Construction Business Owner, January 2008

Focus on Accuracy

Time to sharpen your estimating pencil! “Tough times” usually mean increased competition and tighter margins. You need to review your estimating methods and cost information to make sure it is as accurate as possible. Depending on the type of contractor you are, material, labor or equipment costs are going to be the primary elements of cost you can control. Make sure you have current information with which to work. This would include the bare cost, delivery or set-up costs, production factors (labor efficiency, equipment usage and material shinkage), as well as any relevant mark-ups—especially for labor. In addition, make sure you are up-to-date with any changes in the economic climate. Many states and localities are modifying the taxability of items or the rate at which items are taxed, and many are doing it during mid-year. Make sure you are aware of what is going on and either factor it into your calculations or insist on contract language that protects you in case of things like unexpected tax increases.   

Know Your Margins and When to Walk

After you have ensured that the base information you are working with is correct, look at the margins you are using to get to your final bid amount. What may have worked before may not work today—nor may it be necessary. If your direct costs are accurate and you have provided for the indirects that are directly tied to the direct component of the work, you then need to focus on the amounts that you are adding to cover overhead and any profit expectation you have for the  job. At a minimum, try and cover as much of your overhead as you possibly can. It does not make sense to take work that only covers the direct components and contributes nothing toward covering your other costs. If you are a one-man operation, the situation is obviously different, but if you have non-productive overhead to account for, make sure you cover as much of it as possible. If you can also make a small profit, do so. Many contractors find it difficult to do this during a slow time and consider anything in excess of recognized cost a blessing. If you can’t cover your costs, don’t be afraid to walk!!

Take What Is Yours—Only

Cash is the lifeblood of any construction organization, and managing it is more of an art than a science. The way we bill for our work is one of the primary reasons cash is difficult to manage in the contracting environment.

Most contractors practice “front-loading” during the billing process. This is the practice of weighting  work progress more heavily in the early stages of the job. The natural tendency is to consider all the money you bill as earned. If you have sufficient construction volume, you can survive not managing the amount of over-billing for an indefinite period. That is not the case when money is tight. If possible, segregate the excess cash collected so it will be there when the time comes to pay the “rightful owners.”

Profits in Action: The IRS requires calculation of the over or under billing for contractors that meet certain criteria. If you are not at the volume level where percentage completion revenue recognition is required, you should still follow this practice. If your volume has been decreasing, you may be entitled to switch income recognition to the completed contract method. Check with your CPA to see if there may be some advantages if you qualify.

Bill Early, Bill Often and Collect Your Money

This is another no brainer, but we often do not bill as aggressively as we can. Review each of your jobs to ensure that you are billing the maximum you can, as early as you can. Something often overlooked is the right to bill for stored materials or pre-purchased engineered items before they are installed—many times without the requirement to withhold retention. Then, stay on top of your collections. If your billing is subject to review for completion percentages, make sure you have as much agreement on them before the billing is submitted. A classic delay tactic is for the owner to dispute an item but not until you call them to see where your money is. Try to anticipate this behavior if a client has a tendency to act in this manner. The more excuses you take away, the quicker you will see the $$$.

Profits in Action: If your billing involves agreement between multiple parties (subcontractors, the GC and the owner’s rep), consider setting up a time to walk the job, and make sure all parties are in agreement as to what will be billed.

Accelerate Change Orders

This is an ideal time to review your in-house procedures for recognizing and getting paid for change orders on the job. It begins with making sure that everyone involved with the job understands the scope of the work for the job. More money is lost in construction companies because of work on unrecognized changes than any other preventable cause. Make sure  your eyes and ears in the field understand what is and is not included in the contract, then make sure you have the proper mechanisms in place to get approval for the work before it begins. Once you have started the change order process, pursue it doggedly. Make sure someone is responsible for knowing the status of each of your change orders and ensuring that the ball is always in someone else’s court.

Profits in Action: Try including unapproved change orders in your monthly billing. Depending on the client, you might just see early payment!

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