Don’t Underestimate the Human Element

Reduce hidden costs and increase profits with an effective HR program.

It is pretty obvious that spending money on more efficient tools will improve productivity and put more money in your pocket. For instance, if you buy a nail gun for $300 that helps you earn $400 more profit by completing work faster, you have made a smart business move. 

But it can be hard to find high-return investments further away from the jobsite. Human resources is an example of an area that can put money back on your bottom line, but you must invest in your people.

First, you must understand what HR actually involves. Here are the most basic pieces to follow when setting up an HR program:

• Manpower Planning—To grow your business, you must have a long-range revenue plan, which includes finding the right talent. What skills should your future employees have? When will you need these future employees, and how many will you need to grow revenue?
• Job Descriptions—When you create job descriptions, specify in detail exactly what skills and experience each position on your organizational chart requires. Also, include performance standards, compensation/bonus programs and a reporting structure.
• Hiring Process—A detailed job description will help during the hiring process. And when you select candidates to interview, compare them to your standards. This is an arduous formal process, not a 20-minute interview.
• Training—Do not take training for granted. Training thoroughly for each position is a step-by-step process that pays off. When training employees, cover every base, and give every employee the same information. Training brings new employees up to speed faster and minimizes the time spent repeatedly telling new people the same things.
• Development—You need to have a plan for every employee’s career path. What future positions will each employee hold, who will fill open positions, etc.? Employees who can see a future at your company will work harder and stay with you longer. 

These steps may seem like overkill for a mid-size contractor, but it is easier to create the HR process earlier than later, even if you only have five full-time employees.

Setting up and maintaining an HR system might sound time-consuming, but a solid system can put money back in your pocket by motivating employees to perform at very high and profitable levels, minimizing labor costs and reducing costly but hidden turnover costs. 

Reducing Turnover

Turnover is a huge expense that comes out of your profit—it can sometimes cost between 30 and 50 percent of the former employee’s annual wages. For instance, if Joe makes $15 an hour and quits or gets fired, you will spend at least $10,000 replacing him.

Turnover is a sneaky expense because you cannot track this in your financial reports. Turnover costs are hidden in direct labor—new hires have to be trained, their productivity is low initially, and they slow other workers by asking questions. They also make more mistakes, waste materials and cause callbacks. Plus, administrative time is consumed in placing ads, interviewing people and doing paperwork. All of this adds to your costs and takes your attention away from other important projects.

You can keep turnover costs down by hiring right the first time, developing a good compensation system and providing career path planning. For each productive $15/hour employee you keep on board, you can add $10,000 back in your pocket. 

Maximizing Productivity and Profitability

Effective reward systems make money by motivating employees to make choices that maximize profit. Unfor-tunately, the most common (and useless) systems are the ones that simply give hard-working employees a yearly percentage-based raise. Would you work hard all year just because you think your boss might give you a raise?

Or would you work harder if you knew exactly how your performance would be measured and that you would get a big bonus every three months if your numbers were good? That sounds better because it gives you some control of your own income. Plus, you can see a short-term payback for your efforts rather than waiting a whole year.

The term “pay for performance” sometimes causes a quick, negative response from business owners: “What happens if I commit to paying bonuses and can’t afford to pay them?” or “Why should I pay employees more than the going rate?”

A solid pay-for-performance system handles both of these objections. If it is done correctly, the employees will automatically do the most profitable thing because it is in their best interest to do so—resulting in more profit and fewer management hassles.

Suppose one of your crews costs $35,000 in salary and routinely produces $50,000 a month in gross margin. Now, suppose you offer that crew 40 percent of any gross margin increases that they produce, and they start doing $55,000 a month. You will pay them an extra $2,000 but will add $3,000 to your profit and net an added $1,000. That is a 50 percent return on your investment in one month. Over a year, that would be $12,000, and if you create the bonus system carefully, there is no risk to you. Everybody wins, and turnover stays low. 

Matching Skills to Jobs

Just because Bob has been doing the scheduling job for years does not mean he has the right skills for the job or that he is paid the right salary. Jobs should be assigned to the lowest-paid employee who can do them effectively. Each job description should detail exactly what skills and experience are needed, and the market will tell you what those positions are worth in salary. It may be uncomfortable, but if the scheduling job can be done by a $15/hour employee instead of a $25/hour employee, you can gain $20,000 back in your pocket each year.

You can also make more money by hiring cheaper labor to free up high-skilled employees from low-level tasks. If you have a $40/hour journeyman doing $10/hour cleanup work, you lose $30 every hour. If this happens for 10 hours a week, you lose $16,000 for the year. If you have three journeymen doing this work, you lose $48,000.

Another major benefit of a solid HR system is the time it gives back to you. Every hour you spend rehiring or retraining people to do the work right is time you are not investing in the strategic work that propels your business forward.

It does not cost much to develop an HR program. Initially, you have to invest time brainstorming and documenting the plan, job descriptions and performance standards. A good job description can be done in a couple of hours. You may be thinking, “Wait a minute, I have five jobs that will need to be written up. That’s 10 or 15 hours that I just don’t have.” But consider this: How many hours could you free up every month if you spent half as much time rehiring and retraining? Fix it once, and it pays you back for years. You can hire a pro to help you or do it yourself, but either way, a simple but solid HR system gives you more time to do your job and puts dollars in your pocket.

Construction Business Owner, October 2011