Estimating Profit
Creating a detailed, accurate estimate for work you propose to do is the first step toward achieving real profitability.
Overhead. Understanding overhead is important. Think of overhead as costs that would remain even if your crew didn;t do any work for a week. you would still need to pay your Account staff, telephone, insurance, rental, and utilities - as an example.
Risk. It is important to include risk factors in each estimate - contingency line - rather than just a padding here and there.
Job Costs. Labour can be the riskiest and most difficult part of the estimating process. IIn order to prepare an accurate estimate, you must know how long each task will take and how much each task will cost - and that depends on the relative efficiency of your personnel. Without understanding the true productivity of your field staff, you cannot create accurate and reliable estimates.
Managing Job Production for Profit
Once you're awarded a job, it's crucial to perform the work in the most cost-effective way possible if you expect to make a profit. While that may be easy in theory, it can be another matter altogether in practice. To effectively manage a job, keep these important factors in mind;
Change Order. Too many contractors lose money on change orders because they don't systematically track costs and don't take the time to bill for the change work they perform. Ironically, change orders can be an excellent source of additional profit because you have no competition for the work. In order to better track and manage change orders, you must create procedures to record changes in the field, turn those changes into work orders, and obtain sign-off on approved work for billing purpose.
People productivity. As Ben Franklin said, "time is money", and it's especially true in construction. For example, if you run a job exactly as budgeted, but it took two weeks less to complete than expected, you have added profit directly to your bottom line.
Keep everyone informed. Both employees and subcontractors need to know the job schedule. Subcontractors appreciate early notice of schedule changes and will be more willing to help you out.
Accounting for Profit
True job cost accounting can increase your profitability by helping you understand the actual costs associated with each job. A proper accounting system needs to accomplish two things:
One, effectively meet your daily accounting and bookkeeping needs and two, meet your specific requirements as a contractor. That means streamlined processing and an effective way to manage workers’ compensation, liability insurance, bonding and other issues of concern to you.
Remember that an accurate construction accounting system must distinguish between overhead costs and direct job costs. You must also be able to systematically compare your budgeted costs to your actual job costs to measure estimating effectiveness, labor productivity and use of materials.
Assigning the right responsibilities to the right people will help make your accounting system work for you. To accurately assign costs to a job, your project manager needs to be the one who codes the bills. If left to your bookkeeping staff, they may assign costs incorrectly since they are not close to the actual construction work being done. The result is that any report that compares actual to budgeted costs by cost code will be inaccurate and therefore meaningless.
Purchase orders can also help keep your costs in order. Using purchase orders will ensure that the project manager codes expenses at the time of order, not the bookkeeper, when the bill is received.
And without using a PO, you could end up paying more than your supply house originally quoted if they make a billing mistake. This could happen because your bookkeeper can’t spot the overcharge without a PO showing what the correct price should have been.
Contractors spend too much time and energy on accounts payable—and without a workable system in place, the quantity of incoming invoices will overwhelm your office. Just as important, if you do not send receivable invoices in a timely fashion and fail to follow up on them, you’ll quickly
find you don’t have the cash to take care of the bills.
Analyze for Profit
Many contractors make the mistake of thinking of each job as an independent project—with a start and a stop. As a result, they rarely take the time to analyze each job and assess the overall success of the business. If you think of your projects as circular rather than linear, you will find effective ways
to reduce costs and increase profits.
Contractors often have trouble ending jobs because they are more focused on starting the next one.
Yet it’s important to remember that you won’t get paid until you successfully complete the project punch list—and the sooner you do, the sooner you’ll receive payment on the final invoice, as well as the retention.
A thorough review should be built into your closing process. Look for unbilled amounts still outstanding from vendors. Look for unbilled change orders.
Another important part of the review process is to compare your actual costs to your budget. Based upon what you learn, you can make needed adjustments, which will help you be more profitable on future jobs.
Understand the Profit cycle
Since we’re half-way through the “Steps” let’s review the construction business profit cycle again. Within the first 4 Steps, there are multiple strategies to pursue. Decide which of them would provide the most ROI (return on investment) for your company and implement these.
Define Goals and Set Expectations
You may wish to take some time to seriously consider and define your goals for your business. This will be your roadmap to follow. Once you’ve defined your own goals, then you’re in a good position to guide your employees’ and clients’ expectations and behavior to serve your vision and theirs.
Define Goals. Really take some time to consider what you want to achieve in your business. Do you define success by your bottom line? By company growth? Spending more time with family?
Here are some important things to keep in mind as you define success.
Too many companies define success in the short-term—an error that may ultimately damage your business. An emphasis on long-term planning and relationships over short-term gains will help ensure the ongoing success of your company.
We recommend some practical ways to define your goals that include use of a mission statement and complete business plans. Crafting a mission statement will help you systematically identify your values, your focus and what you hope to achieve. Business plans, on the other hand, require you to set realistic, detailed long-term management, financial and marketing goals and enable you to measure your success against them.
Set Expectations. Setting expectations will influence the behavior of your clients and your employees and result in more productive, long-term relationships. Consequently, you will be in a better position to achieve your own goals.
Clients. Repeat clients and referrals not only reduce your marketing expenses, but can dramatically increase your business volume and profitability. That’s why it’s so important to set expectations to influence your customer’s view of your work.
Here are some important tips for setting expectations:
• Your clients need to know in advance that it’s typical to have additional costs 10% to 25% more than the original contract from change orders. A client who has a realistic expectation of change orders and resulting costs will be far more willing to work with you during the job—and pay for the additional work you do.
• Don’t forget to ask for referrals. Use your company signs at each job. Inform the neighbors that you’ll be working in the area. Use each contact as an opportunity to do direct marketing for your business.
• Sometimes, as difficult as it is, you may need to fire a bad client. Miserable clients, who have unrealistic expectations, make for unsatisfactory and highly unprofitable jobs.
Employees. Your employees also need to know your goals and expectations. Employees who have shared goals will be more effective in performing their jobs. Sharing profits can go a long way toward creating shared vision and goals. Find out what makes each of your employees happy—better wages? increased responsibilities? fewer work hours?—and use that information
as you work with them. Some employees are content to do the same job year in and year out.
Others look for additional responsibility. Let your employees know what advancement path is available to them—and encourage them to succeed at it.
Employees are far more satisfied when they are held accountable for tasks they can control. Be clear about who is responsible for what, and then hold those individuals accountable. For example, it is difficult to make the bookkeeper responsible for coding invoices to the correct cost codes if he
or she is not the project manager.
Create Performance Rewards
Money isn’t the be-all and end-all of motivation…but it certainly helps!
Creating performance rewards for your employees will motivate them to watch out for the bottom line. Here are three good ways to get started:
Setting profit-sharing goals based upon job responsibilities will help your employees feel in control over their contribution. Field personnel, for example, could be measured on job costs against budget, while office staff could be rewarded for decreased overhead costs.
Establish a range for bonuses. Setting a pre-determined percentage for all employees does not allow you to reward exemplary behavior. Employees will then have pocketbook feedback on how their work is viewed and evaluated.
Just because someone works really hard doesn’t mean they are working well. We all know the person who stays late every night and works every weekend, yet never seems to get all the work done. Don’t be fooled by effort—instead, look at each employee’s results.
Train Good Staff
Good training can improve process and profitability, which is why it’s crucial to remember that the right training is an investment, not an expense.
Why? Because replacing employees is expensive. Studies show that the costs associated with advertising, interviewing time and training can add up to almost half of that employee’s annual wages. The bottom line? You want to keep good employees right where they are—working for you.
Education helps everyone. Encourage your employees to look for sources of training and learning opportunities.
Create Written Procedures
Written procedures within a company are key to business profitability. Typically, companies create written procedures only after they lose money because something wasn’t done right. The better way is to create written procedures ahead of time and avoid the failures altogether.
Written procedures will provide a roadmap to new employees on how and when to do their work.
Defined procedures will save you time and money and will increase your profitability—not to mention save you training dollars. Consider these examples:
It only takes one instance of an incomplete lien release to understand how much money you can lose. Each state has different laws, and you must know the laws that affect you so that you can pass the knowledge along to your employees.
“Internal controls” is an accounting practice that can limit the risk of embezzlement. The bank statement must be opened by the owner. And someone other than the bookkeeper should reconcile the statement each month.
Since so much money is at risk on change orders, it is essential to have a good change order management procedure to ensure change orders are as profitable as they should be. Have written procedures for how each change order is started, completed and billed. Collecting time cards daily is essential to measuring your employees’ productivity. Remember that a weekly time card due on Monday morning will typically be filled out all at once on Monday morning—and will probably not be accurate.
Create a system that tracks the expiration of your subcontractors’ workers’ compensation. Why? Because if you pay a sub without it, you will be held liable for those dollars. Consider the story of the contractor who verified liability coverage before the subcontractor started the job, but by the time it
came to paying the sub, the policy had expired. The result: the contractor had to pay large sums of money to cover the sub.
Communicate
On most projects, there are several groups with whom you need to maintain regular contact.
Depending upon which group you fall into, these might be clients, general contractors or builders, subcontractors, employees, bonding agents, architects, engineers and inspectors. When you make communication with the various groups involved with your projects your top priority, you greatly increase the likelihood of having successful and profitable projects.
Communication with your employees, for example, is both valuable and necessary. Having regular staff meetings and recognizing and rewarding good work will help keep the lines of communication open. But be careful—you must also value your employees’ time by making staff meetings both short and powerful. Remember, too, that employees will often assume the worst when they are not informed. Job security creates commitment among your employees, which in turn, can lead to greater profitability.
To improve communications with various parties outside of your company, you should develop a system for producing and documenting professional-looking reports and notices. Providing documented reports, including approved change orders, bonding reports, job cost summaries, subcontractor notices, and lien releases will provide clear communication and prevent against any misunderstandings long after the job is completed.
Source: L Shiner
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