Remember the old Westerns, where the good guys wore white hats and the bad guys wore black? In those days, one could judge a person by the color of his hat. If a guy was seen riding up to a ranch, wearing a black hat, it was known that he was up to no good.

A rancher needed 10,000 running feet of 4-foot-high crossing fencing to keep his cattle from roaming. He found a contractor named Black Bart who said he'd take care of everything. As the general contractor, Bart calls Chester, who is a well-known fencing subcontractor. Chester looks at the job and submits a bid for $150,000. Bart informs Chester that his bid looks good and that he's got the job. The GC tells Chester that he doesn't have the money to pay him but that the owner does.

Chester contemplated the offer while Bart went on to assure Chester that all the specialty cowboys agreed to work under these terms. Chester sat straight up in his saddle and said, "Let's get this straight: You're going to pay me but don't have the money but you're going to get the money from the owner?" Bart said yes. Chester rubbed his whiskers and wondered if he could trust Bart. He also wondered what would keep Bart from just riding off into the sunset with the money. Chester looked down at Bart and his black hat and said, "I'm getting the feeling this deal is slipperier than a newborn calf."

Identifying threats

People don't wear black hats anymore and it's difficult to identify real threats to one's business. What are some of the threats faced by subcontractors today?

• Inaccurate material takeoffs

• Inaccurate material pricing

• Inaccurate production rates

• Unfair contract language

• Payment

• Insurance rates

• Fraud

• Accidents

• Overhead

• Verbal agreements

• Working capital

Several months ago, steel suppliers sent out notices indicating that steel prices were going up. Some subcontractors don't believe that steel increases would stick and are now paying double the price they estimated.

The material for a $1 million steel stud and drywall job could cost a subcontractor $150,000 more today than it would have four months ago. Three months from now that same job could cost another $100,000 for a total of $250,000 out of pocket due to steel increases alone. Subcontractors face the threat of escalating material prices after the job is bid.

Threat of inaccuracy

What's the difference between an estimator who overestimates the amount of material needed and one who underestimates the amount of material needed? Nothing, both are inaccurate. If material is under or overestimated, most likely labor will also be under or overestimated because labor is normally based on quantity of material. Subcontractors face the threat of inaccurate material quantities.

The production rates one estimates are the rates of production one expects his employees to achieve. If it is estimated that a worker will install 25 studs per day and it is found that one's employees are only averaging 20 studs per day, there is a 25 percent error in the production rate. If one estimates drywall hanging at 1,000 feet per day per person and employees are only hanging 900 feet per day per person, there is an 11 percent error in the production rate.

In construction, errors accumulate and compound. They add up like this: material pricing errors plus quantity errors plus production rate errors equals a big loss. The threat we face is inaccurate production rates.

For instance, one lands a few big jobs and now has a chance to hire a couple of big guns that will keep the work coming in. The subcontractor increases his overhead by $20,000 a month and lets these new guys display how it's done. The threat we face is out-of-control overhead, without oversight.

In September, one signs a contract for several large jobs that will be starting before the end of the year. In October, a letter is received from his insurance company stating they will no longer be the insurance provider. After a new provider is found, the insurance costs $35,000 more than last year's with less coverage. The threat we face is signing contracts, which requires us to provide insurance at any cost-not to mention check and credit card fraud, as well as under handed bookkeeping. We all disagree with the situation where there's some guy in the field named Bart who gets a check each week and has never been on the job. The reason fraud insurance is so costly is because it's hard to pin point the culprits. Fraud is a real threat to busy subcontractors.

A customer promises to pay for the extra work done but can't remember telling the subcontractor to do the work. Meanwhile, a promise has been made to employees of a bonus but the employee remembers the amount being a lot more. The customer says not to estimate any draft stops and forgets the conversation once the city inspector requires them. There are some exceptions to verbal agreements but I've come to the conclusion that I won't make one if the risk is too high.

Back at the ranch, Black Bart, the GC and Dillon, the owner, meet with Chester. The owner assured Chester that he will pay Bart and that Bart will pay Chester as the work is completed. Chester felt better about the deal and started dancing on his spurs. Chester shook Bart's hand and confirmed that it was a deal and that work would commence the following week.

Wise old Chester rode back to town and met up with his buddy at the watering hole. Chester walks up to his buddy Billy and says, "Billy, I've got a great deal for you. I'm going to let you do a job for me."

Chester tells Billy all about the job and also explains the payment arrangements. Billy looked at Chester and asked who would be paying him. Chester explained that he would pay Billy once he gets the money from Bart, who's getting it from Dillon.

Although he has holds some reservations, Billy did the job for Chester and Bart rode off into the sunset with the money, leaving Dillon to face Billy. The owner told Billy to go after Chester and Chester told Billy to go after Bart.

"Why did you get me into this mess?" Billy asked.

Chester replied, "I never would have thought an owner or GC would ever mess with Billy the Kid's money?"

Billy said that owners and GCs are the only ones that do.

It's important to identify threats and determine if they are real. Look at them one at a time and develop a game plan. Some subcontractors don't realize they are in high-risk business, and because of this, they underestimate their value. Owners and GCs need subcontractors much more than subcontractors need owners and GCs. Just ask Billy!

Remember: Teamwork begins with a fair contract.