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Construction Business Model
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1. Construction Business Model:
1. The majority of construction companies have a business model that is not sustainable and has a high level of failure - being the same as others is not a good business model.
2. In 2017, every publically quoted construction company reported a loss in their annual return - what they did is not to be copied.
3. In 2017, 16% of all construction companies went out of business - what they did is not to be replicated.
4. In 2018, client retained and delayed payments increased to the point that many construction companies could not continue in business.
5. When a construction company fails, it is the little sub-contractors who have no possibility of being paid for the work they have done.   Evidence is that very few construction companies are more than ten years old.

2. Sustainable Business Model:
1. Two alternative business models can be shown to be sustainable as:
  (DAY). Per Day billing of a team of construction engineers are contracted to work for a client with an agreed per day rate.
  (JOB). Per Job billing where a project is planned and work scheduled to be sub-contracted to people on an agreed per job price.
2. Any variation of these two business models will fail because it is not sustainable   To quote for a fixed price project and then sub-contract on a per day rate is certain to make a loss on many projects.

3. Per Job Business Model:
1. The only construction business model that can be proven to be stable and sustainable is the "per job" business model where all parties are paid by the job.
2. Highly skilled Quotation Managers are mandatory to prepare quotations that are backed up with detailed work plans of what has to be done as managed work packages.
3. Each and every work package has a price to the client and a sub-contracted price that is typically 80% of the client price.
4. Every work package is sub-contracted for an agreed price that must be less than the client price.   Where the company cannot sub-contract for a price that is less than the client price, then the company cannot afford to do that work package and must decline the project.
5. Risk is minimised by only taking on projects with a fixed price and sub-contracting each work packages with a fixed price.
6. People are highly motivated to complete a work package when they understand that it has a fixed price and they can begin a new fixed price work package as soon as the current work package is complete and correct.   A work package is only complete and correct, when it has been photographed and documented as evidence.
7. When a work package is complete, it is signed off by the client and the client is billed the same day.   When the client pays, then the sub-contractors are paid so risk is eliminated and cash flow issues are eliminated.   This is the only construction business model that can be proven to have long term stability for the client and the contractor.

4. Per Day Business Model:
1. A construction business model that can be proven to be stable and sustainable is the "Per Day" or "Per Hour" business model where all parties are paid by time.   The "Per Day" and the "Per Hour" business model are virtually identical in operation.
2. Quotation management can be minimised because only the agreed day rate has to be negotiated.
3. Each person has a day rate that is billed to the client and a day rate that the person is paid - they are typically paid 80% of what the client is billed.
4. The daily time sheet is the work package to be managed with all invoices based on the same time sheet hours.
5. Risk is minimised by only taking on projects with a day rate and sub-contracting all work to people with a day rate.
6. People are highly motivated to take as long as possible with a day rate contract because the longer they take the more they are paid.   Very few clients still imagine that the "Per Day" or "Per Hour" business model is viable, but many people still imagine that this business model has long term viability - most people are wrong.

5. Failed Business Model:
1. The worst case construction business model is where a fixed price contract is undertaken and sub-contracted to people paid by the day or hour.   It is self evident that a cause for a fifth of all construction companies to have cash flow problems is due to this failed business model.
2. People paid by the day are highly motivated to take as long as they can make the job last to maximise their short term income.   People paid by the job are highly motivated to finish a job as soon as possible so they can begin their next job and maximise their short term income.
3. Any fixed price project demands detailed work package plans and not all construction companies have the skills to create such detailed plans.   Where work package plans have been created, then eack of these can be sub-contracted for a fixed price so the company does not risk a price overrun.   Where work is sub-contracted on a day-rate, the company risks a price overrun and in many cases the company will loose money - most construction companies loose money like this.
4. The worst part of the "Per Day" business model is cash flow, because sub-contractors demand payment in 7 days and clients pay in 45 to 60 days.   Any construction company that imagines it can sustain this cash flow deficit is fooling itself - eventually cash flow will cause the company to fail.

6. Profitability based on Productivity:
1. Profitability cannot be generated by quoting high amounts for little project - guessing a price will fail in the majority of cases.   Profitability can be based on very high levels of productivity that exceed that of competitors.
2. Where a project is quoted as 10,000 GBP then two options are possible:
  (1). People paid per day will take 8 weeks because they are motivated to take as long as possible to maximise their income.
  (2). People paid per job will take 4 weeks because they are motivated to complete the job as soon as possible to maximise their income.
3. Where the project is poorly planned without work packages that can be managed then productivity will be low and any competitor can do the same.   Where the project is well planned with logical work packages that can be managed by the job then productivity will be high and no competitor can do better.
4. Profit comes from complete and correct quotations that are backed up with a schedule of work packages that can be contracted out by the job.   Profit cannot come from guessing the size of a job and then paying people by the day - the job will just take longer until the project is no longer viable.
5. When a project is profitable, then the people doing the project deserve 80% of that profit.   When a project is not profitable, then the people doing the project deserve 80% of that loss.
6. When a client demands a discount so a 380 GBP job is to be done for 300 GBP, then the company must pass on that discount to the people doing the work.   If a person is able to do the work for 80% of 300 GBP, then the project is viable, but if a person will not do the project for 80% of 300 GBP, then the discounted project must be declined.   The client has the right to ask for a discount and the company has the right to decline a project when the job cannot be sub-contracted without making a loss.
7. History of 2018 is very clear - every project took longer than estimated and did not make a profit because people were paid by the day to do a fixed price project.   The founders can either learn from history and change what they are doing or can continue to loan money to the company to make things worst.   Change the business model because the current business model does not work.

6. Paid By Results (PBR):
1. A hole is not complete and correct until it is photographed and evidence is recorded ready to be billed.
2. STOP payment by the day - it is not sustainable.
3. START payment by the job - payment by results is sustainable.
4. Do not do what others do - most fail.

7. Scanario:
1. A diamond drilling team of two people is paid 285 and 85 per day plus expenses, uniform, equipment and supplies.
2. 85 miles at 20 pence per mile is 17 per day, but this may be treated as normal commuting by HMRC and subject to tax.
3. Equipment expendature is an average of 30 per day. Insurance, administration, legal and marketing is extra (another 30 per day).
4. The daily cost of the diamond drilling team is more than 417.00 GBP per day - 2085 GBP per week every week.
5. Construction work done by the diamond drilling team is subject to CIS at 20% and VAT regulations where VAT charged may be standard-rated. reduced-rated or zero-rated for a new dwelling.
6. 400.00 GBP per day as a special deal to a client means that after 20% CIS is withheld, the company gets 320 GBP into the bank and pays 417 to the team and suppliers - a loss of 100 GBP per day to be paid by the Directors.
FACTS:
1. The company must charge a daily rate of 610 GBP to operate the diamond drilling team.
2. The company needs 450 into the bank account to pay the diamond drilling team and their suppliers.
3. The company needs a modest 12% profit to make the business worth while and to pay for days without work - that is 504 in the bank.
4. To get paid 504 into the bank after CIS, 610 GBP per day must be invoiced - every day.
5. If clients will not pay 610 per day, then the diamond drilling team is not viable and not sustainable at the rates they are paid - costs must be cut to match what the client will pay.
REVERSE:
1. Where a client demands diamond drilling to be done at 400 GBP per day, then when invoiced and paid 45 days later, the amount banked is 320 GBP.
2. The company must retain an amount to pay suppliers, insurance, uniform and all the other things at say 12% as 38.40 leaving 281.60 to be paid to the diamond drilling team for each days work.
3. If the diamond drilling team are paid more than 281 GBP per day, then it is the Directors who are personally paying that extra cost.

CIS:
1. Construction Industry Scheme (CIS) is a taxation device to ensure that casual labour pay adequate taxes.   However its implementation is promoted by large construction companies to cause start up construction companies not be be competitive.
2. CIS regulations are well developed and must be fully understood so they can be utilized in the most effective way.   A key factor is that CIS only applied to work that is classified as "construction" and that does NOT include "manufacturing" or "engineering services".
3. Construction only applies to a site where a building is being constructed.   Construction does not apply to a factory where complete housing units are manufactured.   Construction does not apply to automated equipment as robots with drivers or operators.
4. Head ofice labour and administative services is not construction work and may not be subject to CIS taxes.
STRATEGY:
* All off-site manufacturing and administative work is NOT subject to CIS regulation.
* All on-site robotic work is NOT subject to CIS regulation.
* All off-site administration, planning and design work is NOT subject to CIS regulation.
* It could be said that each construction company needs a sister manufacturing company to demonstrate a clear demarkation between types of work.

Infrastructure:
1. The company has no operatives who work on-site. The company has Directors who work off-site.   The company sub-contracts all on-site construction work to CIS registered people and companies.   The company sub-contracts all off-site manufacturing work to companies that are not CIS registered.
2. The company undertakes projects that are classified as "construction" according to CIS regulations.   This means the company is paid 80% of the projects labour cost and 100% of its supplies cost - 20% of labour costs are paid by the client to HMRC.
3. The company must clearly show on each client invoice, the labour cost that is subject to CIS and the supplies cost that is paid in full.   The client has the responsibility to withhold 20% of the labour cost and pay that to HMRC within the month.
4. The company must ensure that quotations, contracts and invoices clearly show labour and supplies as distinct amounts for CIS purposes.   The company is not responsible to educate the client on CIS regulations, but is responsible to show all relevant costs so the client can apply CIS regulations.
DIAMOND DRILLING:
* If a single charge is made for a hole, then the client must withhold 20% of that charge as if it was all labour.
* Each hole can be shown with a pair of costs as a labour cost (subject to CIS) and a supplies cost (that is paid in full).
* Each day-rate must have a labour and a supplies part that can be shown as distinct amounts on the invoice.

Personal Invoicing:
1. Personal invoices for sub-contractors must show the labour cost and the supplies cost as distinct amounts.   Labour costs will be subject to 20% of the amount being paid directly to HMRC.   Supplies cost will be paid in full.
EXAMPLE:
* A person in worth paying 200 per GBP day because the company can earn 240 GBP per day from the work they do.
* If the person invoices and pays 200 GBP per day, then they will be paid 160 GBP and 40 GBP will be paid to HMRC.
* If the person is asked to travel 100 miles that day at 45 pence per mile, then they can claim 45 as a travel allowance.
* If the person is traveling 100 miles they can claim a breakfast and lunch subsistence allowance of 10 GBP.
* The person may claim for consumables, uniform and minor supplies as 15 GBP to do the days work.
* The person may invoice 70 GBP for supplies and 130 GBP for labour as 200 GBP for the days work.   70 GBP for supplies is paid in full. 130 GBP labour is paid as 26 GBP to HMRC and 104 GBP to the person.   The person gets paid 174 GBP (rather than 160) and CIS is paid 26 GBP (rather than 40).
* By using the CIS and HMRC rules, the person is paid 38,280 per year, rather than 35,200 per year (9% more).

Project Invoicing:
1. Project invoices to clients must show labour and supplies as distinct amounts.   Labour costs may be subject to 20% of the amount being paid directly to HMRC by the client - if they choose to do so.   Supplies (and hire) cost will be paid in full.
EXAMPLE CIS-1:
* The total cost of any construction work can be classified as subject to CIS.
* Sub-contractors invoices of say 200 per day is classified as subject to CIS of 40 paid to HMRC with 160 paid to the person.
* Client invoices of say 400 per day is classified as subject to CIS of 80 paid to HMRC with 320 paid to the company.
* A CIS balance sheet is maintained with 80 already paid to HMRC by the client and 40 to be paid to HMRC for each subcontractor.   The effect is that CIS paid by the client is deducted from the amount to be paid by the company to HMRC each month.
EXAMPLE CIS-2:
* In general, labour is 66% and supplies are 34% of the amount charged, but this will vary.
* A diamond drilling team is paid 400 GBP per day and is billed to the client as 448 GBP per day (cost plus 12%).
* Diamond drilling contract hire of equipment is 80 GBP per day.
* Diamond drilling consubables, travel and subsistenace are 70 GBP per day.
* Diamond drilling labour is 250 GBP per day.
* Project invoice of 448 GBP shows labour as 250 GBP per day and supplies as 198 GBP per day.   50 GBP may be withheld by client as CIS (20% of 250) with 389 GBP being paid to the company.
* Two diamond drilling people invoice the company for 200 GBP per day - total cost is 400 GBP.   Each person is paid 174 GBP and 26 GBP is paid to HMRC, however 50 GBP CIS is already in credit so only 2 GBP is paid to HMRC.   The company pays out 175 for each person as 350 GBP from the 389 that was banked from the client - the margin is 38 GBP per day to pay executives and all overheads.

Sample Invoice 1.
1. For diamond drilling at standard day rate as agreed of 600.00 per day.
2. Labour as drilling engineer at 300.00.
3. Labour as security watchman at 100.00.
4. Total labour charge as 400.00.
5. Equipment hire at cost plus 12% as 100.00.
6. Supplies, travel, subsistence and consumables as 100.00.
7. Total material charge as 200.00.
8. Net time and materials charge as 600.00.
9. VAT added at 20% of net amount as 120.00.
10. CIS deducted at 20% of labour charge as 80.00 (minimised).
11. Labour payment after CIS deducted as 320.00.
12. Gross payment of labour, materials and VAT as 640.00.
13. Banked to pay VAT as 120.00.
14. Banked to pay suppliers as 200.00 (net plus VAT).
15. Banked to pay all labour as 320.00 as 64 CIS and 256 pay.
16. CIS pay to HMRC for labour is reduced by CIS paid to HMRC by client as 64-80=16 credit.   Just 16 pounds to help to pay executive CIS fees, but 256 to pay operatives.

Sample Invoice 2.
1. For diamond drilling at standard day rate as agreed of 600.00 per day.
2. Net job billed inclusive as 600.00.
3. VAT added at 20% of net amount as 120.00.
4. CIS deducted at 20% of total charge as 120.00 (maximised).
5. Gross payment that is banked as 600.00.
6. Banked to pay VAT as 120.00.
7. Banked to pay suppliers as 200.00 (net plus VAT).
8. Banked to pay all labour as 280.00 as 56 CIS and 224 pay.
9. CIS pay to HMRC for labour is reduced by CIS paid to HMRC by client as 56-120=64 credit.   Four times more as 64 pounds to help to pay executive CIS fees, but just 224 to pay operatives.

Document Control.
1. Document Title: Construction Business Model.
2. Description: Construction Business Model, policies and guidelines.
3. Keywords: Construction Business Model, policies and guidelines.
4. Privacy: Shared with approved people for the benefit of humanity.
5. Edition: 1.1.
6. Issued: 2 Jan 2018.