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Monday, January 21, 2008

Some thoughts about integrity

How do you measure integrity?

I suppose a quick answer might be: "What do your peers and clients think of you?" But what about the contractor who pays, religiously, nine tenths of his suppliers on time and without dispute, but stiffs the lone guy on the bottom, the one he knows doesn't have the resources for protracted litigation, and then finds some (legitimate) excuse for non-payment. Do the arithmetic: Even allowing for legal costs and a settlement for part of the moneys owed, the contractor has saved perhaps five per cent of his budget -- and that can go a long way to profitability.

Does this stuff happen? Certainly. Does it get worse in recessions? Absolutely. Desperate and ill-informed start-up businesses are usually the best sucker bait for this kind of scam. In many cases, the scammer is either a psychopath who doesn't care, or simply extends his moral relativism a little further than most of us would dare (and yet, when push comes to shove, I'm sure many of us would do our own ill deeds under the right circumstances.)

In one, unique case in Ottawa, industry insiders got so fed up with one general contractor playing these games that they forced his business into bankruptcy -- against his will. This resulted in something very rare, a bankruptcy trial, with witnesses arguing the business was insolvent, while the owners claimed indeed it was viable. Things got really interesting when the bankrupt sent me a letter that would under normal conditions be considered libelous. I read it to the person he had libeled. "Print it," the person he libeled said. "This letter just shows everyone what we are dealing with". One of the major witnesses, by the way, later managed to pull his business in -- and out -- of bankruptcy three times -- and he still controls and runs his enterprise. Evidence of integrity, I suppose, along with a very thick skin for business.

So, as things head south in the marketplace, we'll see some strange, disturbing things happen. Well run businesses suddenly will find their major customer has gone bust -- either because things simply went bad or simply so that the owner could build a mansion in Florida with the purloined assets. Skilled and talented managers will suddenly lose their jobs, and start up their own companies, on the cheap, underbidding established players and sometimes winning the business (and sometimes experiencing victim hood at the hands of swindlers). In our own business, we'll find clients knocking on our doors, signing sizable advertising contracts, and then, (surprise, surprise) not paying their bills. (After all, if you know you are about to go down, why not advertise -- pull some cash in -- and then file the legal papers.)

If this blog entry is somewhat disturbing to you, good, I intended it that way. Those of us who have lived through (and survived) hard times in the past have pretty thick skins, and relatively reliable radar-scopes for cons and scams. But not everyone reading these posts has been through the experience of a real, lasting, and painful recession -- it's been a while. So I'm spending some time giving you the warning signs, and some simple and easy-to-understand advice.

  • If you are a subcontractor, and are not currently a member of the American Subcontractors Association, join their local chapter. You'll gain incredibly useful insights into business practices and share early warning information about client-no-pay dangers. Its worth the dues.

  • Do you have top notch lawyers and accountants on your side? If not, please find some -- you will probably need them. Make sure your employment contracts are in order, and understand the specific challenges in dismissing older or ill employees even if you are simply asking them to leave because they are not productive and are far too expensive.

  • When clients become fewer and harder to find, you need to rethink your marketing; you must define your objectives and seek opportunities in effective and practical ways. If you are in our market areas and wish us to work with you, we'll help you craft some unique and effective solutions. (You'll pay us with some advertising purchases; the ads themselves -- while 100 per cent of our fee -- will only be a part of the solution.)

  • Read, participate, interact, and contribute to blogs and forums like this -- the beauty of the Internet is that you can build an instant network of reliable contacts and connections, often in markets far from your home base (and certainly away from your competitors.)
Finally, trust your intuition, your sixth sense, and your instincts. If something doesn't seem right, it probably isn't. But you will also sense when things are going well, and when they are turning for the better. And, eventually, they will.


Anonymous said...

Might I add two more items to your list:

1. Include an appropriate percentage as a line item in your overhead under "Bad debt". Since I specialize in jobs under $5K, mine is 1.5%. If I did large projects, it would be about 3-4%, and I'd let that money accumulate in an interest bearing reserve fund. I just think it's smart business. So I never lose sleep over lost monies because in reality I have no lost monies.

2. More and more business owners are gong the route of formal lenders and retailers, obtaining a credit report on whom s/he is about to what amounts to as being a business loan.

3. As a last resort, it does help to know your local (better of he's out of town) "Bubba". He's a great one man collection "agency" and his collection "fee" is added onto the debt as a collection fee. Of course, being ruthless, he should only be used to collect from other ruthless people.

#3 may seem to be coarse, but after being in the business world for close to 45 years, one can or learns, when mandated, to get "coarse." Then again, maybe it's just the Chicago in me.

Construction Marketing Ideas said...

Good points!
One more: Be very wary if you are depending on one client (or a few) for most of your business. If the client goes bust, you will, too.
For my own business (this won't work I realize for everyone) I 'solved' the bad debt problem by putting too prices on each invoice -- 'net' and 'gross'. Net is 25 per cent lower than gross, and is available if you pay within 15 days of invoicing (though we are generous with grace periods here!). Gross is if you are later. About 15 to 20 per cent of our advertisers pay the gross rate, and 2 to 3 per cent of our invoices are disputed/discounted or turn to bad debt. I've analyzed the results and things come out in a 'wash' -- the extra money from the gross invoices offsets the bad debt, so I can sleep at night knowing my monthly sales are just what they seem to be on the books.
I haven't needed to hire a 'bubba' yet but Kathy is pretty efficient when she comes in each Friday to call people who are getting a little late in their payments.

Anonymous said...

Yet another reason why not to have one or two customers supply all sales: Years ago I remembered reading about big manufactures and large retailers who would intentionally become the sole customer of a vendor. Then they would start dictating what they would pay. Eventually the poor supplier would go bust.

And the manufacture or retailer would just start all over again with another unsuspecting potential supplier.

Construction Marketing Ideas said...

Sonny, you are right about the last point. Within my orbit, I've heard that a manufacturer used this "suck in" practice was used quite effectively and effectively to build a multi-billion dollar international business. Perhaps with some poetic justice (or perhaps just part of the evil-doing here), the enterprise has now filed for creditors' protection. (I won't name or allude to the industry because, like many of the sleazes in the world, they will bring out their lawyers at the drop of a hat!)