Learn how turning down some jobs can be in a contractor's best interest.

According to the Pareto Principle, approximately 20 percent of your work will end up providing around 80 percent of your revenues. Knowing which jobs to take and which to turn down can be the key to success.
A very large and successful contractor once told me that the key to success in his business was knowing which jobs to turn down. Everyone who's been around the construction industry for a few years has heard horror stories about jobs gone sour. Some of you probably have tales of your own along those lines. I know of formerly successful contractors who went bankrupt because of a single ill-considered project. Extended litigation from jobs gone bad have cost many contractors a ton of money, along with health problems and shortened life spans.

It's one thing to talk about "killer" jobs after the fact. Are there any signals that should forewarn you against them?

Turning down work is an easy decision when business is booming and you've got more than you can handle. However, when times get slow and you're begging for business, temptation builds to go after jobs, customers and markets you'd be better off ignoring. Here are some guidelines that may help you say no when the pressure is on to take a chance.

1. You're in over your head

Either the job, the finances or the manpower requirements are far beyond what you've ever done before. Looked at from a certain perspective, this is a challenge, and competitive people thrive on challenges. It could be the breakthrough you're looking for to make the leap to the "big leagues" of your contracting profession.

Far be it from me to tell you not to take any chances - that's for you to decide. Just keep in mind that the greater the rewards, the bigger the risks. Do you really think you're up to this job? Or is your ego overwhelming your common sense?

2. Big cash-flow bite

Beware in particular of labor-intensive contracts, where you are liable for hefty payroll expenses before you receive first payment from the contract. Do you have the banking contacts or other means to cover a bunch of paydays without cash coming in? A key to deciding whether or not to accept such a job may be the willingness of the owner or GC to negotiate more favorable terms, such as more frequent progress payments.

You also want to make sure that your internal billing system is up to the task of sending statements out on time and getting after delinquent accounts. Not so coincidentally, contractors who are lackadaisical about collecting money owed them tend to be strung out by customers for as long as possible.

3. Stranger danger

The venture involves significant risk and you know nothing about the customer you'll be working for.

Or even worse, you do know the customer, at least by reputation - and it's a bad one! Some contractors are so desperate they'll agree to work for disreputable clients. "Don't worry, I know what I'm doing" is their watchword. It's like saying, "Don't worry, I can swim," before leaping into whitewater rapids.

Stranger danger is especially common when companies decide to look for greener pastures in other regions once work slows down in their own backyard. Moving to different jurisdictions is an ultimate act of desperation and usually backfires.

4. Manpower crunch

Be wary if a new project, department or client forces you to make hasty hiring decisions for field and/or office personnel. Most contractors have trouble enough attracting good people for normal operations. A sudden spurt could leave you forced to hire a bunch of people you wish you'd never met.

This is especially critical when you're stepping up in job size or kind, say from residential to commercial. Suddenly you have to acquire people with a new set of skills that maybe even you don't entirely understand.

5. Unrealistic schedules

A job is yours for the asking, but they want it done faster than you've ever done it before. It's a big job with a big price tag, so you figure on making it your number one priority, even if it means pulling people off smaller jobs for a few days.

Think, now. Are you sure you can meet their timetable even by forsaking the smaller jobs? What will happen to those smaller jobs? Will those customers ever want to do business with you again?

Don't be the guy who makes a fool of himself over the stuck-up prom queen and forgets to dance with the girl he brought.

6. It was a little too easy

Something ought to smell fishy when what seems to be a plum job suddenly lands in your lap with little effort on your part. First check on the customer's financial condition. Then check your bid with eyes wide open, looking for big mistakes.

7. It's all about volume

Dollar signs often present an irresistible mirage. How important is it to be the biggest company in town?

The construction industry's most prevalent violation of common sense is taking on work you know will bring little or no profit simply to keep your people busy or because "it will pay off in the long run" to get in good with a certain client.

This mindset has a way of replicating like cancer cells. Pretty soon every job you take entails little or no profit because you've got to keep those crews working, and the next job down the line will be the one that makes money. Before saying yes, repeat the following mantra to yourself 100 times - "I'm in business to make money, not to buy work."

8. It's all about ego

Similar to number 7, except this reason makes even less sense. It's always nice to have your name attached to a prestige project, but how much fun will it be if you lose your shirt in the process?

9. There are a dozen or more bidders

If there are too many bidders, the job usually goes to the one who makes the biggest mistake.

I can't recall the details, but I once read of a study showing that when there are as many as a dozen bidders on a construction contract, the "winning" bidder almost always loses money on the project. Before you go out and celebrate winning a job from among a large crowd of bidders, better crunch those numbers every which way to see if you can identify where you made a mistake.

10. It's not you

Your specialty is quality work and treating your customers like royalty. But this customer cares about nothing except the bottom line. Sounds like a mismatch in the making.

11. Deferred Gratification

Things are a little slow, and you're inclined to take jobs you normally wouldn't when you have more work than you can handle. But keep in mind that saying "yes" now may require you to say "no" to a better customer down the road. Be careful about stretching your resources to the limit for the sake of marginal gains in business.

12. The 80/20 rule

It's called Pareto's Law or the Pareto Principle - that 20 percent of your customers will end up providing 80 percent of your revenues - and it's time for a digression.

Pareto's Law is named after 19th century Italian economist Vilfredo Pareto, who established that 80 percent of the land was owned by 20 percent of the population. While gardening, he also observed that 20 percent of the peapods in his garden yielded 80 percent of the peas. Further investigation over the years has revealed the Pareto Principle to hold true for numerous other phenomena. For instance, roughly 20 percent of a sales force will produce 80 percent of the sales, and 20 percent of your customers will be responsible for 80 percent of complaints.

Nobody has ever been able to explain why this ratio persists throughout business and in so many other endeavors. But it's been borne out so many times in so many different organizations that it has become a core principle of business management to focus a lion's share of attention and assets on the 20 percent that is responsible for the bulk of output.

Odds are good that if you took time to go over your records, you'd find that 20 percent of your customers - or a reasonable approximation - provide around 80 percent of your revenues. This means if it takes a disproportionate share of your resources to service a customer who's not in your 20 percent bracket, then you are likely stuck with an unprofitable account. Why waste your time?

Turning down work is not hard to do when you're booked to capacity, but it almost goes against human nature when you're anxious to fill spare capacity. Yet, a willingness to do just that may be what separates the profitable contractors from those losing their shirts.