The Underground
Economy, Consumers, and
You
What we’ll cover
• “UE 101” – what is it? Where did it come
from? What’s it look like?
•
•
•
•
•
A sober look at the problem.
Supply, demand and competition.
Building a competitive advantage.
Understanding how we see risk.
Leveraging your unique value proposition.
What is the U.E.?
Shadow Economy
Legal activities – legally
carried-out
Legal and illegal activities –
illegally carried-out
The self-sufficient economy
The Underground Economy
Illegal activities,
illegally carried-out:
Drug trade, stolen
goods, smuggling, etc
legal activities,
illegally carried-out:
“cash” contracting
and tax evasion
How big is it?
StatsCan
•
•
•
•
About 2.3% of GDP (2012).
Total UE = $42.4 billion.
Construction = 28% of UE.
Construction UE = $12
billion.
• In home renovation, likely
50%+ of smaller (<$5,000)
jobs.
How does it hurt Canadians?
Estimates of Federal Revenue Losses
From Underground Residential
Renovation Activity 2014
Item
Range (Millions of Dollars)
GST/HST
$680 – $1,000
Income Tax
$570 – $1,140
CPP
$465 - $900
EI
$130 - $250
TOTAL
$1,845 – $2,565
How big is it?
Alberta
• 138,700 jobs provided
• $19.8 billion in investment
value
• $1.42 billion UE in
construction (estimate)
How big is it?
Lethbridge
• 2700 jobs provided
• $384 million in investment
value
• $32.5 million in UE in
construction (estimate)
Let’s not kid ourselves about the
‘cash guys’
• They are not all ‘this guy’.
• Many are skilled.
• Some can deliver good
service.
• Some can have great
sales skills.
• And they can all charge
way less than you!
• Many make a LOT OF
MONEY.
Your (worst-case) situation
• You can’t compete on price.
• You can’t win by bad-mouthing the ‘cash
guy’.
• You may end up looking like a jerk who
over-charges people.
• ARE WE HAVING FUN, YET?
Supply & Demand
CRA Problem
Our Problem
Competition
Rivalry in which every seller
tries to get what other
sellers are seeking at the
same time:
sales,
profit, and
market share
by offering the best
practicable combination of
price, quality, and service.
What we have to work with
• How Quality and Service are defined in
customers’ minds.
• Information is our primary tool for
changing the dynamics of demand.
• It’s foolish to try to compete against ‘cash
operators’ on price.
The Status Quo
They know where they want to end up.
They know far less about how to get there.
What’s a “competitive advantage”
look like?
• Cover the basics very
well.
• Change the “terms of
engagement”.
• Redefine the competitive
‘benchmarks’ for quality
and service in a way that
advantages you.
• Make it very difficult for
your competitors to
“match” you.
Step One: cover the ‘basics’
• Be responsive.
• Communicate – stay
connected with customers.
• Manage expectations and
deliver what you promise.
• Handle problems quickly and
effectively, never ‘strand’ your
customer.
• Project a consistent,
professional image in every
aspect of your company.
The GOLD Standard
• “We had total confidence in the guy. He
explained everything and we were
comfortable with how he did things, every
step of the way. We are thrilled with the
way it turned out. We’d hire him again in a
minute.”
Step Two: Focus on things you
offer, but the ‘cash guy’ can’t
• Know who will pay more for this, and why!
• Help customers recognize the extra value
you can provide.
• Work this into your sales presentation –
everytime.
Quality has both tangible and
intangible aspects
The intangible includes feeling secure
and confident, and avoiding risk.
How do people perceive
‘RISK”?
It’s ‘situational’
How do people see ‘RISK”?
• ‘Risk’ is our innate sense that ‘bad things
could happen’.
• It increases with consequences (lose $$ or
get hurt).
• It increases with lack of control (dependency,
“nothing I can do”, helplessness).
• It increases with uncertainty (not knowing).
• It increases if we think we may end up
looking stupid (self-image).
Aversion to risk varies
• How much we want to avoid risk varies
from person to person.
• However, there are some general patterns.
• Risk aversion increases with age, maturity
and responsibility.
• It is higher in women than men.
• And once our risk-response is triggered,
we view the situation differently.
• Consumer information and education.
• Focused on ‘process risks’ tied to business
practices.
• Deals with the “what if’s” – what if there’s
no contract, warranty, specifications,
payment schedule, insurance, permits,
workers’ comp, etc.
• Highly effective with risk-averse
consumers.
How does this play out with
renovation customers?
Young and Competitive
• Male, under 35.
• Single, or no kids.
• Thinks he’s smarter
than you.
• Looks at business
relationships as
contests.
• Sees risk as a positive
thing, because he
believes he’ll win.
How he sees a ‘cash deal’
Just hope he has a girlfriend . . .
• She will be more riskaverse.
• She’ll listen to you
better.
• She’ll want things
‘done right’.
• Odds are she’ll make
the final decision.
Families
• Time-challenged and
often ‘overloaded’.
• See risk as a strong
negative, to be
avoided.
• Place great value on
avoiding disruption,
obtaining certainty.
• Rational decisionmakers who value
information.
Mature Couples
• Can be too trusting
and loyal.
• Judge people on
personality more than
on credentials.
• Highly risk averse –
but only if they know
about the risks (which
they usually don’t).
Older Single Women
• Often fearful – afraid
of being ‘taken’.
• May lack any
experience with home
repair or renovation.
• Peer references
highly valued.
• Particularly receptive
to women contractors.
The extra value you offer
customers
• Certainty and
confidence.
• Feeling safe and
secure.
• Feeling in control.
• Feeling respected.
• Knowing what’s going
on.
• Peace of mind.
• Avoiding risk.
Messaging
“We just hired a contractor for our
renovation, and he seems like such a nice
guy”
That’s terrific – but remember, “nice guys” always give you a written
contract, a written warranty, and proof of adequate insurance.
Because truly “nice guys” do things the right way. Anything less, and
you’re at financial risk.
And there’s nothing ‘nice’ about that. So always Get it in Writing!
Messaging
“I can give you a receipt, but my price will
go up.”
Sounds like ‘no big deal’, right?
Wrong. It’s a really big deal.
A lower price for cash, without a contract, receipt or warranty could
cost you a lot. If anything goes wrong, or someone gets hurt on the
job, you could face serious financial problems.
So ask yourself if someone who cheats on their taxes might cheat
you too. Get it in Writing! And make sure things get done right.
The fact that you run a legitimate
business, and do things ‘the right
way’ can be a huge competitive
advantage!
Most importantly, it’s an advantage
the ‘cash guy’ can’t match, or he
risks getting caught for tax evasion.
Your added-quality ‘assets’
•
•
•
•
•
Written contract.
Written warranty.
Business insurance.
Workers’ Comp coverage.
Written ‘standards of
practice’.
• Building permits and
inspections.
• Visible presence and
reputation within community.
• CHBA and RenoMark™
affiliation.
So how do you handle the
conversation?
•
•
•
•
•
Talk about what you do – and how you do it.
Include key documents in your presentation kit.
Never ‘trash talk’ the competition.
Make it about your customer, not you.
Deal with price objections clearly and directly –
never apologize, explain.
• Always walk through your contract, specifications,
warranty, etc.
• Make the point that, regardless of who they hire,
they need to Get it in Writing.
Always have this conversation
• If you listen carefully,
most prospects will
tell you what risks
they want to avoid.
• If they do this,
respond and tie this to
your extra value
proposition.
• If they miss important
things, draw this into
the conversation.
Adjust the conversation to the type
of customer involved
• Try to learn the ‘key
risks’ each customer
wants to avoid.
• Tailor your
presentation to how
you address this.
• Create the ‘peace of
mind’ advantage.
“If I do this, what happens?”
• You won’t always win, but your odds of
winning go up a lot.
• Your business practices end up being the
benchmark for other companies your
customer may talk to.
• This can make things very uncomfortable
for an underground ‘cash’ operator.
• It also builds your image as a professional.
Sample: How to explain the risk
of cash deals to customers.
What is a “Cash Deal”?
• How do the words “cash deal” make you
feel?
• Everyone wants to save on taxes.
Let’s Look Closer at the Cash Deal
• What do you save?
– HST/GST on labour; - Permit fees
• How is this done?
– Eliminate the “paper trail”
– No contract
– No cheques
– No permits
– No inspections
– A certain level of secrecy is required
Do You Have the Personality for a
Cash Deal?
How Much Risk Do Your Take?
•
•
•
•
You chose to accept risk everyday.
Driving is risky. Do you drive?
Yes, you have accepted the risk.
Do you ever speed? Yes, you have
accepted the additional risk of speeding.
• Will you drive 20 km/hr over the speed
limit?.......... 100 km/hr over?
• Your answer indicates the level of risk you
are prepared to accept.
Driving vs Cash Deals
• Driving
– Total commitment by both parties
– Big truck vs little car
– Tired or impaired vs you
• Cash Deals
– Commitment to keep quiet
– Contractor paid up-front vs you
– Contractor with a full-time job vs you
How Much Risk is Too Much?
• Everyone’s RISK tolerance is different
• Financial RISK
– Do put your money in a bank? – low RISK
– Would you invest in a start-up? – high RISK
• Typically high RISK for high reward
• Home Renovation and Repair
– Not so much reward
– Lots of RISK
Risks & Rewards of a Cash Deal
• Risks
–
–
–
–
–
–
–
–
No record of agreement
No record of total price
No record of time frame
No spec on materials
No legal recourse
Liability for damages
Liability for injuries
Potential lower selling price for
home
– Potential non-coverage of
insurance
– No peace of mind-more stress
– Increased Risk
• Rewards
– Save HST/GST
(labour only)
– Save permit fees
Work together = Get Results
Some Recent CHBA ‘Wins”
• Three-year, $745,000 federal investment
in Get it in Writing! campaign.
• Reintroduction of limited home renovation
tax credit in April budget (Home
Accessibility Tax Credit)
• $118 million for smart U.E. enforcement.
More Recent CHBA ‘Wins”
• CHBA is on Minister Findlay’s
Underground Economy Ministerial
Advisory Committee
• Political leaders promising programs from
CHBA’s “asks”
• CHBA focused on “raising the bar” in
service to renovator members.
Importance of Home Building
To the Canadian Economy
Importance of Renovation
Canada 2014
New Construction
Renovation & Repair
• 391,000 Jobs
• $22 billion in wages
• $58 billion in investment
• 511,000 Jobs
• $28 billion in wages
• $67 billion in investment
• 189,329 housing starts
CHBA Advocacy
The Liberal Platform
• Index the RRSP Home Buyers’ Plan to the
Consumer Price Index in $2,500 increments, to
ensure it remains a useful tool for people buying
their first homes.
• Provide tax incentives for landlords and
developers to build and renovate rental units in
order to make investment in affordable housing
and residences for seniors.
• Increase the new residential rental property rebate
on the GST to 100 percent, eliminating all GST on
new capital investments in affordable rental
housing.
The Liberal Platform
• Direct the CMHC and the new Canada Infrastructure
Bank to provide financing to support construction by
the private sector, social enterprises, co-ops, and the
not-for-profit sector of new, affordable rental housing
for middle- and low-income Canadians.
• Modernize the existing Home Buyers’ Plan to help
more Canadians finance the purchase of a home and
by allowing Canadians impacted by sudden and
significant life changes, such as job relocation, the
death of a spouse, marital breakdown, or a decision to
accommodate an elderly family member, to access
and use money from their Registered Retirement
Savings Plan to buy a house without tax penalty.
Summary
• Read ‘Raise the Bar’.
• Use the Get it in
Writing! materials.
• Work with your HBA to
deliver the Get it in
Writing! message in
your community.
WWW.HIRINGACONTRACTOR.COM