Hope is the Death of Risk

I have a contractor friend who refuses to use the term “profit.” It’s not that he isn’t profit-oriented; he is. In fact, I can’t think of many people who have a business as tightly buttoned up as his. He knows every metric, delivers great service to his customers, and offers his employees both clear career paths and generous compensation. Consequently, he attracts great talent, people who are brilliant craft people, but don’t want to run their own business.

Wishing an outcome will happen risks your profitability

By Paul Deffenbaugh

Deffenbaugh Headshot 1

Instead of calling it “profit,” he calls it “risk.” Why? Because as the business owner, the profitability of his company is the reward for the risk he takes. Yes, he provides jobs for his employees, and, yes, he provides a service to the community, but he does all that by risking his own financial well-being.

Instead of calling it “profit,” call it “risk.”

I once talked with him about some home improvement contractors I know who, when they complete a project way below their estimate, will sometimes not invoice the homeowner for the full contract price. They feel that since the estimate was wrong, it is unfair to make the homeowner pay the full price.

My friend was, as you can imagine, incredulous. He couldn’t even imagine doing something like that. His argument was to ask what the contractor does when the opposite happens? If they blow the estimate and the project cost is above the price, do they go to the homeowner and ask for more money? Of course, not. Risk is spread across all the projects, not just one, and the health of the company depends on mitigating that risk. The risk you accept is for managing the company, not the project.

If you take care of the downside, the upside will take care of itself.

The great danger to risk (profitability) is hope. Contractors are, by their nature, optimistic people. They have to be. In this business, pessimists will be ground down into dust and blown away in the wind. But optimism can lead to wishful thinking. You hope that trade contractor can complete the job on schedule. You hope the weather will hold. You hope the supply chain will loosen up and material prices will come down.

Hoping for those things to happen instead of planning for what may actually happen undermines your own risk. Another friend of mine used to say, “If you take care of the downside, the upside will take care of itself.” In other words, don’t hope for something to break your way; plan for if it doesn’t.

Anytime you fall into the trap of hoping something will work out, you are putting your profit at risk. Don’t hope; plan.