One of the tax and review clients I worked on for several years was a construction company I’ll call Always On, a C-corp. This company exemplified the niche approach perfectly: They specialized in tenant improvements for retail stores in malls.
They didn’t do anything else, ever. With an army of subcontractors, they worked on projects spread from Nova Scotia to Hawaii. That meant their workday began before 5 am and ended at 9 pm or later.
The owner and his wife, who I’ll call Benny and Betty Olsen ran this eight-figure, coast-to-coast operation out of their home. Always On was a well-oiled machine, but according to my boss, it was never going to get any bigger, even though there was a considerable demand for their services due to way the Olsens ran the business.
Maybe it was sleep deprivation that made the owner and his wife so cranky, but a big reason that the company’s growth was limited was that Benny was a difficult man to work with, to say the least. He seemed to have two modes: screaming and shouting. Maybe that was his strategy for getting his contractors to do what he wanted?
Whatever the case, the clients’ actions made it awful for those of us who had to work on the tax returns and financials. Extracting information from Benny was unpleasant, to say the least. We all dreaded talking to him.
My boss was apparently one of the four or five people in the world that Benny had a non-screaming relationship with, so I tried to run all my questions through him. The abuse from Benny was part of the reason one of our tax managers left the firm, which as it turns out was why that project landed on my lap.
Then there was the home office. With the fruits of their labor, the Olsens had built a large home in a corner of the city where homes and lots were oversized and grand, and where lawns were green and perfectly manicured. I bet the neighbors hated the Olsens. They didn’t landscape their large fenced yard, but instead, used it as a parking lot for construction vehicles and trailers. It was a wasteland of dirt and tumbleweeds, where their pack of three or four huskies ran wild.
Inside the house was worse. That was the report from my boss, who never let me go there. The Olsens were too busy to clean the house and too busy to even hire someone to come in and clean.
The floors were carpeted with dog hair (and possibly worse). The beautiful custom wooden doors were trashed from dogs scratching to be let in or out.
Dusty papers and junk covered every flat surface of their home office. It was a pigsty. When my boss went for a visit, he always wore jeans and boots, never tailored suits and nice shoes.
To the Olsens’ credit, they somehow managed to hire and retain a terrific accounting manager. He did a yeoman’s job in keeping track of all of the many moving pieces of Always On. He was also able to somehow put up with constant screaming and shouting from Benny, and the general chaos of working in their home. My boss said he was probably the only accountant in town up for the job.
He used a monster spreadsheet to track income, expenses and status of all their projects. We used that spreadsheet as a starting point in reviewing WIP and revenue recognition for a particular year.
One peculiarity that jumped out at us was that the percentage of completion for their contracts in progress at year-end was always in multiples of 10 percent. As a construction company of that size, Always On was obligated to use the percentage of completion method for recognizing revenue. This required comparing the expenses so far incurred to the estimated total and using that percentage to calculate the revenue to be recognized for that contract. That calculation rarely results in round numbers.
The audit manager and I asked Betty, who handled A/P, about the mechanics of coming up with those percentages. Betty told us that she tossed all of the interim contractor bills out and waited for the final invoices before making payment or even recording expenses in the books. Those percentages came from Benny, she told us, who would make a rough estimate of the status of the jobs that weren’t complete at year-end.
Benny would deem that a project in Chicago was 50 percent complete, while the one in Montreal was only 10 percent complete, and so on, for the dozen or so jobs still in progress at year-end. I’m not sure how he arrived at those estimates. We tried to educate the Olsens on the correct way to calculate percentage of completion, but they weren’t having it.
My boss wanted the Olsens to think bigger. Benny had developed a highly efficient model for getting complex projects completed quickly and for leading a huge team of remote construction contractors. Maybe his leadership method was chaotic and harsh for his team, but it got the job done.
Surely, Benny could teach his methods to others and maybe apply it to other industries. He pushed Benny to consider the benefits of bringing on more talent. By delegating some of the work, Benny and Betty could start taking it easy – and maybe get some sleep. My boss saw the potential in Always On to be a $100 million company, if not bigger.
But to attract the caliber of people who could help Always On expand, they would have to seriously upgrade the office space, and maybe even move the business out of their home. None of those suggestions went over well with the Olsens, especially not the part about delegating work.
In the end, Benny fired us. All of us who had worked on that monster of a project, which included tax returns in almost every state plus Canada, were relieved to have that permanently off our plates. We were especially relieved that we would never have to endure Benny’s shouting tirades again.
Always Lessons to Be Learned
Hindsight is always 20/20, and looking back there are some things we should have paid attention to. Here’s what I have to share about this experience:
1. Beware of belligerent business owners. They may be great at getting the most out of some kinds of employees, but unless someone at the firm can run interference for the staff, they’ll just alienate your best people.
2. Some clients don’t want to grow. Growth for growth’s sake isn’t always what’s best for some people. Unless a client wants something bigger, you can’t want it for them.
3. Sometimes an estimate is good enough. In retrospect, Benny’s estimation method probably wasn’t a cardinal sin. While it wasn’t GAAP and wasn’t IRS-approved, it was probably pretty close to being materially correct. I seriously doubt that the Olsens, who didn’t have time to hire a housekeeper, could have found the time to scheme about the benefits of fiddling with the percentages to manipulate income.
In the end, losing Always On as a client was a big hit to the firm’s bottom line, but a huge win for those of us who had experienced Benny’s incoherent rages.
