Editor's Note: This is the third in our 2007 series of The Business Owner Toolbox written by our regular columnist, George Hedley. Each article is written to provide you with practical, immediately applicable business management tools to assist you on your path to building a successful, growing business. To read the previous article, click
- What's your fixed cost of doing business?
- What is your annual overhead budget?
- How do you determine your markup rate?
- What's your actual labor burden rate for each of your employees?
- What's your annual cost for every piece of equipment you own?
- Which project type do you make the most money on?
- Which superintendent or foreman makes you the most money?
- Which customer do you make the most money on?
- How do you determine your change order markup rate?
- How much money did your money make last year?
Who Minds Your Store?
Ninety-five percent of your competitors have no answers to any of these basic business questions. Do you? Most often, answers to these important questions and financial business decisions are left up to a bookkeeper (or spouse) who doesn't really know how a construction business can maximize their bottom-line if managed properly. You can't make enough profit in the construction business for the risk you take. The competition won't let you. They don't know what it costs to build their jobs. So, they bid work cheap to keep their crews busy and to create cash flow to cover their boat and pickup truck payments. How can you compete with this? It's impossible unless you pay close attention to your financials, manage your costs and watch the little things that add up to big dollars over time.
A contractor called me from Michigan several weeks ago and he told me the economy was bad and work is slow. He said he can't get any new work at his old markup rate and has since lowered it another 5 percent, but he still can't get any work. I asked him the first three questions listed above. He had no clue. So I semi-politely said: "How can I help you if you don't have any idea what it costs to keep your business open?" He said he would call me back with the answer. Guess what? I haven't heard from him again.
You don't make money building things. You don't make money doing great work. You make money by knowing what it actually costs to run your company and what to charge for labor, equipment, materials, subcontractors, overhead and profit. So here's a list of things to boost your too slim bottom-line profit margin.
Ten Tips to Peak Your Profits
1. Watch Overhead Costs
First and foremost, you must know what it costs to keep your doors open without any work under construction. This is your break-even minimum you must cover before you make a profit. Make it a priority to sit down with your professional accounting manager and get a handle on this most important amount. Then trim the fat. Look at every overhead check you signed last year. Where are you wasting money? Look especially at your insurance costs, expense account items, office supplies, subscriptions, phone bills, postage, shipping costs, employee expense accounts, utilities, cell phone bills, computer and internet costs, copy machine costs, accounting and legal services and your own credit card charges.
When I took a hard look at our overhead costs a few years ago, I found people were abusing the "company" accounts and ordering more things than we needed. Consider outsourcing payroll services, craft training, project scheduling, marketing services, safety programs and equipment maintenance. By outsourcing, you'll free your staff to take care of the important things that make you money. And, most likely, you can eliminate at least one full-time employee.
2. Use Accurate Labor Burden Rates
Most construction companies don't use accurate labor burden rates when calculating their crew bid rates. Every year the tax rates and workers compensation rates change. Plus, as your employees become older and their family situations change, their insurance rates also change. Have your accounting manager figure out exactly what the accurate rate is for every employee. You'll find that your burden rate for each employee can vary by 20 percent or more. When using accurate rates for labor plus burden, your bottom-line will improve.
3. Re-Price Material Costs
I'm sure you're busy running your company, keeping customers happy and your crews busy. This doesn't allow you enough time to get good material quotes for every job when bidding projects. You get stuck using the same suppliers on most jobs. Guess what? When this happens, your prices creep up over time. And when you need more material on jobs, you just call your good old friend at the supplier or distributor and get more material shipped out without taking the time to get another price from a different supplier. How much money do you think you're losing every year on just this one big factor affecting your bottom-line?
4. Calculate Equipment Costs
Contractors like to buy and own lots of equipment. They are addicted to yellow metal! When you own equipment you feel big and powerful. Plus, you can brag about how much you own. But-are you making enough money on your equipment to make it worth your while? Calculate the exact cost for every piece of construction equipment you own. For each piece of equipment, add the purchase price, interest, maintenance, gas and oil, service, tires, repairs, insurance, storage rent and mobilization costs you really spend over the life of the equipment. Divide this total cost by the total number of hours you hope to bill for the equipment over that duration. This is your real cost of ownership per hour not including overhead and profit. Next, compare this cost with the cost of renting it on a job-by-job basis. Get rid of all the equipment that doesn't pencil and actually costs you more money to own than you'll get back from your jobs. Use the money you save, and go buy some rental property, which will actually go up in value!
5. Stop Subcontractor Charges
Review your subcontracts, and look at what your subcontractors charge for change orders. Usually, they tend to charge more than allowed by contract. They also tend to round up on small extras. This adds up to lots of money wasted by project managers who don't want to play hard ball. Do an audit of all subcontractor change orders over the last twelve months. When I did this, I found a few extras that didn't even end up on our jobs like patio cover lumber, house re-paints, extra carpeting, fireplaces, a Jacuzzi and a trip to Hawaii! Whose lifestyle are you paying for?
6. Minimize General Condition Costs
On almost every job, contractors run over on their general condition budgets. Ask your estimator the last time they checked the actual cost of temporary facilities. They tend to use old numbers on estimates because they're too busy bidding new work. Just temporary toilet facilities can vary by $100 to $300 per month depending on how many times per week they are serviced. Also look at how many bids you received on temporary services such as fencing, power, water, trailers and final clean-up services. Too busy to inspect? Give up your next vacation, and you'll probably cover what you lost on general conditions from your last job!
7. Maximize Change Order Pricing
How do you calculate your change order markup? Do you always use the same rate? Some contracts clearly state the allowable rate, while others don't. Why not try 15 percent or 20 percent for overhead and then 15 percent for your profit markup instead of the traditional 15 percent total? To maximize change order pricing, always include supervision, trucks, general conditions, small tools, rental equipment and administrative time. Don't forget to add up all extra costs, subtotal it, add your overhead rate, subtotal it again and then markup the total for the final charge. This double markup will increase your bottom-line on changes by 1 to 3 percent. Also look at your last ten jobs to see what your project managers are giving away. This can add up to lots of cash at the end of the year as well.
8. Rank Your Team
Do you know which estimator, project manager, superintendent and foreman makes you the most money? Rank each key management team member by gross dollars and net dollars earned, actual profit versus bid profit and customer satisfaction. Rank them by who hits their project labor, material, equipment and general condition budgets. Focus on how better players make it happen and what low ranked players don't do well. Give poor players a chance to improve or get rid of them. Instead of spending all your time with weak people, spend time with your best team players who make you the most money.
9. Aggressively Manage Money
Most contractors run a lot of money through their checking account every year. What are you earning on your bank balance? By meeting with your banker, you can design a program to earn interest or invest your bank balance on a daily basis. There are many ways to invest your cash on short term one, three, seven and fourteen day programs. For every $1 million in sales volume, you should be able to generate at least $20,000 to $40,000 in interest or investment income annually. This will take about five minutes a day. Not a bad return on your accounting manager's time!
10. Give Yourself a Raise!
Most construction business owners don't pay themselves what they're worth. What could you get paid running another similar company as their president or general manager? Make sure you pay yourself first every month at least 25 percent more than what you could get on the open market. The extra pay is for the hassle, sleepless nights and risk of owning your business. This raise will give you a feeling of value and get you focused on bigger things. You are the owner, not an hourly worker! Stop doing everyone's job for them. Let go of the small stuff; get good people to help you and enjoy the benefits of business ownership. When you think bigger, you'll look for better opportunities to grow your business.
Spend the next eight hours and take a look at how tight you manage you business. I'll bet you'll find at least $10,000 to $50,000 extra you can make over the next few months. Happy hunting!
George Hedley owns Hedley Construction and Hardhat Presentations. He is the author of The Business Success Blueprint Series available in eight workbook and audio CD sets. He is available to speak on his proven system to build profits, people, customers and wealth. Construction company owners are invited to attend his two-day "Profit-Builder Circle" boot camp held regularly. Call 800.851.8553 or visit his website at www.hardhatpresentations.com.
Construction Business Owner, March 2007