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Stop Profit Margin Shrinkage!

George Hedley

In the construction business, the most irritating thing that happens is when you bid a job at a nice profit margin and the final job costs end up higher than expected. Profit margin shrinkage starts when the estimator prepares a bid based on what he thinks a job should take to complete versus looking at the cost history of similar jobs. He reviews his estimate with the owner, who looks at the plans quickly, studies the proposed inclusions and exclusions, adjusts and lowers the crew production rates, and then gives it the final approval. A few weeks later, the customer awards the contract to your company, you accept the terms, and therefore become the contractor. Then the problem really starts.

The estimator turns over the folder to the project manager. They meet for a few minutes with the proposed field superintendent or foreman to review the contract, bid estimate, scope of work and proposed subcontractor list. Everyone’s now vaguely clear on what’s included and how it was priced. The team starts ordering materials, writing subcontracts and scheduling crews. The bid budget is entered into the accounting system so the foreman and superintendent can order materials and charge time to the job.

What’s Wrong this Process so Far?

The estimate wasn’t based on actual job cost numbers from completed production rates on similar jobs. The budget hasn’t been scrutinized properly and corrected. The superintendent and foreman haven’t prepared a detailed work plan to layout the week-by-week field crew and equipment size required. The subcontracts aren’t written with detailed scopes of work or precise quote comparison spreadsheets. The project manager was too busy to get all of the subcontracts written and executed early enough, which caused trades to not have signed contracts when needed on the job site.

And the Field Cost Problems Continue to Mount!

During the project, the customer asks the foreman to stop and start working in several areas, the workflow plan is changed, extra move-ins are required, change orders are completed without approvals, extra manpower is needed and additional overtime is required. The project manager is too busy managing and bidding other jobs and can’t get to meetings, change order requests, documentation and job cost updates. Subcontractors won’t move forward without signed change orders, causing field delays. Required work inclusions were excluded, causing more cost overruns. Little by little, small things add up, and the job ends up costing a lot more than the budget estimate.

The owner regularly asks the project manager and field superintendent if the job is going well. They answer everything’s fine and they have it handled, even though they really don’t. To make matters worse, the project manager continues to present the estimated final job cost at the bid budget on the monthly job cost report update without adjustment for delays, unrequested change orders performed, missing holes in the scope of work, and crew production cost overruns.

The Job that Never Ends!

The owner visits the job site when it nears completion. He asks the field superintendent when it will be finished. He says three weeks. The owner comes back to discover the job is still not finished. He asks again and is told it will be finished in two more weeks. When field managers are not required to update, track or guarantee drop-dead completion dates, jobs never end. The punch list goes on forever, sign-offs seem to never happen, the close-out package seems to drag on, and getting the final payment takes months. It costs real money not to finish projects fast. And customers get upset with the contractor’s overall performance.

The Result is Profit Margin Shrinkage!

Profit margin shrinkage is unacceptable. It happens when owners and managers don’t have a clue about their job cost numbers. When your profit margin shrinks from the project bid mark-up to a lower amount, something is wrong. Profit shrinkage is an outward indicator of poor ownership and management, inaccurate estimates, project managers not required to do their jobs, lack of job cost tracking, and no focus on knowing your numbers.

Commit to End Profit Margin Shrinkage!

To make sure profit fade doesn’t occur takes a commitment to getting your numbers right all the time. Owners must make accurate and timely job cost estimating, tracking and reporting a priority. Estimators must make accurate estimates their number one priority. Project managers must make projecting, tracking and knowing their estimated final jobs costs a top priority. Writing tight subcontracts without holes is a must. Field supervisors and foreman must make tracking weekly job cost crew hours and equipment budgets a top priority. And then they must manage their field production activities and expenditures to achieve the expected goals.

10 Steps to Eliminate Profit Margin Shrinkage:

  1. Pre-Job Turn-Over Meeting
    • Meeting is mandatory
    • Estimator, project manager, superintendent & foreman attend
    • Review scope of work, plans, inclusions & exclusions
    • Approve project change order rate sheet
    • Review and approve proposed subcontractors and suppliers
    • Account for missing items not included in scope
    • Draft a detailed work plan projecting daily & weekly crew size and cost
    • Set project goals:
      • Schedule, milestones and completion date
      • Crew and equipment hours
      • Approve updated project budget
  2. Project Start-Up
    • Hold project start-up meeting with customer to review:
      • Payment requirements
      • Change order procedures
      • Extra work rate sheets
      • Proposed work plan, phasing and schedule
      • Proposed crew size and work flow
  3. Subcontracts & Purchase Orders
    • Must be written and executed with 30 days of project start
    • Use scope checklists to write subcontracts
    • Use detailed quote comparison spreadsheets
    • All must be approved by owner or construction manager
  4. Change Orders
    • No extra work can proceed without written authorization
    • Provide rate sheet to customer for all extra work
    • No trade-offs with customers over $100 without approvals
    • Unsigned change order work deducted from incentive bonus pool
  5. Job Cost Tracking & Update
    • Set up project production scorecards to track job costs weekly
    • Cost to date versus budget for labor and equipment updated weekly
    • Job costs reviewed by foreman and superintendent with project manager weekly
    • Estimated cost to complete must be projected and updated monthly
    • Monthly job cost updates with budget versus actual cost for all jobs are mandatory
    • Project foreman and superintendents meet weekly to review production scorecards, schedule updates, and completion milestones
  6. Crew Management
    • Turn in think-ahead schedules weekly
    • Hold weekly field crew meeting to review crew hours
    • No overtime allowed with prior approval
    • Equipment must be used or removed from job site
    • Start work at 7 a.m. means start work at 7 a.m.
    • Finish work at 3:30 p.m. means work until 3:30 p.m.
    • Thirty minute lunch means 30 minutes
    • No smoking on jobsites
    • No personal cell phone usage on job sites
    • Punch list performed weekly by foreman
  7. Accounting
    • Prepare weekly crew production job cost reports by cost code for field
    • Completed job cost report finalized and given to estimator and project manager
    • Assign job cost update to job cost person to perform weekly
  8. Estimator
    • Review job cost updates monthly on all jobs
    • Review final completed job cost updates and adjust bid rates
    • Verify labor and labor burden rates twice per year
    • Verify equipment rates twice per year
    • Incentive compensation based on accurate estimates
  9. Incentives
    • Offer incentives to finish on-time and on-budget
    • Offer incentives to eliminate punch lists and call-backs
  10. Close-Out Project Faster!
    • Have the field foreman or superintendent do a weekly punch-list
    • Make sure all the weekly punch list items are completed every week
    • Never let your crew leave a jobsite for any duration of time without a job walk and sign-off with your customer
    • Assign project completion documentation to a contract administrator

It takes a dedicated investment and effort to eliminate profit margin fade in your company. Your choice is to do nothing about maintaining your estimated profit or invest time and energy to reduce it and make 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 for more information.