For many small business owners, jagging a contract with a big company is a real boost, and can mean a step-change in the evolution of the business, leading on to bigger and brighter things. But it can also bring additional risks, and the real possibility of actually losing money instead of adding to profitability. The 5 traps below are easy to fall into, but reasonably easy to avoid if you are aware of them and take preventative action.
1. Scope Creep
Scope Creep can sneak up on you – that’s why it’s called “Creep”. In this scenario, you are working on a job, and you are asked to “just do this [insert name of other job] while you’re here”. Before you know it, you’re doing 5%, 10%, or even more work – all for the same contract price!
Solution: Make sure that the client, yourself, and your on-site team are crystal-clear on exactly what has to be performed, and that it has been confirmed in writing.
2. The FAF
The Faff About Factor (substitute any other word that may come to mind).
Every contractor knows the story – you rush to site to fulfill your client’s URGENT URGENT URGENT request. When you arrive, you find that the person who has to sign you in to the site can’t be found, or even better, is back on the Sunshine Coast for their days off.
The “losing” part comes in when this time is not recorded, and therefore not claimed, or if you are working to a fixed-price contract with no avenue for variations.
Solution: Ensure that all time is captured by having a formal time-recording system – ideally one that links directly with your finance and invoicing software. Only then can additional time be turned into dollars.
3. Quoting too cheaply
If you are making a loss on a job, you may as well have stayed home in bed! To quote on work effectively and profitably, you must have a good handle on your costs – what is it actually costing you to do the job? How much per man hour? How much per machine hour? Without a thorough knowledge of your costs, you may be blindly working yourself towards significant losses.
There is more to this than meets the eye as well. Labour costs are not just the per hour wage or salary you are paying to your team members. You must also take into account Superannuation, Workers Compensation premiums, Payroll Tax (if it applies to you), Leave Loading (again – if it applies), and all leave entitlements. You then need to add on all your overhead expenses – the ones that you will have to pay even if you stay in bed. These will include your vehicle and machinery payments, insurances, electricity, rent – and others that may be specific to your business.
Solution: Have comprehensive, up to date, management cost data. That way, you will know just how low you can go, without going out the back door.
4. Quoting too cheaply – deliberately
I know that there are many companies out there at the moment who are “buying” work – for various reasons. It may be to keep a workforce employed, to get on to a site to find other work, or a host of other reasons. If that is a well-reasoned and deliberate strategy by your business – so be it. But know how far you can take this strategy – it carries risk!
Solution: Like Number 3, having good cost data will let you calculate just exactly how far you can push a “loss-leader” strategy. Set the limits, and stick to the plan.
5. Not reading and understanding the Scope Of Works or Contract in detail.
This one is a variation on Scope Creep – but this time it’s self-inflicted.
For all the tenders that are prepared and distributed by large organisations annually, we still see some shocking ones. Common problems include the ever-popular ‘copy and paste from the last tender’, using a template that was clearly prepared for a major engineering contract for a small, non-complicated job, and inconsistent requirements (such as one part of the tender documents requiring 2 hard copies, and another part requiring electronic submission).
The result is that you (or your tender team) MUST read the entire Scope of Works, and the accompanying documents, thoroughly – not just to identify these issues, but to be crystal clear on exactly what it is that you are tendering on. In some cases, this won’t even be spelled out in the tender documents, and part of the tendering process is for you to come up with a solution that will solve the client’s problem.
Once you are clear on exactly what is included in the tender documents, prepare a Tender Preparation Plan which sets out all the elements that you need to address in the tender, and ensure that they are all addressed by checking them off.
Solution: Ensure that you have correctly identified and differentiated the MUST, WILL, SHALL, WOULD, SHOULD, MAY and COULD items. Remember that all of these words have a specific meaning in the tendering process. If you are unsure about any aspect of the tender documents, ask. There will always be a means of contacting the tender owner to have your queries clarified.
Beware of the traps
Doing business with larger organisations is not always easy. For a start, there is often a power imbalance between you and the larger company. Consequently, you need to do everything you can to ensure that your profit potential is protected.
Being aware of these 5 traps, and putting systems and procedures in place to avoid them, is an excellent start.
By Bronwyn Reid