In the good old days, construction companies were owned and run by builders. These proud, tough, hard working men (and women) learned their trade in the field, had years of practical experience, and knew what it took to get their projects finished on-time. If they didn’t produce quality workmanship, they didn’t last long. Back then it was all about getting the work done no matter what it took to meet their obligations. It was about delivering solid structures with unsurpassed craftsmanship. The contracts were negotiated face to face and enacted with handshakes based on integrity, reputation, trust, one’s word, and doing what’s right. It was all about building a project the contractor could remember, be proud of, and then rely on their customers for recommendations and new work.
Fast forward to today. Now successful construction companies are run by professional managers, engineers, and accountants. These business leaders are focused on the bottom-line and following what is only required by the contract. These managers have college degrees and little or no construction field experience. It’s now about paperwork, documentation, notices, claims, and tracking systems. Building the project isn’t as important as getting the work, doing the paperwork, and getting paid, even if it involves litigation.
Combine this lack of real field construction experience at the top of many companies today with the lower and lower profit margins. Years ago there was not enough qualified construction companies to handle all the work available in the marketplace. Under this business climate, contractors could afford to always do a little extra to insure a perfect project and still make a good profit.
More demands = less profits!
But over the last 40 years, the number of contractors has tripled while the total amount of construction has stayed relatively flat (adjusted for inflation). Therefore now there are more contractors than needed to do all the work required by the market. This has created a price squeeze and reduced contractor’s ability to do more than the minimum required by their contract. In addition, with increasing competition, construction customers are now demanding more than ever before. They now demand faster schedules, safer projects, better quality, more communications, better technology, all at much lower prices.
These added customer demands on contractors who are willing to sign contracts for less than they should, have killed the construction business as it once was. Add to these demands poor architectural plans, problematic engineering, incomplete specifications, conflicting contract documents, material shortages, price fluxuations, more regulations, added paperwork, lender’s requirements, third party inspections, construction managers, and red tape, has all but eliminated a fair profit for the risk contractors take.
It’s time to refocus on the field!
These issues have put pressure on contractors to save more and more money in the field. The average crew size has increased, while the number of experienced field workers on the crews have decreased. Training is a thing of the past as most employers have eliminated it as an unnecessary expense. Superintendents and foreman are younger than ever which also translates into less experienced field leadership and less efficient crews. This has resulted in poor or flat field productivity improvements over the last twenty years. Consider your challenges fighting against competitors who charge less than they should, have inexperienced and untrained field crews, and building projects that now require more paperwork and increased risk. A need now emerges for contractors to refocus on improving field productivity as their only viable solution to compete and improve their profit margins.
Construction profitability is about reducing risk. Contracts require contractors to assume more risk than ever today. Have you considered what’s at stake?
Types Of Construction Business Risk:
___ Project Location & Access ___ Project Type & Size
___ Project Schedule & Duration ___ Constructability
___ Customer ___ Architect, Engineer & Consultants
___ Contract Terms ___ Financial , Funding & Payment
___ Regulations & Inspections ___ Subcontractors & Suppliers
___ Material Costs & Availability ___ Plans & Specifications
___ Approvals & Acceptance ___ Project Management
___ Supervision & Coordination ___ Manpower, Productivity & Safety
___ Quality & Workmanship ___ Estimate & Budget
___ Factors Beyond Control
So how do you reduce risk and increase your bottom-line? Your choices are many. But consider which will give you the biggest return on your time, energy, and money. In other words, where can your company gain the biggest advantage over your competitors?
__ Lower Material Costs
__ Better Subcontractor Costs
__ Better Equipment
__ Better Supervision
__ Better Project Management
__ Labor Productivity
Construction risk is a 5 letter word!
The biggest risk and opportunity to make or lose money is .LABOR! Let’s look at a typical job breakdown to see what happens if labor runs over budget by 5%.
Typical Construction Contract Budget
Labor $ 40,000
Materials $ 40,000
Equipment $ 10,000
Subcontractors $ 10,000
Subtotal $100,000
Overhead @ 10% $ 10,000
Profit @ 5% $ 5,000
Contract Amount $115,000
The 5% Factor = 100% More Net Profit!
Most construction companies only make an average annual net profit between 2% to 3%. If you can IMPROVE your LABOR costs by only 5%, you can IMPROVE your net profit amount to 4% to 5%. This can be as much as a 100% increase in your bottom-line!
If you can improve your labor by 5% in the example above, your net profit will increase to $7,000, or from 5% to 7% net profit. And if you improve your labor by 10%, your net profit will increase to $9,000, or from 5% to 9% net profit. This is real money and will put you far ahead of your competition and give you some breathing room to invest back into your company.
But, if you overrun labor by a small 5% amount, you’ll spend $2,000 more than your labor budget and reduce your profit margin to only $3,000, or to 3% net profit. If you overrun you labor by 10%, your net profit will be reduced to only $1,000, and 1% net profit.
Is your crew working efficiently?
Consider how productive your crew is everyday out in the field. Studies of typical construction field crews show revealing facts and much room for improvement. Field employees spend some of their time planning the work. Then they produce the work. Some of the time they support the work doing layout, seeking information, fixing equipment, looking for tools, repairing tools, locating the right material, and asking questions. And of course some of the time is wasted goofing off, standing around, starting late, quitting early, extending their breaks, smoking, making personal cell phone calls, waiting deliveries, running out of materials, or taking care of their dogs loose on the jobsite.
Typical Construction Field Productivity
2% Planning work 0.2 hours / day
40% Producing work 3.2 hours / day
25% Supporting work 2.0 hours / day
33% Wasting time 2.6 hours / day
Do these results shock you? Go out to any jobsite and look around for a few hours or days. Just sit and watch what really goes on. You will be under-impressed and appalled. So where do you start to improve productivity? It starts with identifying the areas that take away form your crew’s efficiency. Look for things that slow down production, create down time, or allow them to be less than productive. Some things that hurt your field productivity include:
– When the superintendent or foreman leaves the jobsite
– 5 trips to hardware store per day
– Run out of materials or small supplies
– Tools break or don’t work properly
– Wrong equipment for the job
– Waiting for the right equipment to show up
– Smoking while working
– Cell phone calls
– Dogs running wild
– Not starting on time
– Quitting early
– Breaks and lunch time extended
– Bad attitude employees
Win the race!
NASCAR is a good model to follow. At each pit stop, there is no time to waste, as every second counts and can cost the team millions of dollars if they loose any time. How can you get your crew to win the race and become:
– super efficient
– super fast
– super productive
– super organized
Focus on the 5% factor!
The dilemma for most contractors is a downward spiral and never ending treadmill. When you try to do it all yourself, you aren’t focused on field productivity. You get too busy taking care of small tasks that need to be done but don’t make you money. When you’re too busy to meet with your supervisors regularly to help them plan properly, problems continually happen. You only have enough time to react and fight fires. This causes your crews to stand around and wait for you to get them answers or needed materials.
You know you are losing money and your crews are inefficient as they waaste more time than they should. But you don’t have enough time to stay out on the jobsite all day to tell them what to do and keep them working faster. So you rely on untrained foreman to get the work done. These supervisors have no incentive to work at a high productivity rate, so they do what they feel is fast enough based on their experiences over the years. Besides, what’s the worse that could happen to them? You come out a few times a year and tell them they’re over budget and try to get everyone working a little faster. Not much of a productivity improvement program.
5% Faster jobs = More profit!
How can you make your jobs finish only five or ten percent faster? Many of these critical scheduling factors can cause major delays:
___ permits
___ procurement
___ submittals
___ approvals
___ material selections
___ long lead items
___ probable delays
___ potential problems
___ anticipated conflicts
___ critical decisions
___ phasing issues
Time is easy money!
Those major factors can cause your projects to take longer. But we are looking for the little things that really cost you money. When you don’t focus on faster, it doesn’t happen and you let your crews go with the flow. When you focus on speed, you get the whole team moving faster and becoming more efficient. When you start every project, get the easy money flowing by getting your supervisor and crew together. Explain the projected and budgeted schedule. And then ask them to brainstorm ideas how they can improve the schedule by a minimum 5% to 10%. Explain to them how 5% faster will translate into dollars and will keep your company competitive in the tougher marketplace. For example:
Squish the Schedule 5% or more!
Total projected project schedule = 100 crew days
Total crew budget @ $3,000 / day = $300,000
Beat the schedule by 5% = Save 5 crew days
Total crew savings = $ 15,000
Beat the schedule by 10% = Save 10 crew days
Total crew savings = $ 30,000
In addition to saving on your crew labor budget, the overall project will finish faster as well. You will save even more money concurrently on general conditions, equipment, clean-up, temporary facilities, and supervision costs. This money adds up fast!
Miracles can happen!
Years ago in July, I was on a jobsite meeting with my superintendent and concrete foreman. I asked them when they were going to erect and tilt-up the exterior concrete wall panels on a large warehouse project. They both told me they were planning on tilting-up on November 15th. That seemed too long a schedule to me for our 20 man crew to get the work done. So I asked them how they arrived at that date. They told me they met with the crane company and thought that date was ‘doable’ and they could easily make it happen.
I didn’t like their answer so I asked if they could finish a few weeks faster. They both squirmed and didn’t want to answer or commit. Then I asked if they could finish by October 25th if I offered them each a $1,000 incentive. In less than ten seconds, they both said they could make the faster October 25th date. A miraculous change of mind by two veterans. And they made the new date. It cost me $2,000 and saved me 15 days for 20 men. You do the math.
Sometimes we have to get creative to get the results we want. When we go with the flow, we don’t push our people, and it costs us real money. When you compete, you run a little faster. When I used to swim in high school, I always went faster in the meets than in practice. Competition makes people go faster. Challenges make people work harder. So do games where you keep score and can declare a winner. I like to say: ‘No score, no game!’ What incentives can you offer to get your crew excited about beating the schedule?
Annual Savings @ 5% Faster
20 Crew Members @ 200 days @ $35.00 / hour = $ 1,120,000 total labor
Labor savings with 5% faster schedule = $ 56,000 saved
Equipment costs saved – 4 pieces @ $50.00 / hr = $ 16,000 saved
General conditions costs saved 4 jobs @ $1,000/day = $ 40,000 saved
———————
Total Annual Savings = More Profit = $ 112,000 saved
Trash your old tools!
Another consideration is the working condition of your tools and equipment, and their overall effect on your crew efficiency. When is the last time you did a tool inventory or a detailed equipment analysis? Some you should keep, trash, replace, or upgrade. Field workers tend to use old, broken, or bandaged tools and equipment rather than admit to the boss that they might be broken or worn out. How much money are old unproductive tools or broken down equipment costing you?
The added benefits of having quality tools and great equipment will be increased crew teamwork, improved morale, more pride of workmanship, better quality, less mistakes, safer projects, and more efficiency. This will translate into even faster jobs and more bottom-line profits for your company.
Poor Production = Poor Profits!
Do you think your crew wastes at least 3 to 6 minutes per hour? Those few minutes are costing you a ton of money.
20 Person Crew 5% Time Lost 10% Time Lost
Time Lost / person = 3 minutes / hour 6 minutes / hour
Time lost / day / crew = 8 hours / day 16 hours / day
Total hours lost = 1,600 hours / year 3,200 hours / year
Crew labor rate @ $35.00 / hour @ $35.00 / hour
Annual Production Labor LOST = $ 56,000 / Year $ 112,000 / Year
There are many ways to improve crew efficiency and finish your jobs faster. Start by taking a hard look at your start time, break time, lunch time, and quitting time. Does stop working at 3:30 pm mean start rolling up at 3:00 pm or 3:10 pm or 3:30 pm? For a 20 person crew, every minute you lose per day costs you as much as $2,500 per year or more.
Double your Profits!
Call an all crew team meeting and discuss ways to improve your schedule, save a few minutes every hour, define your exact hours for production expected, create meaningful incentives, improve your tools and equipment, increase efficiency, and strive to implement the 5% factor to get more everyday from everyone.
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ABOUT THE AUTHOR
Business builder, best-selling author, and professional speaker George Hedley helps entrepreneurs and business owners build profitable companies. He is the author of “Get Your Business to Work!” and the “Business Success Blueprint” series available on his website. His proven system to earn more, work less, build profits, lead people, and generate customers has helped thousands of companies earn more, work less, lead people, generate loyal customers, and build wealth. To receive a free copy of George’s e-book: ‘$ure $trategies To $urvive A $lowdown!’, sign up for ‘HARDHAT Hedlines’ free monthly management e-newsletter, attend a 2-day ‘Profit-Builder Circle’ academy, or hire George to speak at your next event, email: gh@hardhatpresentations.com, visit his website www.hardhatpresentations.com, or call 800-851-8553.
George Hedley HARDHAT Presentations
3300 Irvine Avenue #135
Newport Beach, CA 92660
Phone (949) 852-2005 Fax (949) 852-3002
Email: gh@hardhatpresentations.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.
