Entrepreneurial Small Business 2nd Edition by Jerome Katz , Richard Green

Exercise 11

RICHARD HARRIS AND HARRIS HOMES LLC
Many people who thought the devastation from 2005's Hurricane Katrina would be a golden opportunity for the Gulf Coast construction industry were sadly mistaken. Consider the situation of Richard Harris.
Harris had owned Harris Homes LLC about ten years when Katrina hit Ocean Springs, Mississippi. By 2004, his sales had grown to $3.5 million and his 2005 sales were on track for $5 million when the storm hit. Before the storm, he had $3 million in projects and $300,000 worth of vacant property. Before the storm, he was building 24 houses, and 12 of them were already under contract. When Katrina hit, those homes sustained damage, and even with insurance, Harris' out-of-pocket expenses to cover his deductible were around $100,000. The bad news was that paying those deductible expenses would eat up all of his working capital.
That money problem fed into another problem-people. Harris was employing 60 to 80 subcontracted workers, but now he couldn't make competitive offers to get the workers back. FEMA (the Federal Emergency Management Agency) was spending money for their Blue Roof emergency repair program, out-of-state contractors with fat bank accounts were hiring local workers at premium rates to help them start repairing and rebuilding, and the area's worker base was still depleted because of the people who evacuated the area and had not yet returned. Just as workers were scarce and going for premium prices, so were lumber and all building materials, as an entire region tried to rebuild at the same time.
Those 12 homes under contract were sold at pre-Katrina prices, in effect "locking-in" low prices the region will not see for months, perhaps years to come. Harris was obligated to finish those homes. However, the cabinetmaker, plumber and electrician he had favored all had businesses underwater after Katrina, and may be out of business.
It is now about three weeks after Katrina (and the glancing blow from Hurricane Rita) hit. Looking at his immediate future, Harris knows he needs to get to work on the other nearly finished homes, which would get some new cash flowing into his business. He has applied for SBA disaster relief, but has been told it would be 90 days before any money became available-if he qualifies. He needs to move to get some of the potentially lucrative government contracts for rebuilding that are being offered. But even here, it is hard to know how to bid when prices are so unpredictable. For example, the cost of dumping debris from cleared land jumped from $1 a cubic yard to $4 after Katrina.
Harris had done several things right. He had insurance. He kept a set of records where they would be safe, making it easier to apply for government relief and insurance after the storm. He even had kept ready cash for expenses. Despite all of that, Katrina hit, and Richard Harris is looking at the possible loss of his business, right at the moment when the construction industry in his area appears about to enter a golden age of rebuilding.
What do you think are the two greatest risks facing Richard Harris's business Why