by George Hedley
I'll make a small wager with you. Give me a day to look at how you manage your construction business and I'll bet I can find at least $10,000 you've lost, wasted or didn't charge enough for over the last few months. If I can't find anything, I owe you a steak dinner. But whatever I find, I get to keep half. OK? When can I start?
I have a list of things to help you increase your net profit at the end of your fiscal year. Interested? You are probably losing more money than you think in places you don't pay much attention to. Most construction business owners and managers are so busy getting their jobs finished they don't sweat the small stuff. The last details you want to be bothered with are small financial matters, counting nickels and looking for dimes. But most construction businesses only make a small and totally unacceptable profit margin between one to three percent pre-tax net profits after all job costs, overhead and fixed expenses are deducted. These little things you want to forget or never look at can add up to an additional one or two percent at the end of the year. This is real money.
I speak at many construction conventions every year. I always get contractors coming up to me who boast and profess they make a lot more than three percent. Then I ask them: 'If you are so profitable, why are you always broke, needing your next check to make payroll, hopelessly in debt, have no savings account, no real assets and here at this conference looking for answers on how to make a profit? Then to make them feel great about their real profit margin, I ask these tough and probing questions:
- What's your fixed cost of doing business?
- What is your annual overhead budget?
- How do you determine your mark-up 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 mark-up rate?
- How much money did your money make last year?
Who mind's your store?
Ninety-five percent of your competitors have no clue or 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. He told me the economy was real bad and work is slow. He said he can't get any new work at his old mark-up rate and has since lowered it another five percent. But he still can't get any work. What should he do? 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 you 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. Accurate Labor Burden Rate
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 as much as 20% 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 job. 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 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! Who's 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 got 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 on 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% or 20% for overhead and then 15% for your profit markup instead of the traditional 15% total? To maximize change order pricing, always include supervision, trucks, general conditions, small tools, rental equipment and administrative time. Don't forger to add up all extra costs, then subtotal it, then add your overhead rate, then 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 %. 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 1, 3, 7 and 14 day programs. For every $1,000,000 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 twenty five 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 a 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.
Oh, if you won't take me up on the bet I offered at the beginning of this article, why not 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 "The Business Success Blueprint Series" now available in 8-workbook & audio CD sets. He is available to speak at your organization on his proven system to build profits, people, customers and wealth. Construction company owners are invited to attend his 2-day 'Profit-Builder Circle' boot camps held regularly. E-mail him to receive a free copy of his book entitled "Everything Contractors Know About Making A Profit", signup for his free management e-newsletter, visit his online bookstore, or receive more information. Call 800-851-8553, visit his website at www.hardhatpresentations.com or e-mail George at firstname.lastname@example.org.
3300 Irvine Avenue #135
Newport Beach, CA 92660
Phone (949) 852-2005
Fax (949) 852-3002
Email: email@example.com website: www.hardhatpresentations.com
George Hedley owns a $75 million construction and development company and
Hardhat Presentations. He speaks to companies on building profitable businesses,
leadership, and loyal customers. He holds 3-day in-depth "Profit-Builder
Circles" open to construction company owners in an interactive roundtable
format every 3 months. His "Profit-Builder System" includes proven
tools to always make a profit, build equity, create wealth, win profitable
jobs, motivate your people, and enjoy the benefits of owning a profitable company.