Jacob Austin 00:00:00 Hi all Jacob Austin here from QS.Zone. And welcome to episode 71 of the Subcontractors Blueprint, the show where subcontractors will learn how to ensure profitability, improve cash flow and grow their business. Today's episode is all about surviving the current economic climate as a subcontractor. If you're new to the show, please subscribe for more user friendly advice on all things subcontracting. Now let's get stuck into this week's episode. So economic uncertainty has become a bit of a norm in recent years. Rising materials costs, labor shortages, inflation, incredible hikes in interest rates, and generally unpredictable market dynamics are creating a bit of a perfect storm in the construction industry, and subcontractors are particularly vulnerable because they operate in cash flow dependent businesses. The industry often has slim margins and it suffers a lot with delayed payments. But here's the good news. Whilst those challenges are real, they are survivable with good strategy and good mindset. So today I wanted to share with you some actionable steps that you can take to try and navigate those choppy economic waters and come out the other side stronger.
Jacob Austin 00:01:35 And let's start with the lifeblood of every business, not to mention subcontractors. Cash flow. You can have a full order book, and you can still fail if cash flow isn't your best friend. And it's an uncertain times that you need even more confidence that you're going to get paid when you need to. And this starts right with the basics. Making sure that your invoices or applications are presented in the format that your contractor needs them to be, and of course, submit them on time. If they're late, contractors may defer your payment or it might miss the payment run. So make it a habit to get your payments requested on time, and of course, formatting them and labeling them in the way that makes it easy for your contractor to process them is going to make all the difference to you. Next, you can look at better payment terms. Now, appreciating this isn't always possible because contractors are all the while trying to manage their own cash flow, but where you can offer discounts for a better payment, or perhaps where the contract might suit.
Jacob Austin 00:02:38 Try and negotiate effective milestones that mean you can draw down money more often. Then you need to look at tracking your payments in. This might be something that you can do with the help of some fancy accounting software. Or alternatively, you could hire a dedicated admin that's there to chase overdue payments regularly. You can also look at retentions. I mentioned retentions in detail in last week's episode, but remembering to obtain the paperwork necessary to get your hands on retention at the right time is an easy but often overlooked issue in the subcontract world. But loop back and listen to last week's episode for some detailed tips on how to go about it. Finally, you want to have a buffer aside, and ideally, you want somewhere between 3 to 6 months of operating costs to act as a cushion against delayed payments or slow periods. And when I spoke about cash flow before on the podcast, I mentioned a stress testing technique that you can use to see what happens should your big payments fail to come in when you need them to, and that will give you some indication of how much of a buffer you might need.
Jacob Austin 00:03:48 So moving on. The cost versus profit dilemma pricing in uncertain economic climates is a bit of a delicate balance. You need to price high enough to make sure you're making profit, but not so high that you're losing out on jobs. So how do you strike that balance? Right? Well, you've got to know where the market's moving. So that means keeping a regular eye on your cost increases so that you're all the while charging out the correct market rate for your materials and of course, your labor regularly. Making sure that you're reviewing your pricing in this fashion is going to keep you competitive without losing out. And moving on from that, try and avoid long term fixed price contracts. So by all means, fix your price for a period. But bear in mind alongside that, how long can you fix your downstream costs for? And if you fix your price for a longer period to your contractor, are you taking on more risk than you should? Can you get compensated for that with a fixed price allowance? And if you can't, then consider fixing your price for only as long as you can see the material prices for.
Jacob Austin 00:04:58 Of course, that means that once that period is expired, you then need to do some calculations and likely provide some documentation to demonstrate that your prices have gone up. Your contractor, of course, won't want to pay you any extra money, but if you can evidence it, then they won't have a choice. Remember, of course, that when you're pricing variations, you need to factor in your price increases there too. And also if you're pricing variations at your contract rates and your contract rates have got a percentage adjustment, then that percentage adjustment also needs to apply to the variation. It might sound obvious, but it's easy to forget. Of course, part of getting your price right is understanding how your rates sit in the first place. And what I mean by that is are they making you the right margin, or do you need to change them? And the only way to figure this out is by regularly cost reporting. And that means reviewing how much you're getting paid against how much you're paying out for any given activities.
Jacob Austin 00:06:00 This helps you understand whether you've got extra fat in your prices, that you can trim out, or whether you need to adjust your prices upwards for your next contract. Another way to try and stay stable is to diversify your client base. Relying heavily on a few consistent contractors might seem like a great idea, but when the economy is unstable, you run the risk of losing out, particularly if the worst should happen and your employer goes into liquidation or some other form of insolvency. We've recently seen ISG added to that list of casualties, and I dread to think of what that's done to the wider supply chain. So spreading your eggs between a lot of baskets is at least a way that you can try and mitigate that. You might also consider exploring different sectors. Different parts of the industry have different profit margins and different levels of risk associated with them with certain parts. And I'm thinking of your typical residential house builder. They're very much tied to one market. And if that market's doing well, then there's work aplenty to go around.
Jacob Austin 00:07:06 But when the market's doing poorly of course it falls off a cliff. So considering whether to diversify your business into commercial sectors or start looking at public sector work, having more than one string to your bow can help you have a blended turnover so that you're not overreliant on one particular part of the industry. And then you can try and turn up or turn down your revenue in particular sectors to suit where the economy's going. You may also want to consider the size of the jobs that you're working on. Large projects are appealing. They can give you consistent turnover, but sometimes it's the smaller jobs that provide quicker payments and less exposure to risk. Conversely, if you're going for even larger jobs than normal, you might be able to collaborate with other subcontractors and create partner bids for larger projects, sharing the workload and sharing the important financial risks. Manage your materials wisely. Fluctuating material costs, as we've already mentioned, can be a make or break for you in terms of profit margins. So keeping a close eye on those and negotiating good fixed price deals is essential to you.
Jacob Austin 00:08:16 If possible, lock in prices early. Negotiate a fixed price with suppliers for key materials to avoid price hikes. And at the same time, if you can ring fence materials for a particular project at a fixed price, that can give you cost certainty, perhaps for a whole job. You always want to consider also buying in bulk purchasing to obtain volume discounts is another string to your bow to manage your material costs. So you need to consider not just how much material you need for the next week, but how much you need for the rest of the project. And can you place an order for the whole lot, giving a financial commitment but receiving a better buying gain? It's also important to keep your eye on waste. Can you use small scraps of materials for sundry items like boxing? Can you cut down pieces of material that have been damaged to keep at least part of the material in use? It might not always be possible, but I have seen subcontractors using this to great effect. You've also got the challenge of wages.
Jacob Austin 00:09:19 The shortage of skilled workers in our country is causing added pressure and strain, and it's also increasing wages at a time when market pressures ought to be pushing prices downwards. So you need to make sure what you're paying out is fair and reasonable. But how can you do this when just having men in the first place is a bit of a premium? And for some workers, it's all about the money. If there's an extra £0.50 per square metre to be earned down the road, then they don't have the loyalty to stay with one particular employer and they'll soon be gone to where there's easier money. But perhaps losing them isn't the worst thing in the world, because you want a loyal team and people that feel like they're being invested in and they're progressing tend to be the happiest. So doing the right thing as regards holidays, pensions, training goes a long way to keeping your workforce happy and keep them working for you. You can also recognize and reward your team for contributions to good projects, reward long service, and offer benefits that are beyond the normal financial ones.
Jacob Austin 00:10:24 Another really important thing that people value is being communicated to often and clearly. Keeping your team informed about pipeline, what's going on on the project that they're working on, what their diet of work is going to look like over the next few months or years? These are important details to help set people's expectations so that they can manage their life around work. Communication also goes a long way to forming a good working relationship with your main contractor, and having that strong relationship is another way that you can try and remain successful in difficult times, being proactive about communicating with your contractor so that they don't need to chase you. But you're bringing potential challenges, risks, and solutions to them, helps them to manage the work. And when they're happy, they will try to look after you. Other things that are really important to contractors is having a supply chain that can deliver quality consistently. Clients consistently want to raise the bar and deliver work of a higher and higher standard, and playing your part in that can help you secure repeat business.
Jacob Austin 00:11:32 And that means making sure you source the right materials, you provide the right labor for the job that can deliver a quality product to them. In this industry, you're only as good as your last job, so it's always on you to make sure that your last job is a good one. So what else can you do to make sure that happens? Well, something that often gets overlooked is seeking feedback from your contractor. Sometimes it's the case that you just don't want to know, and maybe in those instances, it's better off that you don't. But for your typical contract, why not seek some feedback from your contractor? See what went well and see what could have been improved. Taking this learning and then implementing suggestions where it's possible. Of course, we'll start you on the track of improving your business and make you better able to perform to the quality and time standards that your contractor needs you to. Obtaining feedback is crucial because not only does it help you improve, but it also demonstrates to the contractor that you value their business and you value their opinion.
Jacob Austin 00:12:35 That can strengthen your relationship and improve your chances of securing repeat work and being hired again. It's good, of course, to maintain a friendly but professional relationship. There are times in construction when disputes arise, things go wrong and you need to be able to handle things calmly and professionally. Use your contract as the basis for discussions and negotiation and if necessary, you always have that third party option to get somebody else in to resolve the issue. And of course, as I've recommended in previous episodes, if you want to keep a working relationship with the contractor, consider that mediation is a good way to resolve your issues, but gives you the best chance of maintaining that working relationship. Surviving and thriving during economic uncertainty requires you to be proactive as a subcontractor, and that means staying on top of your game, monitoring your pricing, your cash flow, having your diverse client and business, and maintaining those relationships that are going to get you repeat work at reasonable prices. Hopefully, by doing this, you can come out of the storm at the other side not only unscathed, but ready to face what comes in the future.
Jacob Austin 00:13:50 Remember, tough times don't last, but tough subcontractors do. My mission with this podcast is to help the million SME contractors working out there in our industry. If you've taken some value away from today's episode, I'd love it if you'd share the show and pass that value on to someone else who'd benefit from hearing it. And of course, subscribe yourself if you haven't already. And thanks for tuning in. If you like what you've heard and you want to learn more, then please do find us at www.QS.Zone where you can subscribe to our training and support system for like minded subcontractors. In there you'll find templates, how to videos, interviews, and more. And it's all for less than the price of a cup of coffee per day, and you can cancel anytime. We're also on all your favorite socials at @QS.Zone. Feel free to reach out or just give us a follow. Thanks again! I've been Jacob Austin and you've been awesome.
