If you aren’t thinking about how to incorporate risk management as part of your construction quoting system, you are doing yourself and your business a disservice. Risk management is a constant undertaking for construction businesses. While risk exists in many forms, financial risk needs to be addressed because if the cash flow dries up, so does your business.
With news of a recession looming, and construction companies coasting out of a few years of booming business, taking control of risk is more important than ever. In boom times, everyone pays on time. In recessions, the accounts receivable can pile up if you aren’t paying attention. When the going gets tough, the tough make sure they are getting paid on time. How do they do that?
With risk management as part of their quoting system.
What’s so Risky About Construction Quotes?
We have a saying here at Takeoff Solutions, “When you manage the downside, the upside takes care of itself.” It’s important to address the risks that come with doing lengthy, expensive projects. If you don’t, those projects can easily turn a profit into a massive loss.
Risks can pop up across your entire business, but the ones that really impact your bottom line revolve around lack of payment from clients. For instance, change orders can make your costs higher than the original estimate. If you don’t have an easy way to adjust and invoice accurately, there go your margins.
Or maybe a certain customer has a history of paying well outside the agreed-upon terms. Again, it’s your margin that takes a hit.
When you run a small operation, it’s much easier for the leaders to vet clients and identify risky situations. Risk management often starts out as intuition from successful business owners. As your company grows, expands into multiple regions, or scales operations into other verticals, that intuition isn’t enough to successfully mitigate all the risk you take on.
Risk Management in Your Quoting System: What Does It Look Like?
The upside of built-in risk management is having more money when it matters. When risk management is part of your quoting system, you are able to plug in a variety of factors, like company size, years in business, or projected job cost. This gives you a read on the potential financial risk, and how to proceed. This means you can use the same system across multiple locations and different projects, and still have a consistent, enforceable policy on how to handle it.
This helps in a few ways. First, it helps you gain more visibility into your financial performance. If you have risk factors built into your quotes, your reports will more accurately reflect what your future situation will be like. Maybe this month is looking great, but what about six months from now? Or a year from now? Long-term projects require long-term thinking.
Next, it helps you collect more of your expected payments. By incorporating risk management, you take some of that burden off your own shoulders through more accurate bids that consider the risk involved. This leads to less uncollected A/R, better cash flow, and ultimately, a higher net margin. All good things for supporting the sustainable growth of your business.
Tips for Incorporating Risk Management Into Your System
1. Evaluate your customers
Start each quote with simple criteria that assesses the risk of each client engagement. Questions like “Have we worked with this company before?” and “How big is the project?” are straightforward questions with black-and-white answers. However, they can illuminate potential risk factors. For example, a new company with a job much bigger than usual represents a higher risk.
A quoting system with evaluative criteria built in assesses jobs in an unbiased way, and presents options for reducing risk that your team has to follow. For instance, credit card pre-authorizations, a down payment before work begins, or stringent payment terms all mitigate a higher-risk job.
2. Train Your Team
Once you’ve added a policy into your quoting system — however simple it may be — you need to spread the word internally. This means not only training your sales team and estimators about the new criteria, but also updating your accountant in case it has broader implications for how you invoice and collect payments.
When you do train your team on the risk management process in your system, it’s important to emphasize that it’s not optional. When risk management is optional, risk isn’t actually managed. Since it’s likely to change the way some of your team bids jobs, it’s important to provide a time frame for the team to learn how to use any new functions of your system, and ensure all employees feel empowered to refuse a sale if the quoting system determines it too risky (or if a possible client isn’t willing to agree to the payment terms).
3. Review Your Debt
To guide your de-risking efforts, review your bad debt from past years. The more recent, the better. Considering each case can clue you in to what factors were at play: did a client go out of business mid-project? Did change orders drastically alter the scope of work? Did your salesperson lowball a big project?
The patterns you identify will guide your efforts to modify the quoting and sales process. The insights you get from the bad debt of years past allow you to continuously adapt your evaluation criteria and the guardrails you put in place to prevent more bad debt.
Risk Management Is Essential for Financial Stability
There isn’t a single business owner that wants to do work they aren’t getting paid for. Without incorporating risk management into your quoting system, that’s exactly what you’ll end up doing.
Managing risk isn’t just about getting your clients to pay their invoices faster. It’s about change. When your business changes, your systems need to change along with it. When the economy changes, your business needs to change along with it. By managing and preparing for those changes through systematized risk management, you put yourself on secure financial footing.