Todd Taggart is a partner in Grant Thornton LLP's tax practice and co-leader of the firm's national construction industry practice.
Kent Myers is a principal in Grant Thornton LLP's business advisory services practice.
Banks are continuing to post enormous losses, and the stock market is struggling to recover from a mid-year swoon.
Every sector of the U.S. economy is feeling the effects of the meltdown in the housing market. During the months ahead, contractors should seek out and eliminate unnecessary overhead expenses to not only survive, but to position themselves for a more profitable future.
The following strategies for locating and reducing overhead expenses can help you streamline costs and save money.
1. Closely review your fleet of cars and pickups
Most contractors have built fleets of cars and pickups through a legacy reward system for their employees and find that expense has gone unmanaged. Now is the time to take a hard look at this major expense. Smart contractors are reexamining the need for all company-owned vehicles on a car-by-car, truck-by-truck basis and reducing their overall fleet size. In addition, for those employees who need a company pickup, parking it at the contractor's place of business overnight is now becoming commonplace to discourage personal use of company assets.
2. Look at outsourcing IT
If the support systems (or "back office") that supports your field employees, supervisors and accounting function have traditionally been all in-house, you may be saddling your company with the expense and risk of maintaining a network of computers and peripherals that is unnecessary. New advances in telecommunications make it not only possible, but attractive, to outsource large chunks of your IT systems through data warehousing, vendor management and many other areas.
3. Explore new ways to provide employee benefits
New alternatives for providing cost-effective benefits to your employees should be examined closely. For example, health savings accounts, which can provide savings to contractors and attractive benefits to older employees, may be an attractive option for employees over age fifty-five.
4. Narrow supplier base and create negotiated contracts
Times are difficult for everyone in the construction industry. If ever there is time to create strong alliances with suppliers, it is now. In good times, we maximize our margin by pricing our services at the highest levels and our suppliers do the same. Develop stronger relationships with fewer suppliers that are not focused on maximizing current margins, but on creating long term relationships.
5. Employ greater discipline in planning and forecasting
Contractors live and practice the philosophy of measure twice and cut once. Practicing this in the office with our general ledger, budgets and forecasts is just as important as practicing this in the field. A disciplined planning process creates efficiencies in our financial operations and provides an effective tool to communicate future cost and risk control to creditors.
6. Multipurpose employees
In difficult economic market times, we are all trying to do more with less. We can apply this same thinking to our staffing. Maximum productivity from each employee is the goal. One way to approach this challenge is to identify workers that can serve in multiple roles and eliminate downtime while they are waiting on another key task in the critical path of construction to complete.
7. Invest in an enhanced change order process
Contractors love to build! When an unexpected jobsite condition crops up, the first inclination of a contractor is to jump in and fix it-then hope to be paid later. Invest in a tightly controlled change order process to ensure that work done beyond the scope of the contract will be well-documented and approved prior to incurring additional costs. In addition to saving on project costs, expect savings related to additional audit and lending costs associated with unpriced change orders at year end.
8. Delay transaction taxes
Sales and use taxes accrue to the contractor as the "end user" of materials and supplies purchased for construction contracts. Consider creating a purchasing company that takes advantage of a resale exemption. Construction materials can be purchased tax-free and then warehoused until needed for a construction contract. Transaction taxes are not due until they are transferred to the entity performing the construction, normally resulting in an immediate cash savings by delaying the payment of tax. A side benefit to a purchasing company may accrue to the contractor by allowing a more centralized approach to inventory management.
9. Take a hard look at underutilized equipment
In a downturn in the construction environment, the value of equipment normally declines as contractors flood the market with underutilized assets. The current worldwide shortage of steel and the increased international construction boom have worked together to keep used equipment prices high. Now is the time to look carefully at equipment that can be marketed without creating significant operation issues. Generating cash by auctioning equipment reduces current depreciation and repair costs and the cash can be used to reduce debt, further reducing interest costs.
10. Spend money
This recommendation seems counterintuitive in an article devoted to reducing overhead, but the harsh reality is that contractors need to spend money to save money. Key employees need to be cared for and kept happy. Look at long-term compensation and retention programs to make sure that your key employees stay with you during tough times. Invest in safety programs to lower workers compensation costs. Spend (wisely) for the future!
Construction Business Owner, September 200