If you share the same business universe with the scores of building service contractors Contracting Profits talked to in the waning months of 2004, success, this year, will depend on how successfully you tackle five critical challenges.

It’s possible that our list of 2005 business concerns won’t exactly duplicate the list some of our readers might draw up. But we talked to enough people whose replies overlapped for us to attempt to compile a “top-five worry list” for ’05. We’re betting you share at least one or two.

According to our research, the stereotypical hand-wringing, hair-pulling BSC of early 2005 would be an owner of a small- to mid-size contracting company who 1) struggles with finding good people, given the fact that 2) costly laws and regulations erode the bottom line, 3) insurance rates are skyrocketing, 4) margins continue to shrink and 5) maintaining a positive cash flow isn’t getting any easier.

In more detail, our top-five critical concerns:

Finding good people as the economy improves
Through most of the country, the U.S. economy is improving. And while that’s good for business, it may mean some BSCs will have difficulty finding and keeping good workers.

“In most markets you are likely to see a continuing tightening of the labor pool — it’ll become more difficult to attract and retain workers,” says Jim Peduto, president of Matrix Integrated Facility Management in Johnson City, N.Y. “When the economy is softer, lots of qualified people are available who need a position as a bridge. As the economy improves, these workers are the first ones drawn into other segments.”

Mark Patton, president of Patton Building Services in Morgantown, W.V., uses an incentive program that pays his employees for recruiting new workers, and he says it’s been successful.

“If our workers recommend someone for hire, and we hire them, and they stay 90 days, that employee gets $50,” he explains.

While higher wages might seem like a good tool for attracting and keeping workers, contractors agree that’s not always feasible. Many BSCs work in union environments, where wages and benefits are set by contract and apply to every BSC in the area, points out Laurence Lauer, president of Custodial Instructive Services in Milwaukee.

Also, BSCs don’t always have the means to pay their workers more, and facility managers aren’t usually willing to accept a price increase.

“So, there needs something other than wages,” says Peduto. “This business has a certain amount of churn, and your ability to manage that is greater than people believe it is.”

Peduto suggests focusing on the retention side, not just the hiring side, of the human-resources coin. It costs more to hire and train a new worker than it does to keep an old one satisfied.

“Retaining workers depends on how hands-on your managers are,” he explains. “Do managers know what’s going on with their employees? Do managers care? Do they encourage the personal and professional development of those under them? Attracting and retaining is a function of how well you develop your relationships, through training, interest and other things.”

Complying with laws and regulations
Hundreds of new state and local laws went into affect on January 1, such as minimum wage increases in several states, including Illinois and New York. Elsewhere, cleaning workers in California should be instructed to keep their headlights on during the day, if they’re running their windshield wipers. The state of Maine is phasing in voluntary health-care programs for small businesses.

But contractors don’t seem too worried about new laws — it’s increased attention to existing laws, such as those concerning immigration and worker legality, as well as perennial concerns such as compliance with Occupational Safety and Health Administration (OSHA) regulations, that will keep BSCs busy in the new year

Ken Foscaldo believes increased enforcement of immigration and worker laws — brought into public consciousness over the last few years because of high-profile sweeps at Wal-Mart and Target stores, will ultimately help his business stay competitive.

“We only hire people who are legal, which unfortunately is not always the standard in Boston,” says Foscaldo, general manager of AM/PM Cleaning in Boston. “We employ an agency to verify — we’re not just looking quickly at I9 forms. We have 700 employees, all validated. When we take over a job, we often find that 60 to 100 percent of the existing employees aren’t legal — and we won’t be keeping them — that has placed a challenge on management.”

He does expect enforcement to increase in 2005, which should allow legitimate contractors to be able to hire and bid based on legal wage rates.

Another legal concern in 2005 is medical privacy. Patton expects the medical privacy law known as HIPAA to take up a good chunk of his human-resource manager’s time, even though it went into effect in 2000. Janitors working in medical facilities must be aware of the law, so they do not inadvertently violate a patient’s privacy.

“In our Charleston branch, every employee gets HIPAA training, whether they work in medical facilities or not,” Patton says. That way, when employees switch accounts with little notice, they do not need to be re-trained.

Lauer, on the other hand, sees general OSHA compliance — specifically hazard communication — as being a continuing problem through 2005.

“Too many companies aren’t passing along information - you need to have at least minimal information on the chemicals you use,” he explains. “Companies spend money on spray bottles, but don’t label them. Companies have an obligation to commit to training and passing on information to line staff — the line doesn’t make mistakes of their own choices.”

To help stay abreast of changes, Peduto recommends having the qualified advisers on your staff, or available through a phone call.

“You need to either have an extremely strong HR staff, or really good legal counsel, because there are very few discussions that don’t have legal ramifications,” he explains.

“We have a full-time HR manager who stays on top of things,” Patton says. “At times, it seems they handle more concerns about compliance than about the actual business. But it’s a normal part of doing business -- once you have programs in place, it’s easy to comply.”

Keeping insurance rates in check
Hand in hand with compliance goes insurance. BSCs are required, by contract or by law, to carry a multitude of policies, especially liability and worker’s compensation. And rates in most areas are going up. Unfortunately, some contractors see no end in sight.

“General liability has been really frustrating,” says Patton. “Our premium will go up more than $20,000 — that’s a significant increase. Workers compensation is a separate problem — West Virginia has a huge workers compensation problem for the incoming government. For the most part, it’s out of our control. Our industry is considered a bad risk, and nobody wants a bad risk, even if your company is good. There aren’t a whole lot of companies writing insurance for cleaning contractors. “

Peduto suggests some contractors might be able to decrease, or at least stabilize, their worker’s compensation premiums by improving safety. Fewer accidents affect what’s called the “mod” rate, a factor by which base premiums are modified to fit company circumstances.

To help safety, Lauer suggests offering employees safety rewards.

“Many factories offer incentives, if their workers go so many days without a reportable incident,” he says. “Cleaning operations should be doing something similar.”

Contractors in different areas of the country may find better luck than others — in Boston, Foscaldo has had some success improving his company’s mod rate.

“We have a very conscientious safety program, with our own medical provider in case someone gets hurt,” he says. “As a result, we have insurance providers competing for our business. It may be more tedious upfront to do things correctly, but it’s more attractive for insurers.”

Improving profit margins
Regardless of their mod rates and safety records, contractors will need to find ways to keep up with the increasing cost of insurance, as well as other expenses — high fuel costs, union-mandated wage increases and investment back in the business so it can grow.

In order to remain profitable in the face of rising operational costs, Patton says most BSCs have two choices —increasing prices, or cutting back on hours worked by improving productivity.

“Since customers still won’t accept price increases, we need to find a way to be more productive,” he says. “It really goes back to finding good people who can do the job in a productive manner. We’ve often thought that certain jobs were impossible to do under budget, but when we’ve brought in better people, they can do it.”

For instance, his company once cleaned a theater, and between the hours and location, it was considered undesirable. When the company found a couple of people willing to perform the job, managers were so grateful that they put up with the crew routinely taking a long time and going over budget; they assumed the job was impossible to do under the contract’s parameters. Eventually the workers were replaced, and managers were surprised to find out that the new employees could do the job well under budget.

Constant training and re-training also can help productivity, adds Foscaldo.

Another way to improve profitability is to find some high-margin niche jobs, says Peduto. They’re riskier, but ultimately much more profitable

“You need a balanced client portfolio,” he explains. “Clean some traditional office buildings, which don’t have high profit margins but are reliable — office cleaning pays the bills, and can be done in high volume. But, BSCs should invest in more rapidly growing segments, such as mold remediation or the education market.”

That way, the start-up risk of a new niche is balanced by bread-and-butter office jobs.

Maintaining positive cash flow
Small building service contractors, especially, find the idea of taking in more money than they’re spending nearly impossible. A new account might take several months, or even years, to earn back the cost of expensive new equipment. Meanwhile, customers on even the most profitable accounts take their time paying their bills. And, all the while, bills must be paid, paychecks must be cut.

The key to improving cash flow isn’t stiffing vendors, or missing payroll, say contractors; that’s unprofessional and, in the latter case, will not help with recruitment and retention problems. The solution is staying on top of the money that’s supposed to be coming in, but isn’t.

“We’ve noticed people paying later, and slower, so we’re proactive in collections,” says Patton. “We have a dedicated person who handles collection. A big part is tracking — know who the contact is who gets the bill. We know who they are. It all starts with the phone call and letter getting to the right person. Some of our larger customers have multiple layers of bureaucracy, and it’s more of a matter of getting to the right person to write a check.”

And, most slow-paying customers aren’t deadbeats, Foscaldo says; more often than not, the delay can be legitimately blamed on a lost invoice or absent-mindedness.

“We give them the benefit of the doubt,” he explains. “We don’t want heavy-handed collection...it’s very important to maintain a good relationship.”

For that reason, Foscaldo doesn’t use a collection agency, but Patton does turn over the most delinquent accounts to an outside collector, as a last resort. He reports modest success.

“But any payment is better than none,” he says.