Most contractors today have several factors reducing their potential profit. Owners get extremely busy putting out fires, preparing bids, scheduling crews, and keeping up with the day-to-day pressures of running their construction business. More projects increase workloads and sales volume, which continuously adds to the list of responsibilities required to keep the machine running. But more also causes cracks in the armor, holes in the boat and profits to shrink as money leaks out in every direction.
What’s Your Profit Potential?
If your company could maximize the available opportunities to produce more profit, would you make more money? Of course! Imagine how much money you could make if everything in your company was working perfectly without any leaks, restrictions or problems. Now imagine your company was a funnel with a shut-off valve controlling the flow of profit output. A steady flow of sales volume enters the funnel in the form of revenue. The funnel absorbs and reduces the profit output by paying invoices for job costs and overhead expenses. Leaks also cause some money to flow out of the funnel. The leftover flow will be the net profit cash flow exiting the end of the funnel into equity account. Now imagine there’s also a profit shut-off valve reducing the net profit output. Would your current company operations, systems, structure, customers or processes reduce some positive profit flow potential as well?
What Would it Take to Open Your Profit Flow Valve?
To look for ways to reduce the restrictions slowing down your profit flow, you must stop and take an objective view of room for improvement in how you do business. There are several common problems many construction companies have which continually reduce their bottom-line profits. Unfortunately, during busy times business owners, managers and supervisors are overloaded and don’t have enough capacity or extra time to improve their company. As a result, these profit reducers continue and significantly reduce the net profit potential.
6 Steps to Proactively Improve Profits!
1. Stop bidding with inaccurate overhead and crew rates or missing items!
Admit it—your bids are not accurate! Most companies don’t know their current and exact overhead mark-up, rate keep accurate job cost history data or know their exact production crew performance rates.
- Verify your overhead mark-up, labor and burden rates are accurate.
- Stop bidding using dollars per quantity; start bidding using quantity per hour.
- Have the estimator review final job cost results with the foreman after job completion to verify and update the bid production rates.
- Develop an estimating checklist of all items required and often missed when bidding jobs.
2. Stop tolerating profit margin fade!
Why do your jobs come in over budget? Likely your field labor on self-performed work tasks took longer than estimated. Profit margin fade is caused by bad estimating, slow field production, an incomplete bid, project manager not knowing the costs, or any combination of these. Your job is to find the problem and stop it!
- Make sure everyone knows their budgets for labor production hours before they start work.
- Keep field supervisors informed weekly using a production scorecard.
- Project managers must prepare an updated monthly job cost report.
- Make sure estimators and project managers are not overloaded so they will have time to focus on accurate estimates and/or achieving the project production and profit goals.
3. Stop doing change orders for free!
It amazes me how many contractors tell me they aren’t capturing revenue for many change orders they perform. Why? There is no excuse for doing extra work without prior approval from customers.
- Proactively managing change orders must be a top priority.
- Never do work without a signed authorization to proceed. Ever!
- Develop a standard change order time and material rate sheet.
4. Stop allowing field crews to go over budget!
A common profit reduction problem is caused when superintendents and general foreman do not focus on keeping field production labor costs on-budget. Instead, they work hard spending their days scheduling and moving crews around, ordering and delivering materials, inspecting quality, meeting with customers, checking timecards and doing required paperwork.
- Assign someone in your company to be 100% responsible to achieve field production goals.
- Implement a weekly job cost scorecard tracking system.
- Make sure field supervisors complete job walk inspections with customers including photos and interim punch-lists before crews move off to other jobs.
- Every field supervisor and foreman must submit a two week look-ahead schedule every Friday to be reviewed with the project manager.
- Require all foreman and superintendents to attend a company weekly field scorecard meeting where everyone reviews their individual job results together to focus on hitting production labor goals.
5. Stop doing business with the wrong customers on the wrong projects!
Contractors often continue to keep bidding and winning contracts with the same customers and project types even if there are better opportunities to make higher margins available. Working with bad customers or projects causes your bottom-line to shrink!
- Develop a target list by determining which customer targets and project types will give you the best opportunity to win more work at higher margins.
- Start a customer and project type tracking spreadsheet grid.
- Keep track of your bid-hit-win ratio to determine which customers and projects you have the most success with.
- Set a standard weekly meeting to determine which jobs to bid or not based on the profit potential.
6. Stop running your business alone!
Your company is restricted by what the owner and key people can do themselves. You can’t grow your company without a strong management team stacked with great people accountable and responsible to help you manage your business and achieve the high margin results you want. With only you at the helm making all the decisions and without a strong management team helping you, your business:
- Isn’t worth anything to an outside investor or potential buyer.
- Can’t grow, seek new customers or find better projects.
- Can’t fix your profit leaks, improve much or ever seem to get ahead.
- Will stay stuck at the same level making low margins.
- Will keep you overworked, stressed-out and underpaid.
Only you can decide to do something about reaching your profit potential. Where and when will you start?
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.
