10 Steps to More Money, Fewer Problems

Profit margin shrinkage starts when the estimator prepares a bid based on the cost of completion he thinks a job might require versus the cost history of similar, completed jobs. He then reviews this estimate with the owner, who looks at the plans quickly, studies the proposed inclusions and exclusions, adjusts and lowers the crew production rates and then gives the final approval to submit. The customer awards the contract to your company. You agree to accept the terms and become the contractor or subcontractor for the project. This is when the problem progresses. The estimator turns over the bid estimate and folder to the project manager who will be in charge of the job. They meet for a few minutes with the proposed foreman to review the contract, bid estimate, scope of work and proposed supplier list. The team gets started ordering materials, writing subcontracts and scheduling crews to build their scope of work for the project. The bid budget is entered into the accounting system so the foreman can order materials and charge time to the job.

What’s Wrong with this Process?

The original estimate wasn’t based on actual job-cost numbers from completed production rates on jobs similar to this one. The budget wasn’t scrutinized properly and corrected by the foreman before the job’s start. The superintendent and foreman didn’t prepare a detailed work plan for the week-by-week field crew and equipment size required to finish the project on time and on budget. The subcontracts were not written with detailed scopes of work or precise quote comparison spreadsheets reviewed by the operations manager to ensure there weren’t any missing items in the project budget. The project manager was too busy to get all of the subcontracts written and executed early enough, which caused some trades to not have signed contracts when needed. This resulted in increased costs due to not committing to contractors within the noted bid timeline.

Throughout the project, the customer asks the foreman to start and stop working in several different areas, the workflow plan is changed a few times, a few change orders are completed without approvals, extra manpower is needed to keep the job moving, and additional overtime is required to keep on schedule. The project manager is too busy managing and bidding other jobs and cannot get to meetings, change order requests, documentation, correspondence, notices and job-cost updates. Some of the subcontractors won’t move forward without signed change orders, causing field delays. Some of the required work inclusions not covered in the subcontracts, causing more cost overruns. Small things add up, and the job ends up costing a lot more than the original budget estimate.

Throughout the project, the construction company owner regularly asks the project manager and field superintendent if the job is going well. They answer that everything is fine and they have it handled, although they really do not.

The Job that Never Ends

The owner visits the jobsite when it nears completion to assess the status of the project. The field superintendent predicts the project will be finished in 3 weeks. The owner comes back in 3 weeks to discover the job is not completed. When field managers are not required to track or guarantee completion dates, jobs never end. It costs real money not to finish projects fast, and customers get upset with the contractor’s overall performance.

Profit Margin Shrinkage

Profit margin shrinkage is unacceptable in professionally managed construction companies. It happens when owners and managers don’t have a clue about their job-cost numbers. Shrinkage occurs when the final project profit margin comes in less than projected. Profit shrinkage is an indicator of poor management, inaccurate estimates and a lack of job-cost tracking.

Making sure profit fade does not occur takes a strong commitment to getting your numbers right. It’s your choice to do nothing about maintaining your estimated profit, or invest time and energy to reduce it and make more money.