Apparently, we contractors are crooks. Not you and I, of course—we’re golden, but the rest of us are downright nefarious. Don’t believe me? Just flip through the wealth “informational” cable channels and scroll down the listings. In moments, you’ll be inundated with home renovation/improvement/house-flipping/yahoo-let’s-all-get-rich-in-real-estate offerings all gravely warning the weary, innocent public of just how much we the evil, greedy contractors are cheating them out of their hard-earned paychecks. These 30-minute-long apocryphal tales are often interrupted only by Angie’s List® and HomeAdvisorsm ads.
Now, never mind the fact that if you listen closely (I recommend you don’t; it’ll just make your head hurt), our TV “expert” is spouting little more than wild generalizations as he offers up nebulous, questionable “advice” that rarely translates to real life. Ignore further the fact that his shirt is far too pressed, hair way too moussed and nails much too manicured to quell your doubts of his claim of “coming up out of the trenches.” Nope, I say don’t waste a perfectly nice half-hour fretting over silly things like actuality. It’s best to just sit back, suspend reality for a half an hour and revel along with our hero at the big kitchen reveal at the end. (What were they thinking with that countertop color?)
And though admittedly entertaining, keep in mind this theater comes at a cost—at least to you and me, the contractor. You see, a main reason television shows of this variety resonate so well with the viewer at large has to do with a tried-and-true, story-telling device: the public loves a villain. This is all well and good until we realize that in this case, the villain is us. And yes, I know the client/contractor relationship is far more too varied, complicated and mercurial (ever had a bad client?) to demonize an entire group, but, hey, they’ve got only 30 minutes. It’s cheaper and less work to generalize. Keep this in mind as we move forward. (It all comes together in the end. I promise.)
A while back, I wrote a piece exploring the subject of contractor “uniqueness.” My argument was that most contracting firms aren’t nearly as special as they suppose and that over time, many contracting firms that co-exist within the same closed, local market tend to take on similar complexions, processes, goals and even employees of their competition. (Ever had an employee stolen away by a competitor? Or stolen one away yourself?) I referred to it as “market assimilation.” And though gravitating toward conformity is great if one simply wants to maintain the status quo, it falls down as a means of standing out among your competitors.
So, let’s recap. First, as a group, the public doesn’t trust us. And second, to remain viable in a homogenous contracting market, we need to search out strategies that can separate ourselves from our competition.
But is there a way to show our potential clientele we’re not like Contractor X while addressing our “villainous” reputation? Well, I believe there is: open-book accounting (OBA). I’ve used it myself and I’m here to tell you that though there are elements of which to be cautious, which we’ll discuss in more detail later on, OBA can spell the difference between your client contracting with you, or taking his/her business down the street.
OBA & Trust
Over the years, many successful contracting firms have set a notable emphasis on the client-builder relationship. There are loads of reasons this came to the forefront, some the result of good experience but I’m guessing far more arising from the wreckage of customer relationships gone awry. And most of these companies found that by far the most crucial element in creating genuine relationships came down to one key and common thing: the element of trust between the client and the contractor.
But how does one create trust? Well, you don’t—at least not from thin air. Trust isn’t available on Amazon®, and you can’t pay $495 for a seminar to hand you the formula. No, trust is a privilege and is gained only over time, and only when there has been a sincere and consistent commitment by both parties to champion the success of the team over the individual. Think of it as a (good) marriage, and with any successful marriage, there will be give, take and compromise. In contracting, this pledge of unity may even compel you, the contractor, to periodically offer up tokens of concession in order to demonstrate your commitment to the team endeavor. This is where OBA comes in.
Nuts & Bolts
Generally, OBA is the sharing of accounting records and information between contracted parties. For the purposes of this piece, this sharing is between the contractor and client only. (Yes, in theory OBA could be extended to the subcontractors, suppliers and even designers, but unless you’re sporting a huge administration staff, which most of us don’t enjoy, the logistics and headache of such a complicated accounting effort would become too much to bear.) OBA creates a working environment wherein each party (primarily the contractor) agrees to give the other access to its accounting records—information that would historically stay under wraps—for the building project throughout the course of work. In theory, no cost information would be withheld by or from either party. This includes accounts receivable, accounts payable, job costing/tracking, closeout/reconciliation and more.
The client might also have access to subcontracts, purchase orders, equipment rental/purchase tickets and even labor timecards. The level of access would be up to the parties (the logic would go: the more access you allow, the greater the trust you will earn) and this access would all be clearly spelled out in the contract terms and conditions (more on the this later). This sharing of information allows the client to become better educated and therefore more involved in decision-making—a good or bad thing depending on the circumstances) and may even extend into assigning crew sizes or scheduling overtime. And although this seems straightforward enough, the trick is in the details. So let’s take a moment to examine some of the plusses and minuses, to both the contractor and the client, of the OBA process.
OBA: The Client
Of course, the first and most immediate pro for the client is that they now enjoy access to the contractor’s accounting and cost information for the project—a privilege not historically extended to them. This in itself is a major concession from the contractor and alleviates much of the angst often borne by a client who may be concerned that their contractor is taking advantage of them. But besides general overview, OBA offers the building customer far more, including the following:
Client Pros. First, a way to monitor cost inconsistencies such as billing-and-receiving omissions, duplications or items billed to the wrong job, which happens more than you think.
Second, a means of gaining valuable information as to what is really going on behind the scenes. This isn’t necessarily a bad thing for the contractor. Having better information, and understanding motivations and circumstances can make the client more empathetic and understanding regarding such things as change orders, disputed items and schedule delays.
Third, an avenue to assist the contractor with operational and/or scheduling decisions. And with the client more invested in the decision-making process, disputes can more quickly be resolved and schedules more readily retained.
Fourth, a portal for a client to offer up value-engineering or cost-saving ideas. This, too, can actually turn out to be a pro for the contractor. It’s not uncommon for a client, especially a businessperson, to have resources available to them that are unknown or unavailable to the contractor.
And fifth, a running start on closeout. Cost-related disputes, punch-list disagreements and retainage decisions don’t have to spring up all at once at the end, which unfortunately happens far too often, elevating everyone’s stress levels. With more issues addressed and resolved along the way (due to client access of information), the parties will have less to reconcile at the end of the job.
Client Cons. To be honest, there aren’t any—other than the fact that the client will now be more drawn into the process and thereby own more of the responsibility of the outcome, which oddly enough, some clients—particularly busy, commercial types—may not prefer. Think Ron Swanson on “Parks & Recreation”. So in short, with such a limited downside, if I were ever offered an OBA arrangement as a client, I would snatch it up every time. Remember, it was likely only offered to you in the first place to secure the sale.
OBA: The Contractor
Well, if we’re being candid (and as we’ve already covered), there exists one pro greatly outweighing all others when it comes to the contractor and OBA, and it’s really quite straightforward: Offering OBA may get you work you otherwise wouldn’t acquire.
Contractor Pros. Simple, huh? But then again, can you think of a better reason to use it? We’re not doing this from the goodness of our hearts. Project awards are the lifeblood of our business, and let’s face it: The public’s (real or perceived) distrust of contractors isn’t going anywhere, and at the same time, your competition is growing and maturing. So it’s like this: OBA may not be a tool you want to include in your operations, but it may be the tool you need to include in your operations. But this main motivation aside, there are other, smaller benefits to the contractor that may not seem so obvious at first. Here’s one example:
Yes, now that your client has deeper information, he/she indeed nitpicks a bit more and even points out inconsistencies and mistakes that may get under your skin at the time. But in the long haul, I’d argue that that is not such a bad thing. In fact, it may even be good for you. How? Well, we all know there’s a natural human tendency to put things off that we find disagreeable (I know I do it both personally and professionally), and I’ve also noticed that people tend to harbor a natural tendency to avoid conflict and confrontation at the time. This isn’t from shyness—most contractors build up a pretty thick skin early on or we don’t make it, but I believe more a result of the fact that confrontation brings with it an inordinate amount of stress and angst that most of us instinctively seek to avoid. (I mean, why ruin a perfectly good Tuesday afternoon?) The offshoot then is that many of these things get pushed out to a later time, where they have a tendency to fester into something much larger than they originally were. Because your client is more in tune to what’s going on, OBA forces this issue and compels the parties to face up to those conflicts right then and there. Yes, your afternoon may get spoiled, but it will benefit you in the end when there’s one, less critical thing to address. And with fewer issues at closeout, more focus can be shifted to retainage releases and final payments.
Contractor Cons. With so little downside for the client, it shouldn’t come as a surprise that OBA is not all peaches and cream for the contractor. There will be greater effort, attention and even cost to keep it on track. Just remember why you’ve chosen it: to secure the work. And with this justification in mind, here are some issues you may encounter:
First, OBA had granted your client authoritarian oversight into your business—more than they historically have enjoyed. This clearly isn’t going to make your life easier. Know this going in. Accept it and adjust not only your mindset but also that of your employees for what is coming down the pipe. Patience and communication won’t just be buzzwords now. They’ll need to be sincerely applied for the OBA effort to be a success.
Second, an OBA arrangement should always be in writing—no exceptions. More importantly, when you do draft the OBA contract, extreme care and thorough diligence should be employed to identify and delineate exactly the types of documents and information subject to review by the client under the OBA arrangement. I cannot express the importance of taking your time and doing this right. OBA should never mean unrestricted or unfettered access to sensitive data; all normal corporate security measures will still apply. Of course, project-specific cost reports, subcontracts, purchase orders, proof of payment, invoices and even timecards will likely be fair game for client perusal. But make sure that the client is clear that this one-time access won’t include (whatever you choose here) sensitive or proprietary material like company tax returns, balance sheets, executive salary information or private employee data (and yes, I’ve been asked for all of these things) unless you specifically choose to include it in the agreement.
OBA isn’t intended to give the client access to everything and, in theory, speaking as a contractor, the logic would go that you only want to grant them as much access as is necessary to win the job. There’s much to consider, and you’ll have only one chance to get it right. And as much of a fan as I am of not telling you to run to your lawyer for every clause-related thing, this is definitely one of those times where it’s appropriate to seek professional, legal counsel for assistance. Once you have a complete and effective company prototype OBA agreement in place, you can decide which clauses to keep or strike on a client-by-client basis.
Third, With more knowledge in hand, your client may (will?) make suggestions regarding operations, scheduling, equipment and even worker performance that may not instinctively be well received by you or staff. This doesn’t have to be a catalyst for animosity. Get into the (new?) habit and routine of taking the extra time and care to explain your motivations and reasoning. I can speak from experience: More often than not, the client simply seeks a genuine explanation and will be quite satisfied with your logic.
And finally, let’s say for the sake of argument that we don’t land a “reasonable” client like that above. Let’s say we get instead one of the loud-mouth, earth-moving, my-way-or-the-highway types who take advantage of the situation and make far more than their fair share of “suggestions” and/or suggestions that conflict with the contractor’s company goals, procedures and philosophies. What if he wants to skirt a safety procedure to get a critical item installed, or forego a permitting process to pick up a few days on the schedule?
Well, there’s no magic bullet here. You hold your ground, just as you normally would. If things go south, just remember that the conflict in this case has nothing to do with OBA and everything to do with the client’s personality. The problem wasn’t that you chose to implement OBA; the problem was that you chose to implement OBA with this blowhard! And there’s a lesson here: OBA isn’t for everybody. There are clients who won’t be right for the process, and this determination will become an important element of whether or not you decide to offer OBA in the first place. Remember, OBA is a sales tool, something to be used as an option when you feel it’s necessary and appropriate. Let the bad risk clients be your competitor’s problem.
OBA can be a terrific tool for motivating a potential yet hesitant building client to come down off the fence. It does, however, have its perils. But when properly implemented and diligently applied, the process can lead to advantages for both the client and the contractor and just might form the basis for a years-long, mutually beneficial relationship. It may also help us contractors as a group to dispel the myth that we’re somehow out to skim the public. But in the end, it would be naïve to discount the potential downsides of OBA for the contractor, and that’s what this article hopes to address. But there’s no better way to learn than by doing. I suggest trying it out on smaller projects with clients you already know, and then fine-tune as you go. Once you have a few under your belt, you will no doubt have a solid idea of whether it’s right for you and your organization.
S.S. Saucerman is a full-time commercial construction estimator and project manager for a large upper-Midwest general contractor. He is also an established freelance writer and author whose work spans more than 20 years.