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Keep Your Profit Wheel Spinning!

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The number one challenge many contractors face is making less money at project completion than hoped for in their bids. As a construction company business coach, I see many contractor income statements every year. I often hear company owners tell me they bid using a 15 percent mark-up for overhead and 10 percent for profit. But after studying their year-end profit and loss statement, they only end up with a 20 percent gross profit. I ask them what happened to the other 5 percent, but they generally don’t know why they had a reduced profit margin.

What Causes Your Profit Wheel to Stop Spinning?

Estimators bid jobs using standard company production crew rates for labor and equipment. Then completed jobs actually often cost more than the bid budgets. Why? Profit margin shrinkage can occur for many reasons, including:

  1. The estimator uses the “blind man method“ of bidding. This occurs when he shuts his eyes and guesses how many hours it will take to complete a task.
  2. The estimator uses the “mystery method“ of bidding. This occurs when using a standard square foot price to bid work. For example, to build and pour concrete sidewalks, he estimates $5.75 per square foot for total labor and material versus calculating the exact production labor, equipment and material required.
  3. The estimator uses a percentage adder factor to cover required supervision, general conditions, clean up and mobilization. For example, on a $100,000 job, he might add 5 percent to pay for these costs, which may or may not be the right amount to cover all these expenses.
  4. The estimator misses several items required to complete the scope of work as contracted.
  5. The estimator underestimates the time required and the overall project takes longer to build.
  6. Field crews were not very efficient, which can be caused by many factors including poor supervision, little or no pre-project planning, several unanticipated additional move-ins, lack of proper scheduling, bad weather, or other factors.
  7. The crew leaves the job before they are 100 percent complete to get to another project. Then they have to come back to finish their work and the punch list.
And the Top Three Reasons that Actually Cause Your Profit Wheel to Stop Spinning:
  1. The estimator uses inaccurate, out of date, too low, or too optimistic production rates to calculate the total labor or equipment required.
  2. The field foreman wasn’t ever given the project labor production budget for crew hours. Then he wasn’t given any updated weekly job cost status reports to see if the crew was on budget. And the foreman wasn’t held accountable to meet the job goals.
  3. The estimator didn’t go back after projects were completed to verify the labor and equipment production bid rates used were accurate. And bid rates were not adjusted properly for future bids.
Steps to Keep Your Profit Wheel Spinning!

To maintain your profit margins and ensure all projects hit the estimated budgets, contractors have to invest people, time and money to implement and monitor the systems required to keep the profit wheel continually spinning round and round.

Step 1 - Estimate The Right Number of Crew Hours

Prepare your construction estimates using unit prices for labor and equipment production based on actual cost history. For example: it generally takes an average of one man-hour to dig and plant a 15-gallon tree, or install and grout 10 masonry blocks, or install three downlights in a ceiling. After the estimator completes the quantity take-off and estimates the number of man-hours based on accurate cost history production rates, he should meet with a field superintendent to discuss and verify the estimate. Together they should agree on the total hours required before the bid is turned in.

Step 2 - Pre-Plan To Hit The Budget

After your company is awarded a contract, the project team meets to plan the job and hit the goals. Get the estimator together with the project manager, superintendent and foreman to review the estimated budget. Review the scope of work, draft a detailed field work plan, determine the right crew size, discuss any omissions, and make the necessary adjustments.

Now combine or adjust cost codes to allow the field to track their time in a simpler version of the budget. Make sure time cards match the actual job budget, are setup to allow for easy time card coding and tracking, and job cost update are reviewed weekly. Break down the budget by job phases for longer duration projects. This will allow your team to know their crew hour production goals.

Step 3 - Build the Job on Budget

With clear labor hour and equipment targets, the field can now keep track of their progress. Have time cards coded properly and turned in daily. At week end, have the foreman turn in the quantity of work completed for every task cost code. By Monday morning, have the job cost engineer calculate the budget versus actual time spent. Then, the project manager must review the weekly progress versus the budget and communicate the actual results with the superintendent and foreman. This process allows the field to be aware of their progress versus the budget and make any adjustments necessary.

Step 4 - Adjust Your Estimating Cost History

Review the final job costs after projects are completed to determine if the estimate and budget were accurate. Have the estimator meet with the project manager and field foreman to review the final job costs versus the bid estimate. Look for reasons the final job costs were different and determine adjustments required to bid future projects accurately. Have the estimator make notes on why this job cost more or less than the original bid. Update the company-wide estimating cost history library for future bids.

Keeping the profit wheel spinning takes a commitment to plan, hold meetings, calculate job costs every week, keep your field foreman informed, and dedicate the time required. When you develop accurate cost estimates, your profit margin will stop fading and you’ll start making more money.


George Hedley, CSP, CPBC, helps contractors grow and profit as a professional business coach, popular speaker and peer group leader. He is the author of “Get Your Construction Business to Always Make a Profit!” and “Hardhat BIZSCHOOL Online University” available on his website. Visit www.hardhatbizschool.com for more information.