Contractor Talk Articles

At some point in time, if you are going to grow your construction business beyond $2 million, you are going to need someone working on sales full time. Now, maybe sales is your thing and you want to do that full time. Fantastic.

It's almost always best when a business owner is committed to selling. But even if you sell successfully, you may still end up wanting to add another salesman.


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McMasters

I thought you did a nice job of defining a profitable commission plan except you did not mention how to handle unprofitable or less profit than expected jobs. I call this the urge to take away money from the commission pot to pay for operational management and cost estimation problems.

I have seen real problems when owners of a company elect to raise the anti against their salesmen by getting creative with their payment plan execution.

Things like charge backs for collection problems, material cost overruns and unexpected labor costs. Often these items are not defined in most commission agreement contracts and this can lead to real problems for everybody.

What is a fair and legal way to deal with less than perfect projects and how do you pay commissions, only at the end of a project when all true costs are known? or partially during a project tied to milestones, payments or percentage of work completed.

Yours thoughts?

Regards,

Michael

CBCron

Michael,

The issues you've pointed out are quite real. When deploying the system recommended in the article, a small handful of procedures resolve most of the problems.

Here's an example. I recommend paying commissions out quarterly and holding part of them back. The hold back is trade specific based on the seasonality of the trade.

For landscapers operating in cold weather cities, paying out only 75% of the commissions each of the first three quarters isn't unusual. Fourth quarter sales are typically tiny.

By holding back 25% of the earned commissions, it protects the owner from getting upside down with his sales force. Of course, 100% of the earned commission should be paid out by year end.

Regarding the creative punishments, those can be necessary depending on the exact role the salesman is performing. If he is estimating and pricing, and someone else is running the field, then he should be paid on actual gross profits prior to warranty work. If someone else is doing the estimating, the salesman should be paid on projected gross profits.

The operations team should be responsible for minimizing warranty work and other quality related problems.

You mentioned a serious issue that salesmen want overlooked: collectibles. The commission should be based on cash collected. It's the salesman's responsibility to qualify the client.

Long projects cause a set of problems that have no perfect solution. Few companies have sufficiently accurate job costing systems to pay on partial completion.

No plan is perfect, but the presented approach, with the necessary refinements for a given company, eliminates most commission problems I've ever seen.

Ron

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Pearce Services

Ron,

First, I would like to thank you for all the great info you have shared, Secondly, If I misunderstand your structure I apologize, but....

I was thinking about how you capture your overhead. It appears that you capture all of your overhead on the "house" cut of 80% of the job profit.

Your example shows 80% of the GP to pay for OH&P, I feel that all overhead should be captured before any split on profit is made. even if a higher percentage would need to be paid on real profits.

example; sell price...............$15,000
direct costs........................$10,000
overhead............................$ 2,000
Commission at 30%...............$ 900
net profit............................$ 2,100

Assume the job is completed, and you have a few mistakes or cost over-runs, and incur $3000 in additional job costs.
In your scenario, you would pay a $400 commision, and short your overhead by $400, whereas you would have covered all your overhead by paying OH before determining profit. And 30% may be a bigger motivation to work for a higher price.

I assume you have considered this scenario, and have good reasons for not recommending this, I am just curious what your thoughts are.

Thank you Kevin

CBCron

Kevin,

When I first started using this approach, we charged marketing, sales, and operations management overhead to the jobs. The resulting commission rate usually rose to around 35%. BUT...

We discovered salesmen struggled to understand these additional charges and therefore complained CONSTANTLY. The approach also allowed gaming of the system by the management team which further eroded the sales team's confidence in the plan.

The objective of the plan is too maximize selling price. When salesmen get confused or sidetracked (by complaining) their effectiveness drops.

Taking your specific example, if the salesman did the estimate and blew the estimate, he doesn't get the commission. If the operations team blew the estimate or their management of the crews, the salesman shouldn't take the hit. Ops should take the hit for their own mistake (assuming they have some type of bonus program in place).

Thank you for the kind words.

Ron

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wackman

Ron,

I'm very interested to hear if you have a similar program for incentive based pay for employees in the field.

I find employees who are paid by the hour to naturally slow down unless I'm around and keeping the pace humming along. I'm looking to cultivate an atmosphere based on speed and efficiency ALONG with quality.

I don't want piece workers per se because quality usually goes out the window. Most programs I've heard involve to much work or are quite complicated.

In my situation I do the estimating and overall management, then I have a superintendent and a few carpenters.

Any ideas?

Thanks in advance,
Wack

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Grumpy

I don't want to click for more.

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Chicago Gutters Chicago Roofing

CBCron

There are three proven financial approaches for incentivizing field crews to work faster:

1. Set them up as legal subcontractors and pay them per job.
2. Nail your labor productivity numbers and pay them for productivity gains.
3. Share the profits with them.

The first option is used extensively and with great success in the residential market. Not so much in the commercial market.

The second option is really tough to pull off. Rarely seen it done successfully.

The third option is my recommended approach. Yet again, this approach can be quite tough to pull off but it isn't impossible. You certainly can't game the system. I can't tell you how often field workers ask me "How do we stay in business when we lose money on EVERY job?"

I'm like "How do you know the company loses money on every job?"

"Because that's what they tell us."

This is what I mean by gaming. If a profit sharing plan is going to work, it's got to be perceived as being on the up and up.

This explanation probably isn't as thorough as you want or need but it's the best I can do in this format.

Oh by the way, the best way to motivate crews has nothing to do with money!

But I'm not going to share that answer right now because it's in an article I'm trying to get Nathan to upload.

If you'd like to see that article, email Nathan and encourage him to load it up...and the 59 other articles I've already sent him for the article section.

Maybe a little feedback from his readers will motivate him to share the information faster!

Good luck with your business.

Ron

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john elliott

Dubious legality, if they are your employees then they can't be subcontractors. Simple as that.

Wow, I wish it really was as simple as that. This is contracting we are talking about here, not a factory production line.

John

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Ed the Roofer said "John too, in his crass and blunt demeanor.............."

CBCron

Instructions on how to set up 1099's legally is all over the internet. I do advise double checking with an attorney first before trying it.

When it comes to tracking productivity, construction and manufacturing are remarkably similar. They are the two easiest industries to track.

Not saying it's easy, but it can be done very successfully with some effort and foresight.

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john elliott

You can only treat someone as a sub contractor if that is what they are. I wasn't asking how to pay a sub contractor, I was pointing out that treating employees as if they were subcontractors is illegal

I hope you won't mind me saying that that is BS of the first order. A worker on a production line and his employers know exactly how long it takes to do each job. In construction and remodeling situations vary constantly

John

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Ed the Roofer said "John too, in his crass and blunt demeanor.............."

wackman

John, I don't think he was implying that construction is easy to predict. As you point out situations change from job to job and even within a single job. I think he's just stating that construction is not too hard to track, which I agree with. I can pretty easily go back and figure out all my costs broken down to materials, hours, etc...

Unfortunately, just because our last dormer addition with a master bath took us XX hours and ZZ dollars doesn't, in the slightest, mean that's how much this one will cost. Which is exactly the problem I'm having with setting up an incentive system.

I would totally do the 1099 sub route but this site has convinced me that's unwise, even though I don't agree with it.

Wack

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wackman

Thanks Ron,

Seeing as how you're a construction advisor what do you think about this whole "common law employee" 1099 thing? Is it really as bad as it sounds on this forum. I'm not talking about someone who practically is an employee that you just got licensed to avoid WC. I'm talking about using a sub so much (because they're good) that you have to be concerned about the Gov. getting involved and making you accountable for them in some way.

Or are some people on here just being a bit paranoid?

Wack

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john elliott

Wack, I don't have an issue with the costs of materials etc, it's the PRODUCTIVITY which he claimed is easy to track and that's BS. There are yards of reasons why it is so difficult to create a sustainable incentive system in construction, especially residential construction. Every job is different. Even the distance to the portapotty is diffferent.

It sems to me that the central message of this thread is that salesmen should be rewarded for producing more profit, and so should the workers. In England the slang description for this is "stating the bleeding obvious". There is no problem with rewarding the producers of extra profit, the problem is how do you do that? How do you measure the profit of each and every small period of time which you need to do in order to closely connect, in the producers' minds, with the incentive scheme you are using?

Even if you achieve that, what happens when the job goes wrong, through no one's fault, and there is little or no profit. Does that mean everybody goes without their bonus, despite having worked extra hard?


As far as the other thing is concerned, all governments (including the UK) are trying hard to stamp out the self employment thing. They absolutely hate it because it costs them money. Many people are getting away with it today but they won't be tomorrow

John

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Ed the Roofer said "John too, in his crass and blunt demeanor.............."

Ed the Roofer

Why not consider working out a health insurance plan that can be provided for at various levels. The cost of health insurance may be a tad on the high side, but does a regular $ 25.00/$ 50.00/$ 100.00 dollar bonus actually promote company loyalty?

After a while, bonus money begins to be expected as part of the course of providing the basis service an employee should automatically be providing anyways.

If they have a significant incentive to produce to enable their participation in, and with various employer contributions made, either on a slif\ding scale or a matching amount for the individual worker, then they would have something significant to lose, if they did not either produce or remain loyal to the company.

Ed

wackman

All good points.... This is definitely a tough subject.

I know this, it won't work if it's complicated. It has to be straight forward and simple. If you have to basically hire a person to monitor everything just in order to know who deserves what, then I doubt you're saving/making more money.

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wackman

Does anyone know what the definitions of these common law employees are? At what point is a 1099 sub reclassified by the Gov. as an employee? Surely they have to have something somewhere that defines this so we at least know when it gets dangerous to use the same guys over and over.

I tend to have two subs for each trade that I use. I never give it all to one, even the good ones. But I might give the good one 95%.

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Ed the Roofer

I know that I have posted the IRS factors which determine how they evaluate the differences.

There is a weighted scale of priorities used to make the determination, but that can be subjective and open to each auditors whimsy and opinion.

First try doing a search on this site. I believe one of the articles contained the phrase, 20 point list blah blah blah.

If you check my user profile, I think I even started a thread with reference to that title, so it would not be hard to just check out the threads I started. I would do it for you, but I have to get some sleep. If you do not find it, I will dig it out later today.

Ed

CBCron

Allow me to address multiple posts.

Wackman, you are SO RIGHT about needing to keep things simple. Most solutions backfire because they get way too complicated. This discussion is a perfect case in point.

John - please go back and read my replies carefully. I never said, nor ever would say, that tracking productivity is easy. It isn't. It's a pain. But an ABSOLUTELY necessary one. What I said was:

1. Construction and manufacturing are the two easiest industries to track. Try tracking white collar productivity some time.

2. Profit sharing plans are tough to pull off.

For some reason, business owners believe running a business should be easy. There's nothing easy about running a business, especially a construction company.

Tracking labor productivity and operations incentive plans are two of the most difficult tricks to pull off. But, I don't see how any contractor can expect to stay in business if he can't track and predict labor productivity.

Bonus plans are an entirely different issue. They are not necessary. They are several other methods for keeping employees productive.

John, you are very right about needing to treat a subcontractor as a subcontractor. It is dangerous territory.

It is my understanding that the safest way to do this is to make sure that the crews work for more than one contractor. In other words, you and a friendly competitor might share crews and switch off now and then. Don't know if that's been suggested on this site but I think that's one of the acid tests the government uses to determine whether they are truly independent from your business.

I have never advised a client to set up crews as independent contractors. I believe that takes away from a "team" culture and greatly reduces the "this is your company too" mindset. Companies who manage to create a team-first mindset inevitably end up with really low turnover and really high productivity.

I have had several contractors tell me their subs are set up as independent contractors and swear they've done it legally. Of course, until the government challenges them, do they really know whether their approach is legal?

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john elliott

I can't quote any sources for this other than myself, but I think the most important thing with the IRS or any other government agency in determining whether or not a sub contractor is really an employee, is whether or not they do any work for anyone else. A genuine sub contractor is likely to have several firms that uses his services. Whereas an employee is only going to have one employer, even if they each call him a sub contractor.

When CRCron advised "1. Set them up as legal subcontractors and pay them per job." that really wasn't very good advice. Perhaps what he meant was keep them as employees but pay them per job, which is perfectly legal as long as certain legally required safeguards are met.

If your business depends on sub contractors then you might want to look into who else they are working for and how often.

When comparing your business with other firms that use "sub contractors" which are really employees, they might be getting away with it at the moment but it isn't anything they should be basing their long term plans on

John

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Ed the Roofer said "John too, in his crass and blunt demeanor.............."