Imagine your company as a funnel with a shut-off valve controlling the flow of profit output. A steady flow of sales volume enters the funnel in the form of revenue. The funnel absorbs and reduces the profit output by paying invoices for job costs and overhead expenses. In addition, leaks cause some money to flow out of the funnel. The leftover flow is net profit cash exiting the end of the funnel into your equity account.
Now, imagine there’s also a profit shut-off valve reducing the net profit output. Are any of your current company operations, systems, customers or people shutting off or reducing some positive profit flow potential? To open your flow of profit, you must take a hard look at what’s slowing down the flow. The following are five ways you can repair and prevent some of the common problems causing leaks in your company, getting your net profit flowing again.
1. Stop bidding inaccurately.
Most companies don’t know their current, exact overhead markup rate, can’t keep accurate job cost history data and don’t know their true production crew performance rates. To combat this ambiguity:
- Verify your overhead markup rate is accurate by calculating the total annual overhead expenses divided by projected total annual job costs.
- Ensure that your labor and burden rates are accurate by determining how many items one field worker can install per hour.
- Bid using quantity per hour, not dollars per quantity (e.g., 25 square foot per hour for labor instead of $2 per square foot for labor).
- Have the estimator review final job cost results with the foreman upon job completion to verify and update the bid production rates.
- Update your cost history library monthly to track bid rates versus actual production rates.
- Develop an estimating checklist of all items required (and often missed) when bidding jobs.
2. Stop tolerating profit margin fade.
Profit margin fade is caused by poor estimating, slow field production, incomplete bidding, ill-informed project managers, and/or superintendents and foremen prioritizing getting the job done over controlling costs. To get everyone on the same page:
- Make sure project managers and field supervisors know their budgets for labor production hours before they start work.
- Keep field supervisors informed weekly, using a production scorecard that shows job labor hours spent to date versus the budget, based on quantities installed.
- Have project managers prepare an updated monthly job cost report with costs to date, estimated cost to complete and estimated final cost.
- Make sure estimators and project managers are not overloaded, allowing them time to focus on generating accurate estimates and achieving project production and profit goals.
3. Stop doing free change orders.
Too many contractors do not capture revenue for many of the change orders they perform as a result of doing work without prior approval from customers. To keep this from happening:
- Proactively manage change orders. This must be a top priority for project managers, field supervisors and foreman.
- Never do work without a signed authorization to proceed.
- Develop a standard change order time and material rate sheet. Detailed rates must cover all your labor costs per the contract, including supervision, trucks, equipment, tools, supplies, move-on and -off costs, insurance, temporary requirements, power, barricades, etc.
4. Stop going over your budget.
Often, superintendents and foreman are too busy with scheduling, logistics and customers to focus on keeping labor costs on budget. To stop this profit leak:
- Assign someone in your company to be fully responsible for achieving field production goals.
- Implement a weekly job cost scorecard tracking system.
- Make sure someone visits jobs two days before you send crews to start working on the project.
- Make sure field supervisors complete walk-through inspections with customers, discussing photos and interim punch lists before crews move on to other jobs.
- Set company standards for crew rules, including equipment maintenance, tool management, truck or bin inventory, job hours, start and finish times, lunch and break time standards, smoking, music, dogs, cleanup, etc.
- Never allow foreman to authorize overtime unless it’s in the job budget and approved by their supervisor before noon the same day.
- Never let the foreman leave jobsites to go to the hardware store or supply house. If required, send a journeyman.
- Have every field supervisor and foreman submit a 2-week, look-ahead schedule every Friday to be reviewed with the project manager.
- Require all foreman and superintendents to attend a weekly company field scorecard meeting, in which everyone reviews their individual job results together to focus on hitting production labor goals.
5. Stop taking the wrong projects.
Contractors often continue to keep bidding and winning contracts with the same customers and project types, even when there are better opportunities with higher margins. To procure the right customers and projects:
- Develop a target list by determining which customer and project types will give your company the best opportunity to win more work at higher margins.
- Start a customer and project type tracking spreadsheet, showing which give you more work, you don’t want to work for, never ask you to cut your bid, treat you fairly, have good supervision, pay appropriately and on time, nitpick change orders, and have the best long-term potential.
- Keep track of your bid/win/lose ratio to determine which customers and projects allow you to have the most success.
- Start a program to target customers with whom you want to build loyal relationships.
- Set a standard weekly meeting to determine which jobs to bid on based on the profit potential.
Only you can decide to do something about reaching your profit potential. These five steps can serve as the tools that help you repair the problem areas and prevent future profit leaks within your company’s systems.