Doing business with a construction services company can be a complicated and a risky venture if they are not properly vetted.
Most homeowners will do their due diligence by interviewing the construction services company and will search the internet for adverse customer reviews and complaints.
Although these are indeed good practices, they can often come up short in assessing if you are doing business with the right Houston construction company for you.
There are many business problems and risk that construction services contracting companies experience in their day-to-day business life.
Some of these problems are just part of doing business in the industry. Others problems are representative of the construction firm’s systemic business practices.
These are the issues that you want to have a better understanding about before engaging them in a construction services contract agreement.
A construction company’s problems are very common in the industry and can often be classified as either contracting issues or/and business issues.
For the purpose of this article, we will refer to contracting issues are non-systemic problems with clients, supporting subcontractors and vendors affecting contract fulfillment obligations.
Whereas business issues are associated with the business ethics of fairness, conduct and transparency.
Although most well-established construction companies have many mundane issues with their business operations including disagreements with their clients and vendors.
There is a major distinction in conduct and practices between professional construction service providers and problematic contractors. We will discuss some different kind of problems that can be worrisome to future clients.
Learn about the business risk of doing business with a Houston services construction firm
Contracting Issues
A construction business can have general contracting services issues that frequently lead to legal actions are associated with a breach of intended actions and/or the perception of one of the parties that the other party is not acting in good faith or deceptive practices.
It’s about Quality and Capability – Not the Cheapest Price
With the rising cost of custom home building and high-end remodeling it is common for the owner to seek out affordable options and get as much value for their dollars as possible. Although this is often misunderstood with getting the cheapest bid.
One of the reasons that owners will get multiple bids is to compare contractors pricing.
Comparing construction cost bids can be very helpful in eliminating a small group of construction services contracting companies narrow from further consideration for a project.
Although if the bid documents are not properly prepared or the specifications are vaguely defined, comparing bid proposals will likely be useless in clearly defining the best construction company for your project needs.
Without defining a level playing field of well-prepared plans and detailed specifications there is little value in comparing prices.
There is no consistency in comparing apple to apples. If you are making your decision on price, you are likely being low balled and you will not know it until it is too late.
Comingling Money is an Invitation for Trouble
Common construction law requires a Houston contracting firm to establish dedicated project accounts for the acceptance and distribution of advanced funds related to a specific project.
When construction contracting firms comingles funds with operational overhead accounts and other project accounts it obscures the ability to transparently trace the trail of the funds if there is a question of financial integrity.
When the building contractor comingles funds, there is not a clear path for the trail of funds dispersed.
This leads to suspicion on the part of the owner even if there has not been any wrong doing. This can also lead to borrowing from Peter to pay Paul that ultimately can indicate financial problems of solvency.
Operating on a Hand Shake is Bad for the Builder and Client
It is essential to document the agreement between a construction company and owner for any amount of project cost.
The contract should at a minimum define the basis for the terms and specifications of the project identifying the construction documents, insurance requirements and payment schedule.
As the cost and specifications of the project get more complicated the contract should address more cures for disputes and resolutions.
In addition, the contract should provide definition and define the obligations for rare occurrence liability associated with unanticipated actions.
In all fairness, it is in the owner’s interest as well as the construction contracting to have a comprehensive contract, although they should not be prepared for the intent to abuse.
Cold Calling Sales People Seldom Represent Owners Best Interest
As a contracting companies business’s grow, they need additional customers and referral business is generally not enough to grow a company aggressively.
So, some contracting companies will use various marketing and advertising methods to get customer attentions. This is a common truth in the homebuilding and the home remodeling industry.
There are in fact limitations to what is acceptable selling practices in the industry. Uninvited solicitations such as tele-marketing and door to door sales such be welcomed with suspicion and caution.
These types of sales approaches are typically high pressure and loosely documented contracting methods. These types of transactional contracting typically can turn out badly for unsuspecting homeowners.
Business Issues
The business problems are most often associated with the consequences of local competition, stressful market conditions and grey areas of ethical practices in the industry.
Business issues take a wide range of problems that are constantly changing through market conditions and the supply and demand of resources.
Many of these items are local issues that are the consequences of economic pressures that result in market factors that cause an imbalance in available resources.
The second common consequential business problems are the results of the business ethics or communication issues associated with working relationships during the planning and execution of construction.
Skilled Labor or Material Shortages
It is very common to experience commodity shortages during hot market conditions. Currently Houston is experiencing skilled labor shortages ever since the 2008 national financial crisis.
As Houston’s housing market started coming back in 2011 the many tradesmen that scattered to the wind did not return to the residential housing market as the economy recovered.
In an already labor stressed market, Hurricane Harvey storm damages has pushed the local industry to the brink. If that was not enough, the 2021 pandemic only exaggerated an already challenged labor and material market.
There is in real terms a housing shortage for the results of the fore mentioned disasters. These shortages put price pressure on the high demand existing housing inventory.
They also create problems with predictability of arranging a timely schedule, as subcontractors’ behavior become more unpredictable.
Insufficient Selection Allowance Amounts
This is a questionable practice that some general contracting companies exercise in attempting to win competitive bids.
If not carefully identified by the owner the product selection process can lead to substantially greater total construction cost in your project.
The common questions the owner should ask is what are the quantities, unit prices and standards of product grade of the items that make up allowances.
In a competitive bid condition, the allowances should be predetermined to avoid distorting the results of a competitive bid award.
When product selections cannot be made prior to the bidding process, presetting the allowances can provide clarity to competitive bidding.
By eliminating the selection allowance amounts from the bid evaluation, the more the comparison becomes apples for apples.
Communications & Expectations
These two factors cause more problems for a building company than any other combination of factors.
Communications are an essential element of any successful builder – owner relationship. The responsibility usually rests with the construction services company to establish a clearly defined and open level of honest exchange of information.
Most importantly the construction services company should clearly define realistic expectations for all elements of their performance during planning, construction and warranty of the project.
If the builder does not clearly develop customer expectations or they are not properly communicated, the owner’s expectations will not be aligned with construction contracting companies’ execution and performance standards.
Under Bid Projects
Underbid projects will always lead to serious issues and stress on the relationship between general contractor and owner.
The Houston construction services firm will look for every opportunity to generate change orders or to save cost on labor or materials to increase profits.
At some point this becomes increasingly clear to the owner that their general contractor is in the owner’s pocket ever chance they get.
These situations normally do not work out well for the owner or the general contractor. If the project has been under bid and the owner terminates the contract, the result will likely be consequently worse than it would have been if they had accepted a higher bid.
If the general contractors honors the contract and continues to attempt to minimize the mounting losses, the owner ends up with an inferior product.
The owner should avoid these situations by conducting a diligent process of vetting their general contractor properly and thoroughly.
Through the awareness of these undesirable factors the owner can manage these unfavorable conditions and eliminate the inherent risk associated with these topics.
Conclusion
Understanding the unpublicized and common Houston construction company business risk that can directly affect an owner’s interest is essential part of managing project risk as well as affecting the owner’s ability of vetting construction contracting companies.
The most effective methods to avoid many of these business risks factors is to openly discuss them during the early stages of vetting general contractors.
