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.
10 Steps To Eliminate Profit Margin Shrinkage
1. Pre-job turnover meeting
a. Meeting is mandatory
b. Estimator, project manager, superintendent and foreman attend
c. Review scope of work and plans
d. Approve change order rate sheet
e. Review and approve proposed subcontractors and suppliers
f. Account for missing items not included in scope
g. Draft a detailed work plan projecting daily and weekly crew size and cost
h. Set project goals
- Schedule and completion date
- Crew and equipment hours
- Approve updated project budget
2. Project startup
a. Hold project start-up meeting with customer to review
- Payment requirements
- Change order procedures
- Extra work-rate sheets
- Proposed work plan and schedule
- Proposed crew size and work flow
3. Subcontracts and purchase orders
a. Must be written and executed within 30 days of project start
b. Use scope checklists to write subcontracts
c. Use detailed quote comparison spreadsheets
d. All must be approved by owner or construction manager
4. Change orders
a. No extra work can proceed without written authorization
b. Provide rate sheet to customer for all extra work
c. No trade-offs with customers over $100 without approvals
d. Unsigned change order work deducted from incentive bonus pool
5. Job-cost tracking
a. Set up project production scorecards to track job costs weekly
b. Update cost to date versus budget for labor and equipment weekly
c. Foreman and project manager review job costs weekly
d. Estimated cost to complete must be projected and updated monthly
e. Mandatory monthly job-cost updates with budget versus actual cost for all jobs
f. Project foremen meet weekly to review production scorecards, schedules and completion milestones
6. Crew management
a. Turn in schedules weekly
b. Hold weekly field crew meeting to review crew hours
c. No overtime allowed without prior approval
d. Equipment must be used or removed from jobsite
e. Start work on time
f. Finish work on time
g. Adhere to strict lunch and break times
h. No smoking on jobsites
i. No personal cell phone usage
j. Punch list performed weekly
7. Accounting
a. Prepare weekly crew production job-cost reports by cost code for field
b. Completed job-cost report finalized and given to estimator and project manager
c. Assign weekly job-cost update to specific person
8. Estimator
a. Review job-cost updates monthly
b. Review final completed job cost updates and adjust bid rates
c. Verify labor and labor burden rates twice per year
d. Verify equipment rates twice per year
e. Incentive compensation based on accurate estimates
9. Incentives
a. Offer incentives to finish on time and on budget
b. Offer incentives to eliminate punch lists and callbacks
10. Close out the project faster
a. Have the field foreman or superintendent do a weekly punch list
b. Make sure all the weekly punch list items are completed every week
c. Never leave a jobsite without a job walk and customer sign-off
d. Assign project completion documentation to a contract administrator
