Use Phase Accounting in Construction – Part II (Trades)

Minimum Bottom Line Profit Should Average 9.4%!
For Trades & Subcontractors, at Least 11%
After Income Taxes Are Paid!

The most effective form of a financial feedback loop in residential construction is phase accounting. Phase accounting is a subset of cost accounting and generates accurate information in the world of new home and residential additions for small contractors building up to 20 houses per year.

There are five remaining phases to cover in this form of cost accounting used in construction. This particular article covers the fifth phase – Trades.

Trades 

This section covers the three traditional trades that require a license from their respective state. This is your HVAC installer, the electrician and the plumber. In some contractor may wish to include the septic tank and water well installer. However, I prefer these two be included in the site development phase as they do impact the site and there is only one connection to the main builder for these two particular trades. But as I stated in Part I, if you choose to place them in this phase, be consistent and all future projects should have the septic and well costs placed in the same phase.

This phase is where a contractor needs to exercise caution in dealing with the subcontractors. Oftentimes issues arise out of who is responsible for what cost as it relates to that trade. 

For the plumber, he should be clear as to what fixtures, piping, and water lines to address. Who pays for the connection to the sewer/septic tank?  How do we address the sprinkler system or providing water drops in the basement or the exterior of the home? The electrician should identify and there should be clarity in who pays for the electrical hookup of the HVAC system. Typically the plans identify the respective responsibilities of the parties, but there are always changes that will occur. If the prospective homebuyer wants recessed lights, what is the marginal cost to the homeowner, how much will the electrician charge etc? Make sure you are clear with the electrician on prospective changes. Address the following with him:

1.      Exterior lighting
2.      Sound system issues
3.      Well wiring
4.      Out Buildings wiring
5.      Landscape lighting or power
6.      Can lights and specialty lights
7.      Code compliance issues if the wiring diagram is not in compliance with the code.

As for the HVAC guy, their industry has changed a lot in the last 10 years. The federal government changed the SEER rating requirements increasing the costs of these systems. Code compliance issues will arise during installation. Furthermore, if you are using gas lines, how do you address code compliance here if the plans are not in accordance with the code? What do you charge for possible change orders, such as an increase in tonnage for the AC system or what if the homeowner wants to go to a continuous water heater system? He should provide you with a list of possible change orders and the associated values to charge the prospective buyer. 

A Warm Toilet

I was working as the controller for a new home contractor and we had just closed on a home sale. The buyers were elated to get their keys and move in right away. About two weeks later I get a call from the male head of household. They had a bathroom included in the room over the garage. He told me his wife loved the warm toilet but he thought that the electrical bill for hot water in his toilet will get a bit out of hand. He was laughing, but I was not. I knew something had been installed incorrectly. But how do you get hot water to run through the cold line that feeds the toilet? No other cold line in the house had hot water coming through. So a crossover had to have occurred near the toilet.

Well, sure enough, the crossover occurred in the floor in the stairwell. This was not good, because to remove the sheetrock underneath meant issues dealing with the textured paint job and exposing a beautiful hardwood floor below to a scaffolding system to reach the stairwell. The plumber claimed that he couldn’t inspect the lines as a normal part of his routine because the sheet rocker had already set the boards in the stairwell due to time constraints on the contractor. The plumber just assumed it was correct. I asked if it were possible to feed off the sinks cold water line, but the sink was across the bathroom and that would require removal of the flooring.

Thus, it was one of those you are screwed no matter what you do. $3,800 and two months later, it was fixed the right way. It took a lot of negotiating between the contractor and the plumber before they finally agreed to the how much each was responsible. To me, a good contract between them would have clearly identified who was responsible for error. But in their business, the agreement was a handshake. I explained that just one master agreement would cover all projects between the two parties. I strongly encourage you to have a contractual agreement between you and all your subs.

Finally, address how and who will pay for errors. This is a true story of how a plumber makes a mistake costing a lot of money to the contractor because neither party was clear in their agreement as to who caused the error. 

The next article in this series will cover two more of the phases in phase accounting. As you implement this type of accounting, you can see the value generated over several projects. As time goes on, margins will begin to increase for you and contractor stress will begin to decrease. You have a much clearer picture of the true costs of constructing a home or building an addition. Act on Knowledge.

Value Investing

Do you want to learn how to get returns like this?

Then learn about Value Investing. Value investing in the simplest of terms means to buy low and sell high. Value investing is defined as a systematic process of buying high quality stock at an undervalued market price quantified by intrinsic value and justified via financial analysis; then selling the stock in a timely manner upon market price recovery.

There are four key principles used with value investing. Each is required. They are:

  1. Risk Reduction – Buy only high quality stocks;
  2. Intrinsic Value – The underlying assets and operations are of good quality and performance;
  3. Financial Analysis – Use core financial information, business ratios and key performance indicators to create a high level of confidence that recovery is just a matter of time;
  4. Patience – Allow time to work for the investor.

If you are interested in learning more, go to the Membership Program page under Value Investing section in the header above. 

Join the value investing club and learn about value investing and how you can easily acquire similar results with your investment fund. Upon joining, you’ll receive the book Value Investing with Business Ratios, a reference guide used with all the decision models you build. Each member goes through three distinct phases:

  1. Education – Introduction to value investing along with terminology used are explained. Key principles of value investing are covered via a series of lessons and tutorials.
  2. Development – Members are taught how pools of investments are developed by first learning about financial metrics and how to read financial statements. The member then uses existing models to grasp the core understanding of developing buy/sell triggers for high quality stocks.
  3. Sophistication – Most members reach this phase of understanding after about six months. Many members create their own pools of investments and share with others their knowledge. Members are introduced to more sophisticated types of investments and how to use them to reduce risk and improve, via leverage, overall returns for their value investment pools.

Each week, you receive an e-mail with a full update on the pools. Follow along as the Investment Fund grows. Start investing with confidence from what you learn. Create your own fund and over time, accumulate wealth. Joining entitles you to the following:

  • Lessons about value investing and the principles involved;
  • Free webinars from the author following up the lessons;
  • Charts, graphs, tutorials, templates and resources to use when you create your own pool;
  • Access to existing pools and their respective data models along with buy/sell triggers;
  • Follow along with the investment fund and its weekly updates;
  • White papers addressing financial principles and proper interpretation methods; AND
  • Some simple good advice.

Value Investment Club

Please Signup
*
Username
Username can not be left blank.
Please enter valid data.
This username is already registered, please choose another one.
This username is invalid. Please enter a valid username.
*
First Name
First Name can not be left blank.
Please enter valid data.
This first name is invalid. Please enter a valid first name.
*
Last Name
Last Name can not be left blank.
Please enter valid data.
This last name is invalid. Please enter a valid last name.
Website (URL)
Website (URL) can not be left blank.
Invalid URL
Invalid URL
*
Email Address
Email Address can not be left blank.
Please enter valid email address.
Please enter valid email address.
This email is already registered, please choose another one.
*
Password
Password can not be left blank.
Please enter valid data.
Please enter at least 6 characters.
    Strength: Very Weak
    Select Your Payment Gateway
    How you want to pay?
    Payment Summary

    Your currently selected plan : , Plan Amount :
    , Final Payable Amount:
    Submit