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BASEMENT BLOG

It's a risky business... | Posted at 15 Jun 2006

My heart sunk earlier today as I read about the conviction. A personal friend of mine, and former owner of a construction company, was found guilty on Monday of negligent homicide and endangerment after two of his employees were killed in a tragic accident on the job. Although I believe that jury’s decision wasn’t the right one, this is a sobering reminder of the risk construction companies and their owners face. These are the kind of stories that keep me awake at night.

Because of the low barrier to entry, many people enter the construction industry. However, few, especially in residential construction, understand the risk associated with their business. (From my discussions with my friend, I think he did understand his risk, and planned accordingly.) Among the things that can go wrong in a construction project are unanticipated costs, sudden increases in material prices, unavailability of qualified labor, clients who are unable or unwilling to pay, equipment malfunction and breakdown, weather-related delays and damage, property destruction, even personal injury or death.

For a general contractor, such as Upscale Downstairs, the construction company must not only worry about their direct risk, but also the indirect risk associated with subcontractors and their independent suppliers. Second, third, and even fourth-level parties all pose potential risk to the general contractor. This is one reason why we carefully hand-pick every subcontractor and supplier who becomes a part of our team. Those trades who work with Upscale Downstairs are proud of this. We may have to pay (and charge) more for first-rate service, but that peace of mind adds value to everyone involved, both contractors and clients.

For those of you who feel that the cost to finish your basement, build a home, or hire any contractor to perform any other job is surprisingly high, I can sympathize – I pay the price, too. However, I argue that many of these costs should be even higher, especially in the remodeling industry. Why? Because of the principle every stock broker, gambler, and employee understands: HIGH PROBABLE RISK EQUALS POTENTIALLY HIGH RETURN.

If you purchase a conservative mutual fund, you expect conservative results. If you bet on the favorite horse, you can’t anticipate big bucks. And if you work for the government, you appreciate security and benefits, not usually unending future potential. As a building contractor takes on potentially greater risk, he/she should charge accordingly. In land development, commercial, and industrial construction, many experienced and educated builders understand this principle. But again, where barrier to entry is lowest, in the residential sector, this is different. A new remodeling contractor, anxious to generate business, doesn’t understand his/her risk, and usually doesn’t charge near enough to compensate for that risk potential, let alone his own costs. I know. I’ve been there before.

I can remember one house I remodeled years ago for an investor. I was probably the only one willing to do the work. The place was a ticking time bomb, ready to go off. Mold was everywhere. The electrical was outdated and unsafe. Pipes and roofs leaked. The house itself was structurally unsound. With my crew, we cleaned the place up. But it was impossible, especially with such a low budget, to foresee and correct every problem. Fortunately, I had enough foresight to have the owner sign a special waiver of liability. Even still, I would never consider such a project today, and anybody who does should charge handsomely. There are a thousand things that could go wrong, for any of which the contractor, in today’s sue-happy society, might be found responsible. Those are the types of projects that stay in the back of my mind, keeping me wondering if one day I will get a phone call…

Now finishing your basement isn’t half as risky, right? There shouldn’t be any mold problems, and if the house is newer, the electrical, plumbing, and structure should all be in great shape. But it isn’t that simple. The long list of potential risk I mentioned earlier, including property damage and personal injury, might still occur.

Speaking in general terms then, and applying the risk-return principle, I should profit substantially more than, say, a database administrator who also has a four-year degree but who doesn’t face the same level of risk. Likewise, I might profit less than a civil engineer who has a six-year year degree and who also faces serious risk. So why then isn’t this the case? Why do so many contractors struggle to pay the bills? Poor financial management is part of the problem, but it’s not the whole story.

Unfortunately, those who don’t understand risk, and don’t charge a risk-appropriate fee for their service, force the rest of us to lower our prices to remain competitive. Worse yet, unlicensed and uninsured “contractors” really hurt the industry. Without the experience required for a license and the high expense of liability insurance, these folks really hurt price standards when they offer lower cost services than their insured competitors. And when something goes wrong on a job, it’s often from one of these people, and the entire industry suffers, partially resulting in the negative stereotype contractors face today. (For more on this topic, see the previous blog)

So the next time you are surprised by a “high” price from any contractor, be thankful the price isn’t higher – it probably should be. And remember my dear friend in jail, and the high price we pay to be building contractors.

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As always, I encourage your comments. Use the link at the bottom of the page to share your thoughts.
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View comments

mike contractor says:
hi, from kansas city MO love your blog wish people understood the risk we take sometimes to get projects done

Database Administrator says:
A database administrator has risk as well... it might not be a physical risk such as a contractor, but a great risk none the less. A database administrator guards and oversees databases with information. Which in this day and age in business information = money, the companies success could depend on that information.

Cory says:
Thanks for your comments. Unique industries certainly have unique risks. As I see it, though, construction risks are often the most difficult to hedge. Things like the weather aren't always cooperative. Now, I'm not trying to make excuses - there are enough contractors who do - but building does have unique circumstances. I don't know enough about other occupations to compare risks. What I do know is that private individuals are far less likely to criticize their doctor or accountant when problems occur.




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