Hard work alone can't save your construction business.
Most construction company owners and managers spend their time on earning revenue and organizing projects, two of the three required operational functions to grow their companies. But a good bid takes a lot of time and effort. Even if you win the contract, the time commitment only gets worse as you begin ordering, subcontracting and scheduling for the project. All this effort to find and do work leaves little time to focus on the third and most important function required to make a profit—knowing and tracking your numbers.
Unless your business goal is to be busy and broke, you must focus on accounting and job costs as much as your projects. Too many construction companies perform high-quality work only to earn too little money. Understanding your costs and how much to charge will lead to reasonable profits at the end of the year.
Many tradespeople without an accounting background win work by charging standard market prices. This practice may pay the bills from month to month, but leaves contractors tired and broke in the long term.
If owners and managers want to understand their companies’ costs, they must learn how to read their financial and income statements, calculate accurate job cost budgets, fill out work-in-progress reports, track overhead, determine how many sales are required and know how much mark-up they need to make a profit. I often see owners make the mistake of hiring bookkeepers with no experience in construction accounting and turning over all the finances to them. Worse, their only expected duties are usually trivial, like paying the bills and balancing the checkbook.
To start earning more money, owners must first make learning construction accounting a priority. Like any trade, accounting takes time to learn, but many contractors don’t stop to learn accounting practices that can lead to increased profits. If you don’t know your numbers, you can’t run your business professionally or expect to make substantial profits.
The Numbers Game
Business owners hope hard work will eventually pay off. But many owners have better odds of hitting a jackpot, winning the lottery or inheriting a fortune than creating profits with their current business practices. It takes knowing and focusing on your numbers to keep you headed in the right direction. The following numbers you must know, track and review on a weekly and monthly basis:
You must know how much mark-up you need to cover your overhead and profit for the entire year. Bidding numerous jobs won’t make your numbers work. You need to balance your overhead and profit goals with your mark-up and sales to end the year with the profits your business needs to grow.
Bidding work starts with knowing exactly how much it costs to build the work. Do you know your labor, crew and equipment costs? How much does it cost to have a crew on a job per day? How much does it cost to own your trucks, tools and equipment?
How much revenue do you need to cover your overhead and make a profit? Dividing the annual overhead and profit you want by your market’s gross profit margin will determine the total annual sales you need.
Without an investment in a fully integrated accounting package that provides weekly and monthly job cost updates, it won’t matter how well your company performs. In addition, you need an accounting expert to manage job costs, construction financial statements, over-under billings and completed contracts.
Performing quality work doesn’t really matter unless you make it your priority to make a profit. Don’t delegate or ignore the most important part of your business. Stay on track by taking at least two hours every week to review these numbers with your accounting and project managers. This small investment of time will give you a much better return than going out to the jobsite to encourage your employees to work faster.