When I ask construction business owners and managers: ‘Why they’re in business?’ They usually answer: ‘To make a profit.’ Then I ask: ‘How much profit do you make?’ Most don’t really know. This tells me a majority of construction business owners and managers don’t focus on what counts most: their numbers. Business owners and managers spend their time getting jobs built and then hope the bottom-line numbers work out. Often, these hard working people don’t like to be bothered with the numbers and pass them off to a bookkeeper or spouse to handle, manage and worry about.
I have been a general contractor since 1977, worked with hundreds of subcontractors and presented keynote speeches and seminars to tens of thousands of construction business owners and managers. The sad truth is only one out of twenty business owners will ever become financially independent. And even worse, one out of eight construction businesses fail every year. Why? The top three reasons for failure include not enough profit, too little equity and slow collections. See the pattern? Minding the storehouse, watching the numbers, or lack of it!
Only 1 out of five will thrive!
You don’t want a business that struggles, doesn’t make enough money, or fails. I’m sure your goal isn’t just to stay busy and create enough revenue to pay your bills. But this is normal in the construction business as owners focus on the wrong things everyday. If you watch 95 out of 100 general contractors, builders or subcontractors, and follow their progress for 10 to 20 years, you’ll hear the same story over and over:
– They work too hard for their effort and risk.
– They never make big money.
– They never have any money leftover to invest.
– They never get out of debt.
– They can’t stop working because they need the money to live on.
Out of every 100 construction business owners at age 65:
– Only 1 will be independently wealthy.
– 4 will be financially secure.
– 24 will still be working because they have to.
– 31 will be dead.
– 40 will be dead broke and need social security to make ends meet.
It seems as if business owners hope their efforts will eventually make them wealthy or give them financial freedom. But the odds they hit a jackpot, win the lottery, or inherit a fortune to create wealth are better than continuing to run their businesses the way they currently do. Construction business owners deserve better. But it takes a plan and focus on the necessary numbers that keep you headed in the right direction. The following is a list of nine necessary financial numbers you must know, track and review on an ongoing weekly and monthly basis. Even if you hate numbers!
1. Know your profit numbers!
Are you hitting your profit goals? Do you even know what your profit target is or should be? How do you determine your net profit mark-up? I conducted a survey of over 2,500 construction business owners and managers and discovered less than 40% of all companies had specific written net profit targets they shoot for. According to the Construction Financial Management Association (cfma.org), the average pre-tax net profit between 1.4 and 2.4% for general contractors is and 2.2 to 3.5% for subcontractors. To me this stinks and is not enough profit for the risk contractors take.
Contractors and subcontractors get in the rut of providing the same services as their competition to the same customers year after year. Contractors generally offer the minimum per plans and specifications and do the same scope of work as their competitors. This forces them to compete on price against other competent contractors and thus diminishes their opportunity to make a good or above average profit margin. How often do offer extra services or provide added value to your customer or project which increases your net profit margin 50%? What is your game plan for maximizing your bottom-line and getting more than the average competitive markup?
Every year, sit down with your management team and decide how much gross and net profit you want to make. To determine the number you want to hit, look at your equity or net worth in your company. Look at your projected overhead for the upcoming year. Look at the risk you take to operate your business. Then determine how much net profit you want to make in total dollars and track your progress monthly.
2. Know your equity numbers!
Equity or net worth is the actual value of your company, not including the intrinsic value. It’s the sum of your total assets minus your total liabilities. It’s found on the bottom of your balance sheet or financial statement. One of every construction business owner’s top priorities is to grow the net worth of their company. If the company doesn’t grow in value, the company can’t go out and do more work, increase their bonding capacity, or grow in size. Over 80% of all construction business owners don’t know what their company is worth.
Only after you know what the investment in your company is, can you then determine your return on investment goals for net profit. I recommend construction companies shoot for a minimum net profit of at least 15% return on total equity or investment. Additionally I recommend companies aim at a 25% return on equity as an excellent profit target. For example to determine your net profit goal:
Company Equity $400,000
Net Profit Goal @ 25% $100,000
3. Know your overhead numbers!
Making a net profit starts with knowing how much money you need to earn and collect to cover your fixed cost of doing business, also known as overhead. In my survey I also discovered only 30% of contractors actually know their overhead budget for the year. This is unacceptable to think business owners don’t know or care what it takes to keep their company open! At the beginning of every year calculate your annual overhead expenses you anticipate spending to keep you company open and running. This number is a must know. Then track it every month to make sure your actual expenses do not exceed your overhead budget.
Another profit target I recommend contractors to aim for is return on total annual overhead. At the beginning of each year determine your annual overhead expenses you’ll spend. Overhead expenses are an investment in your future, in hopes of getting a return. Subcontractors should shoot for a pre-tax net profit return on their annual overhead expenses of 20% to 40% and general contractors should shoot for 25% to 50%. For example to determine your return on overhead expenses goal:
Annual Projected Overhead $500,000
Net Profit Goal @ 40% $200,000
4. Know your sales numbers!
True or false? Only 23% of construction company owners know or track their annual sales or volume goals? Do you know your sales numbers or targets? How often do you track them and what do you do every month to keep them on target? (The answer is true.)
In the financial examples above, the company owner knows they must make a minimum of $500,000 to recover their overhead expenses plus shoot for $100,000 to $200,000 net profit. This is their gross profit (overhead and profit) goal. From these numbers they can then determine how much work they need to perform at the mark-up and gross profit rate they can get in their marketplace to hit the numbers they want to achieve. Divide your total gross profit goal by the gross profit percentage you can get in the marketplace you compete to determine the volume you need in order to hit your numbers. (Note: gross profit and markup are not the same number!) An example how to calculate the sales you need at the gross profit you can get:
Overhead $ 500,000
Net Profit Goal @ 40% $ 200,000
Gross Profit (OH & P) Goal $ 700,000
Average OH & P Markup 25%
Average Gross Profit 20%
Total Sales Volume Needed $3,500,000
Now you know how much total sales you need at an attainable markup rate to achieve your numbers. Next track your sales numbers monthly to make sure you are on target to hit your annual sales, overhead and profit goals. Unfortunately, only the top 19% of contractors and subcontractors set specific overhead, profit, and sales targets for the year and then track their progress monthly. As a result, only the top contractors can make necessary adjustments to their estimating and bidding strategy, customer selection, project management and field operations as the need arises.
5. Know your job cost numbers!
Before you can bid a job, you’ve got to know exactly what it will cost to build. The purpose of every estimate is to create an accurate budget of what the job will cost. 81% of all contractors do not know exactly what their accurate labor and burden rate or fringes cost for each of their field employees. This creates inaccurate bids and estimates for the biggest part of any job – labor. In addition, most don’t really know what their equipment costs them annually to own or how much they should charge per hour when it is used on the job.
Stop everything and sit down with your accounting manager and get an accurate accounting of what every employee and piece of equipment you own costs your annually. For your labor cost include all taxes, insurance, worker’s compensation costs, health insurance, vacation, union dues, overtime, small tools, training, pension, profit sharing, and any other benefits you provide. For your equipment cost, for each piece of equipment include the purchase cost, finance and interest, payments, insurance, maintenance, tires, gas, and repairs. Now you really know what it costs for labor and equipment.
Next you must have an accounting system and software and to track your actual job costs. It should create accurate reports of what each part of your field operation and work performed costs to install by cost code or work task. From these printouts, you can verify the numbers you use for estimating new projects are accurate. If you don’t know what it costs to build, it is next to impossible to ever make any money!
6. Know your contract numbers!
Top construction business owners know their contract numbers. These include closed jobs and current jobs in progress. They review how well they did on past jobs and how well they’re doing on current jobs. To manage your numbers, you should have a report listing out all of your completed and current projects using the example below every month:
Completed Contracts Report
Job Name ABC Project
Start date June 1
Project Manager Dave
Contract amount $1,000,000
Bid Gross Profit Mark-Up $ 200,000
Actual Gross Profit $ 150,000
Current Projects (Work In Progress) Report
Job Name XYZ Project
Contract Amount $2,000,000
Bid Gross Profit $ 300,000
Estimated Final Cost $1,650,000
Estimated Final Gross Profit $ 350,000
Variance $ 50,000
Costs To Date $ 825,000
Percent Complete 50%
Profit To Date $ 175,000
Amount Earned To Date $1,000,000
Amount Billed $ 900,000
Estimate Cost To Complete $ 825,000
Contract Balance $1,100,000
7. Know your receivable numbers!
You can’t make any money unless you collect what you’re owed. Doing work is fun, but putting money in the bank is even more fun! I know it isn’t your favorite job to call deadbeat customers and ask for money. Stay focused on collecting what’s owed by getting an updated weekly account receivable aging report every Monday to review.
Weekly Account Receivable Aging Report
Accounts Total Due 30 Days 60 Days Retention
Project #1 $ 70,000 $35,000 $15,000
Project #2 $ 45,000 $50,000 $25,000
Project #3 $ 65,000 $55,000
Total Due $180,000 $85,000 $0 $95,000
8. Know your liability numbers!
To keep your eye on the ball, you’ve got to know what your liabilities and debt include. Create a report listing out all of your debts, liabilities and large balloon or one time payments due in the near future.
Liability & Debt Report Amount Payments Terms Due Date
Line of Credit
Line of Credit Drawn
Other Credit Loans:
Future Tax Payments
Real Estate Loans
9. Know your cash numbers!
Cash is king and the life blood of your business. You need to know what you’ve got to work with in order to make good decisions. Get a report of your cash position every week and include the following items:
Weekly Cash Report
Cash In Bank – Checking
– Payroll Account
Weekly Payroll Cost
Weekly Equipment Cost
Weekly Overhead Costs
Investments – Liquid
– Long Term
Know your nine numbers!
Doing great work doesn’t really matter unless you make it your priority to always make a profit. Don’t delegate or ignore the most important part of your business. Follow these nine necessary numbers and stay on track towards becoming one of the top contractors in your market. Every week take at least one hour to review these financial figures with your key management team and accounting manager. This small investment of time will give you a much better return than going out to the jobsite one more time to remind your foreman what to do.
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.
George Hedley HARDHAT Presentations
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.