The Final 2%: Ensuring a Smooth and Successful Construction Project Closeout

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Struggling to finish that last 2% of a construction job? In this episode, Wade Carpenter and Stephen Brown discuss real-world case studies of projects that went off the rails in the final stages. Discover best practices to avoid costly delays, rework, and legal battles as you close out your next project.

Watch now for expert tips on punch lists, documentation, and effective communication to ensure a successful finish!

Topics we cover on this episode include: 

  • 00:00 – Finishing the last 2%
  • 00:29 – Train wrecks at job’s end
  • 01:03 – Owners wanting more work
  • 01:58 – Learning from case studies
  • 02:49 – Consequences of unfinished jobs
  • 03:33 – Documenting change orders
  • 04:14 – Punch lists and rework
  • 05:11 – Inaccurate initial assessments
  • 06:18 – Consequences of project delays
  • 07:17 – Financial losses and disputes
  • 08:08 – Disrupting your own operations
  • 09:07 – Reputation damage 
  • 09:56 – Detailed closeout checklists
  • 10:32 – Proper documentation 
  • 11:14 – Communicating with stakeholders
  • 12:15 – Proactively addressing issues
  • 12:52 – Supply chain challenges
  • 14:06 – Embracing technology and data
  • 15:00 – Pre-planning and communication
  • 15:49 – Avoiding the last 2% nightmare

LINKS

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Wade Carpenter, CPA, CGMA | CarpenterCPAs.com
Stephen Brown, Bonding Expert | SuretyAnswers.com

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TRANSCRIPT

[00:00:00] Wade Carpenter: Do you ever have trouble finishing out that last 2 percent of the job? Ever had that job that just wouldn’t go away? Today we’ll talk about a few disasters and discuss things we can do about it. Come on in, let’s talk about it. This is the Contractor Success Forum. If you’re new here, I’m Wade Carpenter with Carpenter & Company CPAs.

With me, as always, Stephen Brown with McDaniel Whitley, Bonding Insurance. Stephen, a couple of weeks back, you brought up the train wreck case study, and I truly enjoyed that. Ever see train wrecks at the end of the job?

[00:00:29] Stephen Brown: Absolutely, all the time. Because the job isn’t finished yet, and the owner may or may not be happy, especially in government work. There’s certain funding, but there’s more work that needs to be done. How many times have you bid a job where there’s a base bid and seven or eight alternatives? Those alternatives aren’t there for fun.

The base is the bare minimum they have to operate. And the alternate’s what they really need and they really want. So that’s what owners do, especially in today’s funding environment. Every municipality, every federal contracting job, almost always ends up with more work that needs to be done.

And if they like the work that you’ve done so far, they’re going to negotiate with you to do more. But at the same time, when you’re down to that last 2%, and you don’t see a change order coming, it can be the most frustrating thing in the world. And the owner can just drag it and drag it and drag it.

And we’ve talked about the ones that play that game to drag out paying you your retainage. One excuse after another. What’s your experience? I know Wade, you had some case studies.

[00:01:38] Wade Carpenter: Yeah, I did, and you inspired me to start. I had a certain situation with a client in the last two weeks, and, it got me thinking about they were just right there at the end, And then things actually, it’s tough enough to get a good job done, but you can’t get right there to the end and you just can’t seem to get over that finish line.

And things started going wrong at that point. And I’m like, you hate to see somebody get to that point. And not all these case studies are that way, sometimes it’s just things that we do. So my hope was that we could maybe discuss some of these, and talk about what went wrong and maybe we can learn something from it.

[00:02:16] Stephen Brown: I think that’s great because so many times I see contractors getting toward the end of the project, like you said, the last 2%, and all of a sudden your fault, my fault, nobody’s fault, the job just starts crawling to a halt. So you have substantial completion in some contracts, a lot of them you don’t. You have a timeframe with liquidated damages that are going to kick in. And something out of your control has happened.

And it’s just absolutely bleeding out all the profits you had in the job in the last 2%. Isn’t that right?

[00:02:49] Wade Carpenter: Yeah. And that’s where I think we’re going to hopefully learn something from some of these case studies. I don’t think there’s anything you can do about all situations, but those that we can think about and plan for to mitigate these issues, I think that’s the point of it.

[00:03:02] Stephen Brown: Okay.

The importance of having a written, thorough punch list

[00:03:03] Wade Carpenter: So the first one I was going to throw out there, and we probably won’t get to all these today, but there was one that was a bigger job and And I’m trying not to get– unfortunately these bigger jobs are the ones you can find in the paper or online. They’re the ones that really go wrong.

But this was actually a hundred million dollar budget and this particular project went over six months, and it cost them an 10 million dollars in additional costs, it went over.

[00:03:28] Stephen Brown: Did they have 10 percent profit in the job?

[00:03:31] Wade Carpenter: They did not. Things started going wrong. The key issues is the contractor really failed to complete their punch list. These punch list items that just didn’t get done and it caused a bunch of delays and rework. And this rework obviously costs additional out of pocket. You ever see that?

[00:03:49] Stephen Brown: Absolutely. Something has to be redone because when you’re punching it out, do you discover something hasn’t been done correctly. Wiring wasn’t installed. That owner does, could not care less whether you got to rip everything out to rebuild it or what it costs you. That’s your problem, but it happens. And the more moving parts, the more likely something like that could happen.

[00:04:11] Wade Carpenter: I guess my point here, which I think we all know this, having a written punch list, a thorough punch list, double checking your work as you get towards the end of the project. We talk about the Parkinson’s Law and no matter how long that project’s been given, if you’re given two years to get it done, you’re still going to be scrambling at the end, usually, to get it done. And that is not the time to figure out where something major has gone wrong.

[00:04:36] Stephen Brown: And, we talk about pre-planning, getting a project started. We had a podcast on getting a project started on the right foot.

[00:04:44] Wade Carpenter: Right.

[00:04:45] Stephen Brown: And part of that is to talk about what the punch list is going to look like before you get to the end of a project.

The critical role of timely and accurate documentation of your projects

[00:04:53] Wade Carpenter: Yeah. Another one I wanted to talk about too was a case study that basically highway road type construction and I think all of us can relate to this. This was a public case study, but I’ve got a few contractors that have gone through exactly this kind of thing. They did not document things, especially change orders.

And they got to the end of the job and they get in this legal dispute, financial penalties for delays and this particular one, again, just pulling out the numbers, it was 4 million additional costs on a 200 million job, with three month delay. And 4 million even on that big of a project, that’s your profit end zone.

[00:05:35] Stephen Brown: Yeah. And even if you just broke even, you’ve lost money. Because however long the project went over is lost productivity that you could have been using to make money on another project.

[00:05:48] Wade Carpenter: I guess the point here, the critical role of accurate and timely documenting your projects. And especially change orders or things go wrong or, having that system in place is key.

 Address any issues before you leave the job

[00:06:01] Wade Carpenter: Next one I want to talk about was basically these people were building a data center. And ultimately it resulted 5 million additional costs on a 50 million project. It was basically a rework kind of thing. And I know these are big numbers and most of the people listening to this are probably not even thinking in this big of dollars, you know, $50,000 on a 500, 000, That’s–

[00:06:27] Stephen Brown: Still 10%.

[00:06:28] Wade Carpenter: Yeah, it’s 10 percent drop. And, again, it’s more like providing accurate data, turning in the data where they could get their pay apps. Again, they delayed those kind of things. So there was delays in getting the work done and getting things approved. So there was rework. And the thought here is making sure that data is accurate and complete so that you get it in properly.

I see it all the time that, you got a new owner or whatever and they may do things and they say you got to have it in by this particular date. Knowing that stuff up front can go a long way.

We had another one that was a government building project. Actually, it’s a recurring theme, but it’s 10 percent increase is 20 million on a 200 million project. And what we found here was that, there was a lot of things. They’re trying to close out the job and they left a lot of things unresolved.

There was things that were on the punch list. It was unclear that, we said we’re going to fix this, and they didn’t come back. They ended up extending the timelines, and the owner was dissatisfied, and they were trashing them in the press.

This was public knowledge, so it was, sometimes even the dollar value is bad enough, but having that bad press is horrible for the reputation.

[00:07:46] Stephen Brown: Can sink your business.

[00:07:47] Wade Carpenter: Yeah. The idea again is addressing all these issues before you leave the project.

[00:07:52] Stephen Brown: Good advice..

[00:07:53] Wade Carpenter: There was one nuclear power plant that I dug into. And problem there, had something to do with soil analysis. And basically when they came back, they had all these safety concerns and had to go back and redesign a lot of these things.

And I didn’t fully understand the case myself. That’s not what I do. In this particular case, it was a 255 percent increase in costs. This was a huge project, but it was obviously on a nuclear power plant. But I don’t even want to talk about the numbers on this one, because it was in the billions.

But–

[00:08:32] Stephen Brown: It’s exactly why we have this podcast, Wade. It’s a risky business. There’s no limit on how much you can lose. There’s a limit on how much you can make. It doesn’t seem fair, does it? There aren’t other industries out there like the construction industry. It can be so rewarding and it can be so frustrating.

And just like my dad, when he’s teaching me how to hammer a nail. I learned to look at that nail head and cause I hit my thumb so many times. And it’s all of our listeners, every contractor, and the two of us individually in this business have learned the hard way.

And we just don’t want people to have these nightmarish studies, like the case studies we’re discussing today, sink their ship. And every little detail you can learn about keeping something bad from happening from the experience of others is a lesson learned, right?

[00:09:26] Wade Carpenter: Absolutely, and I think the lesson here actually goes back to what you said just a minute ago, or starting the project off. This particular one I’m talking about here, just doing a thorough and accurate initial assessment and documentation of the project would have resolved this one. But this was a huge rework that cost a ton of money and a lot of headaches.

[00:09:48] Stephen Brown: It could have been a lot of chiefs and not enough Indians. It could have been poor communication. But either way the paperwork wasn’t done. Paperwork is there for the owner and for you to gauge whether the job’s progressing, right?

[00:10:01] Wade Carpenter: Right. Again, just really quickly looking at some of these case studies and I’ve got some more that actually fit with these too, but, punch lists, unresolved issues, deficiencies on the jobs, the documentation is inaccurate or in, poorly done. The data management and those kinds of things where we have reworked from these project delays.

All these things come into play. So let’s talk about some of the consequences real quick. I think they’re obvious. You got any thoughts on that before I jump into it?

[00:10:33] Stephen Brown: No, because I don’t want this podcast to be a downer. Unfortunately, other people’s failures are definitely something you can learn from.

[00:10:42] Wade Carpenter: Again, it’s not trying to be a downer, but what can we do to avoid these problems? Because I’m sure a lot of these people, maybe not on the same dollar value level that I’m talking about in these case studies, but the consequences are obviously the financial losses.

We end up with these legal disputes that can take years. I see all these legal battles and, consume your life and take years to resolve.

[00:11:06] Stephen Brown: It’s like hitting your thumb with a hammer. You don’t have to go through these legal battles very often before you’re just not going to let it happen again. Everybody will tell you that these legal battles occur because of you not documenting the project and communicating.

They almost always boil down to that. Every construction attorney I’ve ever met has always said, that you put together a project file that tells the entire story of what you’ve done on the project. From the time that you first started estimating the job to the time you started the project to the time it was punched out. And that’s what gives them the ammo they need to do their job to defend you.

Don’t let one project delay affect your ability to complete other projects

[00:11:50] Wade Carpenter: Right. Just a couple other things. It’s one thing that you’ve got a job and you operationally disrupted the owner of that, but you think about like you get in these legal disputes and we’re having to stay on this job longer, then we can’t get other work done.

So it becomes a snowball effect. And it can take down my entire company if you’re not careful. So it’s not just the operations of your owner. It can also disrupt your own operations. Losing other projects because you can’t get to them.

[00:12:21] Stephen Brown: You notice these competitive, the folks on YouTube that make these incredible domino displays? They all have a break in place so all the dominoes don’t fall. They spent hundreds of hours placing these intricate designs. And they have these firewalls, right?

And what we see time and time again on a project that goes under that cost our customers a lot of money is those firewalls are not in place and all the dominoes fall. And when I say firewalls, it’s, what are you doing to keep that last minute punch out, take your profit, move to the next project. What are you doing to guarantee that will happen and that there won’t be a domino effect on your other projects?

[00:13:07] Wade Carpenter: That sort of fits with the last point I was making in this is the reputation damage. Had one client that had several people doing projects at the same time. And I still believe the owner was in the wrong in this particular one, but they went around town trashing these people and they had all these other jobs and they ended up losing the trust of everybody else and everybody else started pulling their jobs.

 It’s sad. But again, sometimes just wrapping these things up, a lot of that particular case was documenting change orders and, had delays on the project, but they actually really did a good job on it.

[00:13:44] Stephen Brown: Yeah, but contracting officers, owners of construction projects, they all talk.

Best practices to ensure a successful project completion

[00:13:50] Wade Carpenter: Yeah. So let’s just talk about best practices and–

[00:13:53] Stephen Brown: End up on a happy note.

[00:13:55] Wade Carpenter: Yeah, absolutely. One of the easiest things we’ve talked about already is how do we fix this? A detailed closeout checklist. You probably have a standard one for your construction company or a particular type of job.

If you do the same kind of thing all the time, maybe it’s very specific and maybe you have that initial meeting, create your closeout checklist. And if they’re specific to that job, write it up to begin with.

[00:14:21] Stephen Brown: That’s right. Checklist is no good if it doesn’t apply to finishing out that specific project. It’s worthless.

[00:14:29] Wade Carpenter: Again, the documentation, we talk about it all the time. This particular one I was talking about with the change orders. Our first year we had one guy in there and he was taking pictures and, a lot of contractors have done a pretty good job of that, but they don’t have a system for that.

But documenting it some kind of way, whether you’re writing it up or taking pictures or, having these job meetings and I’ve started transcribing these notes from the meetings. That goes a long way.

[00:14:56] Stephen Brown: Transcribe the notes and re communicate the things that you saw were positive in that meeting and ask what other people thought about it. And you ask, you’ll get. You don’t ask, you don’t get.

[00:15:08] Wade Carpenter: Another thought is making sure you’re communicating properly with the owner or the stakeholder owners in the job. When you’re not talking, that’s when problems happen. And if something comes up, it’s better to, I always say, better to give them a heads up before things snowball.

[00:15:24] Stephen Brown: Already, before you get to the last 2 percent of the contract. You should be really happy with everything and you have to be on time and on schedule. So contracting, you have to do it perfectly over and over again. Don’t you, Wade? It’s a very challenging business.

[00:15:39] Wade Carpenter: I don’t know there is perfect in construction.

[00:15:41] Stephen Brown: There’s perfect in the mind of the engineer. There’s perfect in the mind of the architect. There’s perfect in the mind of the owner.

[00:15:48] Wade Carpenter: You’re absolutely right But one of the things that’s key to getting to that last 2 percent, I think I told this story before but supply chain, you know, It’s one thing to get make sure your subs are gonna be on the job when you need them and all that stuff and that’s project planning.

But there have been things like it was one in particular I remember is a multi family team thing and it was had something to do with a sprinkler head, specific sprinkler head that had to come from China or something that was specific model. And it held up this one particular contract for nine months. And it was over a million dollars of retainage.

[00:16:24] Stephen Brown: 9 months. God.

There’s so many of those stories during the nightmarish COVID supply chain issues that it’s amazing. If it wasn’t for technology able to move quickly to get things moving back in the right direction, I don’t know how they did it. really don’t know how the distribution chain has been able to recover as well as they have so recently. A lot of people may say it hadn’t recovered. It just depends. But that’s a great point, Wade.

[00:16:54] Wade Carpenter: Yeah that’s a perfect example of this last two percent because it’s like this one sprinkler head it had to be a specific model and the fire marshal would not sign off on it.

[00:17:04] Stephen Brown: Yeah.

[00:17:04] Wade Carpenter: Big hardship for my contractor. But

[00:17:06] Stephen Brown: Planning punch list, you’re operating in a new territory. You don’t know how picky that fire marshal is going to be. Or maybe you do, but you know what the code is and you know what they’re going to ask for. And you don’t assume that they’re going to take anything less than what they’re demanding for a millisecond.

You just can’t assume that. If you’re fortunate, maybe they’ll be flexible, but that almost never happens, does it?

[00:17:30] Wade Carpenter: Being proactive, as I already said, something’s going wrong. Address it early. Don’t wait till it snowballs and festers and then turns into a big old legal battle.

And the last point I had on here was more of the technology side is a lot of contractors still, we say all the time you know, they stay away from the technology and Just you know data tracking. I made the point of recording these Job, meetings and stuff like that and they can be transcribed without a human being doing that and it’s amazing what you can document.

[00:18:03] Stephen Brown: That’s right. How would

you be able to survive if your materials suppliers weren’t embracing technology to do their job the best they could? It all flows downhill.

[00:18:13] Wade Carpenter: Again, just having good data and being able to track it, and technology can go a long way to that. Or even just setting up the basic systems.

[00:18:24] Stephen Brown: Okay.

[00:18:25] Wade Carpenter: So those were my main thoughts on it. Do you have any other ones? I’d love to hear them.

[00:18:29] Stephen Brown: I think we touched on a lot of them and I think it all boils down to pre planning and better communication for the last 2 percent because you are so right on the money. The last 2 percent of a project, the last 2 percent that costs you 10 percent and your gross profit is 5%. The nightmares that come with your assuming that the project is going along smoothly and on track, and all these things have been hidden from you and they come to light in the last punch out stage, the last 2%.

Yeah, it’s a sad story. But I think we have some great advice for our listeners and as always, we do not want this to happen to you.

[00:19:15] Wade Carpenter: Absolutely. If you’ve got any thoughts or feedback of things that we didn’t put on the list, or examples of things that you’ve seen, we’d love to hear about it in the comments. Drop ’em in. We love to hear from you if you’ve got questions. Wanted to thank you all for listening to the Contractor Success Forum.

Get more on the show notes at contractorsuccessforum.com or the Carpenter CPAs YouTube channel. And we would appreciate if you consider liking subscribing, sharing the podcast and follow us every week as we post a new episode and we will look forward to seeing you on the next show.

[00:19:46] Stephen Brown: Have a great week.

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