Smart Business for Contractors

Contents

CHAPTER 1

Money Matters: Pricing, Billing, Collecting 5

How to Price Your Work 6

Using the Hourly Rate Approach 7

Keeping Track of Expenses 16

Billing and Collecting Payments for Your Work 17

CHAPTER 2

Putting It in Writing: Contracts and Beyond 26

Estimates and Contracts 26

Following through after the Contract 35

Contract Disputes 38

CHAPTER 3

Running and Growing Your Business 45

Setting Up Your Office 46

Working Smart 49

Getting Help 58

Growing Your Business 61

CHAPTER 4

Managing the Paper Chase 66

Getting Motivated 66

What is a Record? 68

What Records to Keep and How to Keep Them 71

When It�s Time to Use the Records 77

Getting Help with Record Keeping 80

CHAPTER 5

Drawing the Line: Business vs.Personal Finances 82

Legal Reasons for separating Business and Personal Finances 83

Good-Sense Reasons for Separating Business and Personal Finances 86

Methods for Separating Business and Personal Finances 89

CHAPTER 6

Sizing Up Your Options: Corporations,

Partnerships, Employees 93

Look to the Future First 94

Should I Incorporate? 95

Business Expansion: Employees, Job Sharing, Subcontractors 102

Taking on a Partner 106

Hiring a Lawyer 109

CHAPTER 7

Taxes: Plain and Simple 113

Tax Estimating and Reporting Requirements 115

For the Do-It-Yourselfers 120

Tax-Related Issues for Contractors 121

Selecting the Right Accountant 123

CHAPTER 8

Insurance: Money Well Spent 128

Types of Insurance 129

Insurance to Protect Your Business 130

Insurance for Employees 137

Including Insurance Costs in Your Prices 140

Filing Claims 142

Working with an Agent or Broker 143

CHAPTER 9

Medical Insurance: How to Live with It 146

Basic Medical Coverage 147

Group Medical Coverage 148

Types of Medical Insurance Plans 151

Selecting the Right Medical Insurance 154

Medical Insurance and Taxes 159

Making the Best Use of Your Health Care Coverage 160

CHAPTER 10

Disability: Anticipating the Solution 164

Disability: A Clear and Present Danger 165

Disability Insurance 165

Other Solutions for Dealing with Disability 172

CHAPTER 11

Retirement Planning: Never Too Early 178

Getting Started 178

Defining Your Objectives 179

Estimating Your Future Expenses 181

Retirement Income: Putting Together the Pieces 181

Balancing Income with Expenses 193

Medical Care during Retirement 194

Retirement and Estate Planning 195

Glossary 197

Index 201

Introduction

Ever since I was a child, I have admired the work of contractors. In the small apartment building where I grew up, I would follow the building�s superintendent-a plumber, electrician, carpenter, and everything else-whenever he came to fix whatever was broken or, for a few dollars from my mother, add a shelf or install a new appliance. When he would leave, I would use household utensils, brooms, and mops to imitate his tools so that I could pretend to be doing what he did. Sometimes on weekends, my mother would take me to a nearby lumberyard where the workmen gave me leftover scraps of 2x4s and plywood, which I would take home to make into crude toys and furniture.

In later years, I worked for builders while in school and got a closer look at their lifestyles. From scattered conversations throughout the day, I came to realize the hardship and precariousness of the lives of most contractors. The very same man whose tilework or woodwork or roofing or flooring was so carefully and seamlessly completed was often unable to pay his mortgage, get proper medical care for his family, or make reasonable plans to retire someday.

Since that time, I have practiced law for 30 years and represented quite a few contractors. I have also had many opportunities to deal with owners, architects, engineers, and others involved in construction projects in matters ranging from the smallest engagements of contractors by private owners to large development projects involving general contractors or construction managers. What struck me as I learned about the lives of contractors is the contrast that often exists between the skill and integrity of a contractor�s work and the frequently haphazard manner in which his business and financial affairs are organized.

I know contractors who don�t have liability or medical insurance. I know contractors who have no plan whatsoever for retirement or disability. Very few of the contractors I have discussed the matter with get all of the tax benefits available to them. It is an unusual contractor who is aware of his choices about retirement plans. Contractors are not alone in these shortcomings, but it is disturbing to see people with highly developed skills in their crafts who lack the business skills that deeply affect their lifestyles. In these activities, I have found that my sympathies lie with the men and women who perform the actual work, the contractors themselves, and it is this feeling that has been the primary motivation for this book.

In one respect, the work life of a contractor is the same as every service provider. Anyone who makes his living providing services has nothing to sell unless he gets up in the morning and does whatever it is that provides his service. But in other respects, contractors are different from other service providers. Usually, if they don�t do it, it doesn�t get done. The buck stops right where it starts. You can save the word �delegate� for bigger businesses.

The independence that attracts many contractors to their work often brings with it difficulties. The self-reliant nature of contractors haunts them in many ways that affect their financial securities. The majority of contractors work alone or in small groups that don�t operate like other established businesses.

What is a minor glitch for workers in many types of work is a showstopper for a contractor. A broken truck fro a contractor doesn�t simply mean finding an alternative way to get to work. It means, more often than not, that the contractor can�t do his work and earn his income. A pricing mistake for a dentist means at worst a short-term loss on one small part of his business. For a contractor, however, a faulty takeoff from plans for a job that will last six or eight weeks may mean bankruptcy. Similarly, bad knees for a contractor who does flooring or carpet installation or neck pain for one who des ceilings or overhead lighting will probably mean disability sooner or later.

In the year or so before I started to write this book, I asked contractors some very direct questions: �Do you use an accountant? What sort of retirement plan do you have? Why did you decide to use a corporation and is it helpful to you? If I wrote a book t provide you with all the information you would like to have, what would you like to see in it?� From the answers to these questions, I have learned what contractors generally know and don�t know and, most important, what they would like to know. I hope that I have also learned the best ways to explain to contractors matters that may not be particularly exciting for them.

This book is my best effort to include in one manageable volume everything the typical contractor needs to know about business matters. I have tried to provide specific and useful information wherever possible; when that is not possible, I have directed you to the best and most convenient sources of information. I have outlined each business topic with simple, easy-to-follow, and time-saving steps. I am well aware that the finished product of learning and following good business practices is not like the finished jobs most contractors try to do. If you learn the information that is in this book and follow the recommended steps, your reward will not be a beautifully pointed-up brick wall or perfectly fitted custom cabinets. But it will be more money and more financial security for you and your family as a result of the hard work you are doing.

As I think about contractors following the advice that I offer in this book, I think about the work of my friend Phil Florie. I have been fortunate to enjoy Phil�s exceptional skills in a number of renovations to y home. Phil�s approach to each project is planned and performed with precision, dedication, and skill. It�s a real joy to watch Phil execute his trade and enjoy the results. The outcome is always beautiful, functional, and cost-effective. I doubt if many readers of this book will find the steps that I describe in this book as interesting as I have found watching the progress of these many projects. It is my hope, nevertheless, that your next project-to create for yourself the most lucrative and financially secure life your work can make possible-will work out as well as Phil�s projects. If you follow each of the steps carefully, it will.

You are a contractor. You know your trade, and you're good at it. But what about the unique financial and legal concerns of running a construction business? Do you have the right tools for dealing with money and the law? Attorney Jim Kramon provides all the information you need to turn your hard work into greater financial security. You'll learn how to:

• Price your work and keep track of expenses

• Resolve contact disputes

• Get all the tax benefits you're entitled to

• Work effectively with an accountant or lawyer

• Plan for retirement

About the Author
Jim Kramon is a managing partner of the Kramon & Graham, a 20-person law firm in Baltimore, Maryland, that routinely represents small contractors and tradespeople.