jobs profitably. And once they start selling
profitable jobs, there is less need to sell more and more time
to sell wisely.
Impart Knowledge, Standards, and Company
Owners who wouldn't dream of starting a home addition for a
client without detailed plans often fall into putting "an
addition" on their business — growing in size or scope
— without any planning whatsoever.
In an effort to give up doing the books, banging nails, or
supervising crews, an owner may "buy" a new employee and then
be disappointed when the person — who was thrown into the
maelstrom without any training — fails to meet
expectations. Without a training program in place, supported by
adequate funding and time from key personnel, new employees
can't get up to speed on understanding and reinforcing company
But once you realize that you can't take off one of your hats
and pass it along with confidence until that employee has been
trained, you can start using mission statements, procedural
manuals, employee manuals, policy statements, and even
contracts as training tools to get everybody working on the
same page. This, in turn, will help you build an effective team
capable of meeting company standards while permitting you to
retain only the hats you most enjoy.
Melanie Hodgdonis a business-systems consultant for
builders. She works in Bristol, Maine.
Protect Yourself From Employee
Many years ago, I received a call from a high-end remodeler
who could not understand why he was having trouble with cash
flow. Business was booming, and when he looked at the books it
appeared that all of his jobs were profitable. Still, there was
no money in the bank, so he asked me to help figure out what
was going on.
I began by reviewing his financial statements. The bookkeeper
was there, so I asked her when the bank statement was last
reconciled. She said she had been too busy to do it for a
while, apologized profusely, and promised to be caught up by
the time I returned the following week. I found several other
suspicious clues, but the bookkeeper looked honest and had been
working for my client for more than seven years.
After the second visit, I approached the owner with my
suspicions. That evening, the bookkeeper called my client, came
into the office after everyone had left, and admitted that she
had been stealing money. She thought it was probably about
$100,000. She was wrong. After spending several months
reconstructing the last three years of his data, we discovered
that she had actually stolen more than $550,000.
It was the largest embezzlement case in our county. The
bookkeeper, a "shopaholic," started small, but by the time she
was caught she was taking $25,000 per month. It's sad to say,
but if she had kept it to $50,000 per year, her theft may never
have been noticed.
Contractors Are Vulnerable
Since that experience, I have become more aware of how common
fraud and embezzlement are in the construction industry.
You might think that the problem affects only giant
corporations, but according to a 2004 report by the Association
of Certified Fraud Examiners, small companies suffer
disproportionately large losses from fraud and embezzlement.
When these crimes are discovered, victims rarely recover more
than a small percentage of what was taken.
Contractors are particularly vulnerable, because a lot of money
flows through their offices and many of their employees are
hard to monitor; often they're working on site, picking up
materials, or traveling between jobs.
In addition, it's hard to keep track of all the tools and
materials that are floating around and there are plenty of
opportunities for employees to pilfer them.
Unwitting victims. Most thefts are discovered by
accident. I had a client who was reviewing costs coded to the
"miscellaneous job" category. Typically, he never reviewed the
details of those costs, but this time he did, because the total
seemed to be growing.
What he found was hours and pay for employees who had not
worked for the company for several months. It turned out that
the bookkeeper was paying "ghost" employees in the accounting
system, changing the payee on the paychecks, and cashing them
herself. I have also heard of schemes in which bookkeepers cut
two paychecks for themselves each pay period.
Illegal activity, of course, is not limited to bookkeepers.
Another client installed the Fast Trak system (an automated
method for paying bridge tolls) in each company truck. The
employees appreciated not having to wait at the tollbooths, but
the added advantage for the employer was a monthly report
provided by Fast Trak of the time each truck crossed the
bridge. If employees' timecards showed they were on the job
site at 7 a.m. every morning, why were some of them crossing at
There is no end to these kinds of stories. If you hire anyone,
from a field laborer to office help, you are vulnerable. And
the question is not "if," but "when" and "how much." While
there are no foolproof ways to prevent theft altogether, you
can certainly take steps to protect yourself. First, you must
create an atmosphere in which your employees will not feel
justified in stealing from you. Second, you should implement
strict internal controls for all accounting and bookkeeping
Create the Right Atmosphere
Integrity starts at the top. If you do not operate your company
with integrity, do not expect your employees to.
Do you lie to employees, vendors, subs, or clients? Do you
treat your employees fairly? Do the employees get anything
extra when the company has a really good year? Are you living
high off the hog while paying your employees a minimal
A client once told me that when an employee asks for a raise,
he knows he'll end up paying for it one way or another
regardless of whether he grants the request. If employees feel
underpaid or underappreciated, or perceive they are working for
an unscrupulous boss, they may feel justified in taking a
little extra here and there.
There are some employees who will never be happy with their
pay, but that doesn't mean you should pay as little as you can
get away with. Many of the contractors I consult for pay their
employees more than average for their area, but they are also
more profitable than average. Their attitude is that you get
what you pay for.
Institute the Proper Controls
A good atmosphere helps, but when it comes to the office staff,
any accountant will tell you there is no substitute for strict
In larger companies the key to internal controls is called
"segregation of duties." For example, several different people
enter the invoices, cut the checks, sign the checks, and
reconcile the bank statement. Small contractors can't do this,
though, because they typically have one part-time or full-time
bookkeeper doing everything. Nonetheless, there are precautions
you can take to reduce your chances of loss.
Checking accounts. First, the owner of the
company should open all bank statements. In fact, if your
office is outside of your house, have the statements sent to
your home. Let your bookkeeper know that it's not a matter of
your not trusting him or her; it's simply good business
Second, when you get the bank statement, look through either
the actual checks or the copies of the checks. Look for payee
names that you don't recognize, and make sure you ask
questions. Just appearing to pay attention reduces the
temptation to steal.
Third, don't use a signature stamp. Many banks will allow you
to use one to sign checks, but it's a bad idea even to own one.
Someone in the office may need money for a quick loan, and the
temptation to write himself or herself a check could be too
great. If someone steals one of your checks and forges the
signature by hand, the bank may be responsible for the loss. If
the thief uses your stamp, the odds are higher that you'll have
Also, be sure that you know what you're signing for. If a
bookkeeper writes your checks, verify the amount by looking at
the supporting documents. You want to make sure that the bill
you are paying is for a current job, not for something one of
your employees is buying for his own house or for a side
Finally, before you sign, make sure the invoices add up to the
amount on the check. It's better to pay from statements than
from invoices because that reduces the likelihood of accidental
or intentional overpayments to vendors. If you don't look, you
could end up paying the same invoice twice and the vendor might
not catch it. Or the vendor could refund the overpayment and
the bookkeeper could hang on to it.
Credit cards. If you want to use
credit cards to earn airline miles, make sure that only
specific employees have access to the cards. The credit limit
should be low, and each employee should have his own card and
be required to turn in and justify every single receipt.
Don't use your company credit card for personal expenses,
because it sends the message to employees that it's okay to do
this. While the focus of this article is on fraud, I must point
out that using a company card for personal expenses can get you
into trouble with the IRS and put your personal assets at risk
if you are incorporated (see "Protect What's Yours:
Incorporate," Legal, 11/04).
Take the time to run monthly reports on gas cards. With gas
prices so high, there's great temptation for employees to use
the company card to buy personal gas. If you have company
vehicles, make sure each one has its own credit card, and
compare bills month to month and vehicle to vehicle to spot
Financial statements and data. There are good
business reasons to review trended financial statements (see
"Looking Beyond The Bottom Line," Business, 6/05), and
one of them is to detect fraud. If you compare expenses over a
period of months or years, you may notice that a cost category
has mysteriously increased.
If you're like most contractors, you keep close tabs on job
costs, compare them to the budget, and ask questions when they
look high. But have you ever added up job costs to make sure
they match your financial statement?
You should, because illegitimate costs can be hidden in the
"shop job" or "miscellaneous job" categories (places where the
bookkeeper knows you don't really look).
For example, QuickBooks allows you to pay for something without
assigning that cost to a job. If you run a financial statement,
that cost will be mixed in with the cost of goods sold for all
of the jobs the company is doing. But if you run the report for
Profit & Loss by Job, that cost will not show up, because
it was not assigned to a job (see tables).
Co.Profit & Loss
For 9 Months Ended September 30, 2005
(Cost of Goods Sold)
The financial statement above is for a
fictitious construction company. It contains all of the income
and expenses for the first nine months of this
Co.Expense by Job
For 9 Months Ended September 30, 2005
Maple Road Project
This report is from the same company
and shows the expense totals that would appear if you ran a
"Profit & Loss by Job" report in QuickBooks. Costs that
were not assigned to specific jobs would not show up, so unless
you compared the total job costs here with the cost of goods
sold (Direct Expense) on the P&L, you wouldn't know $23,112
(435,523 - 412,411 = 23,112) was missing.
The bookkeeper. Many bookkeeping
thefts are uncovered when the bookkeeper takes a vacation. Do
not allow yourself to become so dependent on your bookkeeper
that no one else can do the job. Make sure at least one other
person is capable of performing the bookkeeping
Also, be sure to back up your computer data — and, if
possible, keep the backup off site. When someone is about to be
caught, he may find ways to cover his tracks or make your data
An Ounce Of Prevention
Nothing you can do will absolutely ensure that you won't be a
victim of fraud or embezzlement. But if you take the actions
described above, you are less likely to be victimized and more
likely to detect problems early on, when the losses are still
And remember that the systems you put in place and the
procedures you use become especially important as the company
grows, because with growth comes a tendency for the owner to
Leslie Shiner, M.B.A.,of Mill Valley, Calif., has more than 20
years of experience working as a financial and management
consultant for the construction industry.