I Wish I Would've Known That

Foreign. Hey everybody, Jim Johnson here, your host with Contractor Radio and another episode that's here to help you understand your business strategically, educationally, practically tactically, and hopefully a little bit entertaining. We're going to talk about all this stuff I wish I would have known before I jumped into business on my own and especially getting into business as a contractor. We see this all the time with people saying, hey, I think I can do this better than the person I was already working for. And they go out and they start their own business and realize there's a lot more to it than selling a bunch of jobs, installing those jobs and collecting the money. You also, we always hear that concept in our world. Sell it, build it, collect it. But in order to do some of those things, there's some components that we need to know and those things have to do with risk. And that's what we're going to be talking about today. Risk versus Reward. Can't wait to talk with you about it. Can't wait to share with you all the stupid mistakes I made. And hopefully they'll help you not make those same mistakes because they are all things I wish I would have known. But before we go there, let's go ahead and get started with one of our sponsors. They help us make sure that this show can go on and look forward to hearing from them today.

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Haven'T talked to the guys that get the referral yet, you should set up a demo with those guys. It is the best referral tool that I've been able to find. It not only encourages more referrals, but tracks them for you so that you reward your people that are referring to you, your raving fans, the way you promised that you would. So today let's talk about risk. Risk. As a contractor, we have to realize that with risk comes either great reward or great consequences. You may have heard that in the Spider man movie. With great power comes great responsibility. Same thing with risk. The higher the level of risk, the higher the level of reward, but also the higher the level of Consequence, lower the risk, the lower the reward and lower the consequence. And so I'll put this into terms that hopefully clarifies what I'm talking about. As a salesperson in the home services industry, the risk that we have is pretty minimal. If we make a mistake or a job goes wrong or anything like that, we don't really own the risk for that. The actual contractor does. So I don't have a lot of exposure there. And then I also have this ability to earn some reward, but that's capped a little bit. It can be really great for a lot of really good guys out there. But even then, the ultimate reward of selling a company and the value that goes along with that is still limited as a salesperson, but could be very ideal. I know a lot of guys that have gone from being a salesperson to owning a business, running into all these risk things. I'm going to talk about today back to being a salesperson because they're more comfortable there. Now being a contractor, that's taking on a lot of responsibility, a huge amount of responsibility. And our reward could be amazing. You know, it could be millions of dollars if we do it right, but our consequences could be dramatic, bankruptcy, all kinds of things that could affect your marriage, divor seen it all. And it can be really tough in people's world. So what I'm trying to do today is to help mitigate some of those risks so that you avoid them as you move forward in your contracting business. And what I've decided to do is I've decided to put them into five different categories. We have our work risk, the things that we're doing, what risk lives there. We have the risk in agreements, the agreements that we create with people or customers. We have our insurance, huge risk thing there. And we're going to get into that when I'll give you a few stories along those lines. Finance risk also another one where it's actually the biggest area of risk that we have as contractors. Not understanding them well can lead us down a path of destruction. And then finally we have business and just the operational business side of things. And so let's start off with work. Let's start off with some of the easy stuff, some of the basic stuff, and hopefully get to some of the more intense stuff here in just a second. So work stuff. All right, first things first. Understand OSHA and what it means. The Occupational Safety and Health Association, I believe, is what it is. That is where they control the safety of the work conditions that we are providing to the folks that are engaged with us, whether they're subcontractors or employees, there's a huge book on it. You should go make yourself aware of that book. You should go make yourself aware of the safety precautions that are necessary for the particular trade that you're doing. So if you're doing roofing, you have a lot of fall risk involved in that. And so what do I need to have as far as ropes and harnesses, fall protection, the various things that go along with that? How far does a ladder supposed to extend above the eave line of the roof whenever you access it? There's all of these different things that if you're off on any of them, they can cost you significantly. And we're not just talking $100, $500 fin. Depending upon the project, it could be hundreds of thousands of dollars. Fine. And if you think about it, they actually have a point. The risk of somebody's life is at stake here. And if we don't present a safe place for people to work, we open ourselves up to a risk. Yes, that person could fall and die, but that fall and death could severely affect our business to the point of putting us out of business. And if we aren't following the rules, fines are the least of our worries because we get into a bunch of other areas where it can be emotional, physical, mental damage to us in the loss of a person's life. So get your safety stuff squared away. Do everything in your power to train your team. Make sure that you're providing the safety information that you need to provide in order to provide a safe workplace and avoid all of those nasty fines that OSHA loves to get us on. We think, boy, we'll get away with it, we'll get away with it. And all of a sudden, of course, it's always the best project. The one you're most proud of is the one where you get tagged by those guys saying that you pulled a permit. They know where you're located, they're going to come out and watch, and sure enough, there you are. And even if you don't have to pull a permit, they're driving around, taking a look and knowing what's going on in their particular regions that they cover. And they're looking for you. So get up to date on your OSHA stuff warranties. So your workmanship warranties need to be written clearly and understood completely by whoever it is that you're working with, because you don't want to come to a situation where after you do the work, your warranty either is less than what you purveyed it to be, or it's including more than what you intended it to be. This is a great place to get with an attorney. We're going to talk about those attorneys towards the end. But having an attorney helping you with your warranty, your workmanship, warranty is paramount. And it's different in every state. It's different in what you're willing and able to take on. And so each company is going to have its own belief system on how they want to warranty things. And really and truthfully, it came down to this for me. You know, if I had a five year warranty on something and somebody called me on year seven, I was going to go take care of it. But I didn't want to get into a position where that particular person was disparaging and ruining my company. Although I still was living up to my warranty and even surpassing it. So you want to make sure your warranties are tight. I know that I own the risk on that warranty too, not the salesperson. A good example is a large commercial project doing the work. I'm going to take my glasses off for this one because it still hurts. Large commercial projects come, you know, three years later after it's all done, that particular building was being sold. So they did an inspection on it. And in that inspection they found out that ice and water shield, which was necessary by code in that area, had not been installed on that roof. Well, sales guy that was supposed to watch the job wasn't there. Crew that installed the job wasn't there anymore. And I own the warranty. So it was my responsibility, my dough that had to take care of that. And to the tune of about $125,000. And so knowing that I always set aside a warranty fund off of every single project that we ever did, I took a couple of bucks per square and set it aside to cover warranty to say, hey, if something ever happens, we're able to make sure that we take care of this. And fortunately we had done that and it solved a lot of problems for us in having to perform that work. Although I wasn't overjoyed at having to outlay that cash, but I was overjoyed at making sure that it was right. So make sure that you have a good tight warranty, have an attorney look it over. Attorneys for those type of things aren't as expensive as you think. And for what it costs for them, three, four or five hundred dollars to have them look it over, make sure it's right. Far less than $125,000 or even 10 or 15 or $20,000 on a project that you may not be responsible for having to deal with because you don't have a good warranty injury. So somebody gets hurt on your job site, who is that person? First off? So are they an employee? Are they a subcontractor? Based on either one of those, do you have the right workman's comp in place, General liability in subcontractors, certificate of insurance and liability. We're going to talk a little bit more about those. But this all ties back to setting proper expectations, being clear about those things from the beginning, that if somebody's injured, what precipitated that injury? Were they possibly under the influence that caused it? Were they. So have had that happen. I fall off a roof, hit the ground, broken bones, all kinds of problems. Problems. Hospital and come to find out after a blood test he was. He was under the influence. Well, we didn't have anything in writing saying you could or couldn't. And we suddenly became responsible, had to get attorneys, huge expense. We were ultimately not held responsible. In the end, after several thousands of dollars in defending ourselves, we. But it was something that we could have eliminated by having great documentation up front. So make sure you have yourself covered. Now, that's not to say that if somebody gets injured and they get injured in a way that we play a part in avoiding, that we shouldn't be willing to step up and take care of the people that work for us through our insurance. That's what it's there for. Or if we've got to pay out of our own pocket for some reason or another, being willing to do so. So that kind of covers the work side of things. It's not all encompassing, but all the things I wish I would have known, those are like, hey, boy, if somebody would have just told me those before I got into it, that would have prevented a lot of problems. So let's talk about those agreements a little bit. We have agreements with a variety of different people. We have agreements with our employees. We have agreements with our crews. We have agreements with subcontractors that are maybe sales reps. We have all these different agreements. We have agreements with our people that we're going to do work with. So there's all these different legal documents that need to be taken care of. And so in order to do that, that goes back to that attorney. Get those things right. But I want to give you some of the things that may help prevent you from issues, for example, with your crew, subcontractors have a good, solid subcontractor agreement. But include in there what may be a consequence of not doing things correctly and what might be a reward. So you might include in your subcontractor agreement for every job that you do well and it passes inspection perfectly. Hundred dollar bonus. But if it doesn't, you're required to fix that job before being allowed to do another job or being given another job. And write in clearly what that entails at all costs. So their cost, their time, their labor, all that stuff. Nothing off of you for improper installation, for great installation, you should probably provide some type of reward. It doesn't have to be on every project. It could be every 10 projects. It could be a lot of different things. But make sure it's in an agreement so that it is clear you don't want it to just be verbal. That's where we get into more most of our problems as a contractor. A lot of verbal exchange of information. And yeah, if you do a job great and we pass inspection, I'll give you 100 bucks. And then they get their check and there's not 100 bucks. You say, well, that's not exactly what I said. What I said was this, now we have a problem. Now we have conflict and things just go drama ground zero H bomb, and everything's a problem. So we want to be really clear about what our agreements look like. We want to be clear about what it takes to do the work, what it takes to get paid and what that pay will look like and who it will be paid to. For example, you don't want to pay a subcontractor to just his name like Bob Jones. You want to pay it to an entity. It will protect you and it will protect your homeowner. Much better to have them have an entity. So like an llc, a lp, a corporation or incorporation, either one of those would be sufficient to say, hey, there's some protection between entities instead of personal liability. Want to avoid personal liability at all times. We're going to talk about that a little bit too. So that kind of handles subcontractors with your crews, but with your salespeople. Let's say you have salespeople that are subcontractors. Very common in the home service contractor world to have independent sales reps out selling your service, whatever it may be. Maybe your roofing, maybe your pest control, maybe your solar. A lot of Those guys are 1099 independent contractors. And we just have a verbal thing with them. They come in, hey, yep, we're going to pay 1099, this is going to be your commission. And there you go. Get out there and go. A guy goes and sells a whole bunch of stuff, he's doing well, and then he decides to leave. What does that look like when he leaves? Am I now responsible for everything he's sold to pay him the full commission on when he had other responsibilities like washing the job or collecting things? Well, if that's not written into the agreement somewhere that he gets a part of his reward for each aspect that he does, we owe him for the whole thing. If he ever goes to the labor board on you and says, hey, I was hired to be a salesperson, I sold these things, they're not paying my commission, and I left, you're going to lose in court. You're going to lose that battle. But if you have an agreement that says, well, he had three responsibilities. Sell it, watch it, make sure it got built, and then collect the money, and all he did was sell it. So we're willing to give him a third of his commission, and the other 2/3 are going to go to people to take care of those projects. You, you'll win that as long as it's in an agreement usually drafted by an attorney and signed off on both parties. So make sure your agreements include all of those little areas that you could get caught in. That's one of the big ones is, hey, you gotta. This is what it looks like for a salesperson and the responsibilities he has and what portions of the commission are allocated to him. Because if he leaves, I gotta have somebody else do it. The other things to be concerned about is like, when people get paid, do they get paid right away when they sell it and they turn in the contract, or do they get paid when the job is built and collected in full? Include those things in your agreement. Because you hire somebody, it's a verbal exchange of information. He sells three or four jobs and then he gets clarity on the fact that he's not going to get paid until these jobs are actually produced and collected. And he can't make it that far without making some money. And he leaves, now we have a problem. Now there's an issue. So we want to make sure that we're really clear about those things and how people get paid when they get paid, when they need to turn in their payroll request form to get paid, because all of those will play a big part in us being clear, setting proper expectations, and having a team that loves us while protecting our company from risk. Then we have the contracts for our work that we do. This is something that is near and dear to my heart because there's a variety of contracts that are out there. I've seen all kinds of them. I know that I can write a loctite contract, I mean absolutely go to court, win every single time. But the ability to get that contract signed out in the field becomes very difficult because everything's in huge print and big bold face and stuff like that. And I'm not saying to write a contract that doesn't fully protect you. I'm saying write the contract that protects you while still afford you the opportunity to get business. And if you lose one here and there due to a technicality, it's okay because you got so many over here that you wouldn't have gotten before because you had this really difficult, hard to understand agreement. Because attorneys, I'm going to warn you about them, they don't like to lose in court. And whatever they write up, they're going to write up an agreement that ensures they win in court. They're going to cover every loophole, every everything. When you try to go to explain that to a homeowner, it gets very legalese and something that somebody doesn't want to sign, it sounds like they're going to have to give away an arm or a baby or something to do work with you. And so be cautious in how far you go and how far you need to go. Get a really good attorney. I'll mention somebody here. Her name is Karen Inslee with the Benitez law firm in Dallas, Texas. She's a good resource to start with. She understands our industry, She's a contractor attorney and she works with a lot of folks. You can also talk with Steve Patrick. He's got a download, it's something you purchase called Produx, has all the documents we never need agreements and all that other stuff. A lot of those were in collaboration with Karen Inslee to get those done. To protect you, protect the people working for you and protect the people that are having work done for them so that all parties are clear on things while still being able to obtain the business. And then we have our employee contracts, so we have contracts with our employees. Another good person with this Karen Inslee, again, she is good at getting these written up and ensuring that it is a contract. That is employee experience. A lot of times we write a contract, it sounds very negative, like all the things you can't do. But we should include in that contract all the benefits of what happens when we work here. And so we don't want to write a Consequence contract. We want to write an employee experience contract. But what it looks like when you come on board and what your pathway to success looks like and what your responsibilities and duties are, and then what happens if there is a termination and being really clear about that so that you don't run into legal battles on the back end saying this guy fired me for this, when actually it was for something else. So get really tight on your employee contracts to ensure that you mitigate the risk for your business in the long run. We all think when we're a contract, I will never have any problems. Everything is going to be wonderful, rosy, it's all unicorns and rainbows. But the reality is somebody will come along, somebody will not understand exactly what you said to them versus what they interpreted and the final result. So we want to be clear. And one of the best ways to be clear and mitigate risk in our businesses is clear written documentation. Whether that's an employee contract, a subcontractor contract, crew requirements, sales rep requirements, all these things need to be well documented to keep that risk off of you. So that kind of handles agreements at a high level. Once again, my advice there is go get an attorney. Explain what you want. Explain, hey, I want to hold my customer accountable to paying me, but I also want to be able to get them to sign this thing. So let's write it in that form fashion and they'll understand what you're talking about and usually do a pretty good job. You also have state by state issues that you deal with. And so make sure you find an attorney. And this is the best thing about attorneys, advice I can give you. Test them, make sure that they have other contractors that they work for. Call those contractors and ask them if they're happy with the work that they've done. Find a attorney that is used to working with, with construction contractors. Because we are a whole different breed from any other business out there. There's a lot of risk in what we do with injury, damage, all these type of things, warranty. We want to make sure that the person that's writing these things up for us has knowledge of our industry and writes them accordingly. So that's two work and agreements. Let's talk insurance. So this is one of those ones where it's kind of fun because we get into the business, we don't really think about this a whole lot. Until we decide that we're actually going to do it, we've like left wherever we are, we're going to go start our own business. And they're like I know I'm supposed to have insurance, but I don't know what that looks like. I'm going to go talk to somebody that provides insurance and they ask us a key question. How much revenue do you think you're going to do this year? And we all being who we are, is like, it's going to be awesome. We're going to do $5 million or a million dollars or $10 million or whatever the number is. And whatever that number is determines how much your general liability is going to cost. So higher the number, the more liability you have and the more your insurance is going to cost. What you really want to do is be very accurate, be as accurate as you possibly can be, and then a hair over that. So if you think you're going to do a million, say 1.2, that way your liability insurance is close to accurate. Because if you overpay and under produce on revenue, they owe you the difference back. But if you overdo and underpay, they're going to come back to you and say, hey, you have a bill with us. And that bill can be pretty large all at one pop. And if you have not planned for that and not kept that into your thought processes while you're doing your business, like, holy cow, I'm doing a lot more than I thought I would need to call my insurance company, get that adjusted, you're going to get a big bill at the end. If you have spent on other things prior to that and now you're out of money, you're out of business, you're not able to actually perform business legally, and it can put you out of business, you could be very profitable and still go out of business because you did not cover yourself from a general liability aspect. The other thing about general liability is to ensure what it covers most of these policies and the most of our approach is, hey, I need general liability insurance. What's the cheapest thing I can get? So your agent, being who they are, want to sell a policy and they say, well, okay, what do you think you're doing with this? He runs all his numbers and does his magic tricks and tabulations and actuaries are all involved. And here you go, here's your number. It's the cheapest thing you can get for that revenue. But it doesn't cover anything. It doesn't cover anything that could really actually happen. Like, for example, one of your crew who's underage, driving a vehicle into a house. Well, that's excluded from your policy. Any of you guys that do insurance restoration Work, you know about exclusions, so you should be on top of this. But any other rest of us really don't think about it too much. So we need to make sure we ask a lot of questions. What does this cover and what does it not cover? That's the key thing. What does this not cover? That could be a problem for me as a contractor. Make sure you find an insurance provider that specializes in contractor services. The understanding the risk. One of the great choices out there is roofer's choice. If you happen to be a roofer, although they handle other contractors, that's their specialty. But they do a really good job of reviewing the liability policy you have, pointing out where you may have an issue that you didn't realize. There's reliability policies that do not cover fire. So you set somebody's house on fire, which happens. It can be happening for all kinds of different reasons. It could be a spark from a saw blade, it could be a flame from a torch. It could be all kinds of different things that cause a fire on a home. And that's excluded. So while you have insurance, it's not going to cover it. Now you're out of pocket on all of it. So pay a few more dollars for your general liability. Make sure it covers those things that you know are high risk. People falling off and getting injured, people having personal injury in whatever it is that you do. If they're on a roof or something like that, what does that look like damaging a person's home in any way possible that you could imagine based on what it is that you do. For example, here a fencer and you're putting in fence posts, you can hit electrical lines, you can hit water lines, you can hit sewer lines. And all that stuff is supposed to be marked off by the utilities company because you make the phone call first. But even if they mark it off, they may miss stuff and have been known to miss stuff. They also have an agreement says they're not responsible and it all falls back on you unless you have it in your agreement that it doesn't. And now the homeowner is responsible because it was their utility that did it. And then what level of responsibility would you have as far as general liability? It could be simple things. For example, if you're a roofer again and that exhaust cap on their furnace is shoved down too far backfills carbon dioxide and they house could kill a bunch of people. Is that covered? Those are really important things. Those are big questions to ask. Think about what it is that you do. What are the possible problems that it could generate, even the least likely ones. Get a list of them and make sure your policy covers it. Now, on the other side of things, you've got subcontractors. So now you're protected on the work that you do, but you've got subcontractors doing work for you. They need to carry general liability as well. And there's a key point point in this that you need to get their certificate of insurance. This thing that says, yep, they're insured for that thing and they're covered. But there's a key little component that. That I wish I would have known. I wish I would have known that I needed to get the policy as the certificate holder that my company held the certificate was to be notified of any changes in this policy, whether it was reduced, eliminated, they quit, they didn't pay. Whatever it was, anything happens where that policy was changed or canceled, my company would be notified. I didn't do that. And I learned the hard way at Cruz came in.