Healthy Profits Require Healthy Markups

Q:

I have been working on my numbers based on your formulas and I have a quick question: I’m making a profit after materials and overhead. But when I take out wages on many jobs I’m left with a negative profit number (I am a sole proprietor who does concrete staining and resurfacing, so overhead is just me and my bills). This is partly due to jobs that go on too long because of customer demands or unexpected problems. How can I improve? I believe I need to charge more and spend less time. I don’t know if the market will bear a higher price and I don’t know how to go any faster. Any suggestions are gladly appreciated.
 
James Sadler

Concrete Staining Co.
 
A:

First, do you know what it really costs to do the work you do? Or are you charging a square foot price based on how long you think it should take if the job goes perfect or what the market will bear? Your field costs must include all labor, material and equipment to do the work. If you do the labor, you are a cost of the job (not free). Then add a juicy markup for overhead and profit to determine what to charge. It sounds like you are not charging enough by at least 35 percent and don’t know what it really costs to do the jobs you bid. Take a look at your last ten jobs and figure out what they really cost. Then look at your bids and ask yourself if you charged enough. Regarding customer changes and special demands—if your customers add more work or change the contract scope of work, be sure to charge them extra for it.

 
 
Q:

My partner and I opened our general contracting company in October 2005.  Our initial organizational structure was based on our experience with previous firms.  As a structural engineer, I would manage the engineering and field.  As a controller, my partner would oversee the financial side.  This worked well for the first eighteen months.  Then, as you have pointed out, our work load has grown until we can no longer simultaneously manage the work and grow the company.  As a design-build contactor, my engineering capabilities are needed more and more on other projects, which leaves less time for project management.

I was hoping you could give some insight into two basic areas.  First, what is the best fundamental organization for a construction company with regards to project management and “chain of command?”  My experience was to have a project manager (in the office) who looks after several projects at once.  Each project had a field superintendent, who, in turn, looked after one or more foremen or crews, plus the subs on the job.  Ultimately, the project manager was the person responsible to “bring in the job.”  The project manager directed the superintendent, and so on down the line.

I hope my second question may help to explain my first question.  I have one project manager on staff plus myself.  However, I have a superintendent on staff who came from a work situation where the superintendent ran the project, and was assisted by the project manager.  The project manager, Ken, is much better at submittals, purchasing, scheduling, documentation and communication.  He has good construction background, though not as good as my superintendent.  The superintendent, Ben, is “old school”.  He has great skills and experience in all types of construction, is very hands-on, deals firmly and fairly with the employees (who look up to him) and can really kick a job in the backsides when it needs it.  But he is very poor at the paperwork side of construction and has no computer skills.

The problem is :both are good, dedicated men, and both want to be in charge and to have the responsibility for the project.  If I could get them to see that their skills complement one another, life would be good.  But they are both “Type A” personalities and neither wants to take direction from the other.  And they are older gentlemen (late 50s), and rather set in their ways.  That has been the setting for a couple of big personality blow-ups in the past.

We have just been awarded a $2 million contract, the largest we’ve ever had, and over half of last year’s total volume.  The project will require a lot of documentation (submittals, reports, timely correspondences, meetings, etc.) and is on a tight time schedule.  Do you have any suggestions for organizing this project to address the talents of each man, and yet eliminate the friction between them?

 

Jim Scott, President

Citrus Construction

 
A:

Never design your company around the people who work for you and what they can or will do. Design your company for growth and then fill the slots with the people who can do the job. If your existing people won’t or can’t do the job, it’s time to make a change and hire the right people to allow your company to grow without personality conflicts. After all, you are the owner!

The perfect organizational chart is laid out to allow for growth with clear definitions of what each person is totally accountable and responsible for. With two owners it increases the potential problems of how to divide the company structure. Ideally, the president is 100 percent responsible for achieving all of the company goals. Then each department has a person in charge who is 100 percent responsible to achieve their goals. The best division of responsibilities are business development (sales and marketing), construction operations (project management, purchasing, project supervision and crews), pre-construction (estimating and all pre-construction management), finance (accounting and bookkeeping) and administration. Layout your chart per the above chain of command. Then assign the jobs based on what you and your partner will handle. Then assign or hire people to fill all the slots.

Regarding your project manager/superintendent conflict—the project manager must be over the superintendent. The superintendent is 100 percent accountable to finish the job on time and with quality and safety. The project manager is responsible to meet the financial and contract goals, customer relations, do the contractual paperwork and overall achieve the project goals. Quit letting the old guy get his way. Tell him to grow up and do his job as you direct him to based on what’s best for the future of the company.

 Construction Business Owner, July 2008