Revenues are up, but I'm not making any more money. What am I doing wrong?
There are lots of reasons why more revenue doesn't translate directly into more profit, but one that'll kill you is callbacks, and here's how:
Our new house was built by a big national builder, and I'll use it to illustrate my point, but the same idea applies just as much to smaller builders and specialty contractors.
In the three years since we've moved in, we've had more than three dozen warranty claims. Some were the usual details of new construction, but many were large and expensive (tens of thousands of dollars) to fix. All were due to shoddy workmanship or cheap materials, and every single one could have been avoided with minimal cost up front.
Why so much bad work? Because the construction manager was only responsible for getting the houses built as fast and cheaply as possible. He had no responsibility for the final net cost of the warranty repairs, so he used the lowest-grade/cheapest subs he could find, the cheapest materials and the quickest and dirtiest building practices he could get away with. He did what his company had told him was in his own best interest.
The builder's warranty department, however, is an entirely separate group, and their job is to clean up the builder's messes at the lowest cost. Since there were a ton of defects, and tearing something apart and redoing it is far more expensive than doing it right the first time, the callback cost gets very big.
So, instead of making $100,000 (let's say) in profit on the house, the builder's real profit after the repair costs and the big warranty department overhead may be only $50,000. And the sad part is that for perhaps another $10,000 in upfront cost, the $50,000 loss could have been avoided. I'd take a 500 percent yield on my money, and that may be the kind of return you're throwing away as well.
So what's the answer?
- Understand how much callbacks are costing you: This means breaking callback cost out as a separate line on your profit and loss statement as part of direct cost. This may mean better systems to track costs by job and/or employee, but these systems are great investments for many reasons anyway.
- Pinpoint the cause: Identify the jobs, procedures, crews or employees that create the bulk of the problem. Do the employees know how to do the work? If not, create systems and checklists and train them to produce a good result the first time.
- Are you rewarding quantity more than quality or overall contribution? Like the megabuilder's construction manager, your employees will maximize whatever they believe to be in their best interests. If you pay for blow and go, that's what you'll get, along with high callback costs. Make sure their interests are the same as yours.
- Include the callback expense when you bid: You'll inevitably incur some warranty costs, so don't ignore them when you bid. Even if your warranty costs are a reasonable percentage of gross revenue, they'll kill you if you don't account for them up front.
Doing it right the first time always turns out to be the best business decision, even if it costs a little more up front. By including callback costs in your gross margin and getting your employees to think about both volume and first-time quality, you can make that small investment pay back a lot of dollars and create a good reputation in your market.
Construction Business Owner, May 2010