The 5 Percent Factor: Produce More to Make More!

Editor’s Note: This is the fourth in our 2009 series, “Earn More, Work Less.” To read the previous article, click here. To read the next article in the series, click here.

In the good old days, construction companies were owned and run by builders. These proud, tough, hard working men and women learned their trade in the field, had years of practical experience and knew what it took to get their projects finished on time. If they didn’t produce quality workmanship, they didn’t last long.

Back then, it was all about getting the work done no matter what it took to meet obligations. It was about delivering solid structures with unsurpassed craftsmanship. The contracts were negotiated face to face and enacted with handshakes based on integrity, reputation, trust and doing what’s right. It was all about building a project the contractor could remember and be proud of, then rely on customers for recommendations and new work.

Fast forward to today: Successful construction companies are now run by professional managers, engineers and accountants. These business leaders are focused on the bottom-line and following what is required by the contract. These managers have college degrees and little or no construction field experience. Business is about paperwork, documentation, notices, claims and tracking systems. Building the project isn’t as important as getting the work, doing the paperwork and getting paid, even if it involves litigation.

Years ago, there were not enough qualified construction companies to handle all the work available in the marketplace. Under that business climate, contractors could afford to always do a little extra to insure a perfect project and still make a good profit.

More Demands = Less Profits!

Over the last forty years, the number of contractors has tripled, while the total amount of construction has stayed relatively flat (adjusted for inflation). Therefore, there are now more contractors than needed to do all the work required by the market. A price squeeze resulted and the contractor’s ability to do more than the minimum required by their contract has been reduced. In addition, with increasing competition, construction customers are now demanding more than ever before. They now demand faster schedules, safer projects, better quality, more communications and better technology, all at much lower prices.

These added customer demands on contractors, who are willing to sign contracts for less than they should, have killed the construction business as it once was. Add to these demands poor architectural plans, problematic engineering, incomplete specifications, conflicting contract documents, material shortages, price fluxuations, more regulations, added paperwork, lender’s requirements, third-party inspections, construction managers and red tape, all but eliminated a fair profit for the risk contractors take.

It’s time to refocus on the field!

These issues have put pressure on contractors to save more money in the field. The average crew size has increased, while the number of experienced field workers on the crews have decreased. Training is a thing of the past as most employers have eliminated it as an unnecessary expense. Superintendents and foremen are younger than ever, translating into less experienced field leadership and less efficient crews. Resulting in poor or flat field productivity improvements over the last twenty years. Consider your challenges of fighting against competitors who charge less than they should, employ inexperienced, untrained field crews and build projects requiring more paperwork and increased risk. A need emerges for contractors to refocus on improving field productivity as the only viable solution to compete and improve profit margins.

Construction profitability is about reducing risk. Contracts require contractors to assume more risk than ever today. Have you considered what’s at stake? Take a look at the sidebar listing types of risk.

So how do you reduce risk and increase your bottom line? Your choices are many. But consider what will give you the biggest return on your time, energy and money. In other words, where can your company gain the biggest advantage over your competitors?

•     Lower Material Costs
•     Better Subcontractor Costs
•     Better Equipment
•     Better Supervision
•     Better Project Management
•     Labor Productivity

Construction Risk is a 5-Letter Word!

The biggest risk and opportunity to make or lose money is labor! Let’s look at a typical job breakdown to see what happens if labor runs over budget by 5 percent.

The 5 Percent Factor = 100 Percent More Net Profit!

Most construction companies only make an average annual net profit between 2 and 3 percent. If you can improve your labor costs by only 5 percent, you can improve your net profit amount to 4 and 5 percent. This can be as much as a 100 percent increase in your bottom line!

If you can improve your labor by 5 percent in the example above, your net profit will increase to $7,000, or from 5 to 7 percent net profit. And if you improve your labor by 10 percent, your net profit will increase to $9,000, or from 5 to 9 percent net profit.

But, if you overrun labor by a small 5 percent amount, you’ll spend $2,000 more than your labor budget and reduce your profit margin to only $3,000, or to 3 percent net profit. If you overrun your labor by 10 percent, your net profit will be reduced to only $1,000 and 1 percent net profit.

Is Your Crew Working Efficiently?

Consider how productive your crew is everyday out in the field. Studies of typical construction field crews show revealing facts and much room for improvement. Field employees spend some of their time planning the work. Then, they produce the work. Some of the time they support the work doing layout, seeking information, fixing equipment, looking for tools, repairing tools, locating the right material and asking questions. And, of course, some of the time is wasted goofing off, standing around, starting late, quitting early, extending breaks, smoking, making personal calls, waiting on deliveries or running out of materials.

Do these results shock you? Go out to any jobsite and look around for a few hours. Just sit and watch what really goes on. You will be under-impressed and appalled. So how do you improve productivity? It starts with identifying the areas that take away from your crew’s efficiency, like:

•     Superintendent or foreman leaves the jobsite
•     Multiple trips to the hardware store per day
•     Lack of materials or small supplies
•     Tools break or don’t work properly
•     Wrong equipment for the job
•     Waiting for the right equipment to show up
•     Smoking while working
•     Cell phone calls
•     Dogs running wild
•     Late starts
•     Quitting early
•     Extended breaks and lunches
•     Employees with bad attitudes 

Win the Race!

NASCAR is a good model to follow. At each pit stop, there is no time to waste, as every second counts and can cost the team millions of dollars. How can you get your crew to win the race and become:

•     Super efficient
•     Super fast
•     Super productive
•     Super organized

Focus on the 5 Percent Factor!

The dilemma for most contractors is a downward spiral and never ending treadmill. When you try to do it all yourself, you aren’t focused on field productivity. You get too busy taking care of small tasks that need to be done but don’t make you money. When you’re too busy to meet with your supervisors regularly to help them plan properly, problems occur. You only have enough time to react and fight fires. Your crews then stand around and wait for answers or needed materials.

You know you are losing money and your crews are inefficient when they waste more time than they should. But you don’t have enough time to remain on the jobsite all day to tell them what to do and keep them working faster. So you rely on untrained foreman to get the work done. These supervisors have no incentive to work at a high productivity rate, so they do what they feel is fast enough based on their experiences over the years. Besides, what’s the worst that could happen to them? You come out a few times a year and tell them they’re over budget and try to get everyone working a little faster but that’s not much of a productivity improvement program.

5 Percent Faster jobs = More profit!

How can you make your jobs finish only 5 or 10 percent faster? Many of these critical scheduling factors can cause major delays:

•     Permits
•     Procurement
•     Submittals
•     Approvals
•     Material selections
•     Long lead items
•     Probable delays
•     Potential problems
•     Anticipated conflicts
•     Critical decisions
•     Phasing issues

Time is Easy Money!

Those major factors can cause projects to take longer. But what are the little things that really cost you money? When you don’t focus on speed, it doesn’t happen. When you focus on speed, you get the whole team moving faster and becoming more efficient. When you start every project, get the easy money flowing by getting your supervisor and crew together. Explain the projected and budgeted schedule. And then ask them to brainstorm how they can improve the schedule by 5 to 10 percent. Explain to them how 5 percent faster will translate into dollars and will keep your company competitive in the tougher marketplace. For example:

 In addition to saving on your crew labor budget, the overall project will finish faster as well. You will save even more money concurrently on general conditions, equipment, clean-up, temporary facilities and supervision costs.

Miracles can happen!

One July years ago, I was on a jobsite meeting with my superintendent and concrete foreman. I asked them when they were going to erect and tilt-up the exterior concrete wall panels on a large warehouse project. They both told me they were planning on tilting-up on November 15. I asked them how they arrived at that date. They told me they met with the crane company and thought that date was “doable.”

I didn’t like their answer, so I asked if they could finish a few weeks faster. They both squirmed and didn’t want to answer or commit. Then I asked if they could finish by October 25 if I offered them each a $1,000 incentive. In less than ten seconds, they both said they could make the faster date. And they made it. It cost me $2,000 and saved me fifteen days for twenty men. You do the math.

Sometimes we have to get creative to get the results we want. When we go with the flow, we don’t push our people, and it costs us real money. When you compete, you run a little faster. When I swam in high school, I always went faster in the meets than in practice. Competition makes people go faster. Challenges make people work harder and so do games where you keep score and can declare a winner. I like to say: “No score, no game!” What incentives can you offer to get your crew excited about beating the schedule?

Trash Your Old Tools!

Another consideration is the working condition of your tools and equipment and their overall effect on your crew efficiency. When is the last time you did a tool inventory or a detailed equipment analysis? What should you keep, trash, replace or upgrade? Field workers tend to use old, broken or bandaged tools and equipment rather than admit to the boss that they might be broken or worn out. How much money are old unproductive tools or broken down equipment costing you?

The added benefits of having quality tools and great equipment will be increased crew teamwork, improved morale, more pride of workmanship, better quality, less mistakes, safer projects, and more efficiency. This will translate into even faster jobs and more bottom-line profits for your company.

Poor Production = Poor Profits!

There are many ways to improve crew efficiency and finish your jobs faster. Start by taking a hard look at your start time, break time, lunch time and quitting time. Does clocking out at 3:30 pm mean start rolling up at 3 pm or 3:10 pm or 3:30 pm? For a twenty-person crew, every minute you lose per day costs you as much as $2,500 per year or more.

Double Your Profits!

Call an all crew team meeting and discuss ways to improve your schedule, save a few minutes every hour, define your exact hours for production expected, create meaningful incentives, improve your tools and equipment, increase efficiency and strive to implement the 5 percent factor to get more everyday from everyone.


Construction Business Owner, April 2009