Colorado Construction

What your Last Boss Never Taught You About Management Skills

By Michael Rudd

Since the Middle Ages, the apprentice system has been a formalized concept of on-the-job training. But no matter how well an apprentice learns the craft, the teacher still retains critical information. A secret technique or important concept can be withheld so the teacher maintains an edge over a possible future competitor.

Following this tradition, most contractors come up through the ranks and with little or no formal business training, they must rely on what former employers have imparted to them. In this model, critical issues such as effective bidding procedures and professional management skills must be addressed. These are a few important pointers that many bosses fail to mention.

Bid-to-Award Ratios
Increasing the percentage of jobs awarded does not necessarily guarantee higher profits. Consistently underbidding the competition without taking into account the entire cost structure can cause a business to run out of working capital and face difficult times.

A contractor should not just add up the cost of materials and labor and add another 10 percent for overhead. Unexpected expenses must be considered when figuring out the bottom line to avoid underbidding on future jobs. Two main components should be considered when developing a bid.

Direct job costs. These are the estimated variable costs associated with completing the project such as labor, labor burden, materials, subcontractors and equipment rental. These costs vary in proportion to the size of the project.
Overhead. Simply adding a percentage does not make sense. Overhead includes direct business costs such as administration, wages, insurance, rent, utilities and owners’ wages. Indirect costs include transportation and consumables that must be allocated across all of the company’s jobs.

Overhead costs for a certain time period, usually one year, are then divided by job costs over that same period. New businesses should use best estimates for jobs, first and then adjust them on a quarterly or more frequent basis. All costs must be included to determine the break-even point.

Using break-even calculations in the bidding process helps determine the true cost of doing business and provides a return on risk. Profit margins may vary depending on the situation. Contractors must be aware of competitive bidding practices, credit histories and other factors.

For example, if a new client is being groomed for future business, it can be beneficial to keep profit margins low. But once the break-even point is determined, the bid should not fall below that number. That could put the business at risk.

Incentive Systems
Another point many business owners fail to share with employees is the importance of motivation and incentive programs. Here are some key points to consider:

Without an incentive program, employers risk internal fraud.
Keep it simple. Employees must understand how the program works to be motivated by it.
Incentives must be tied to specific cost areas where the employee has control. Example: A worker or crew of workers is given an estimate of 500 hours to complete a job. If the job is done in fewer hours, they are rewarded with a percentage of the overage.
The incentive plan must reward a group as a whole. A good solution is a bonus pool that covers the incentives for all jobs in a certain time period. As employees function more efficiently, the bonus pool grows.
Two sides: The incentive plan must consider all outcomes, helping employees focus on costs. In the 500 hours example, if the job is done in less time, it adds to the bonus pool. However, if costs exceed that figure, a percentage is subtracted from the pool.
Incentive payouts should be made often enough to provide motivation but not become an administrative burden. Bonuses should be paid at the end of the entire job or on a regular basis such as quarterly or monthly. Smaller time frames are likely to increase administrative overhead.

If the craftsmen of old could see the modern construction industry with its space-age materials and behemoth machines, their eyes would be wide with amazement. But they might recognize with a knowing smile one aspect that has remained the same over the centuries – it still takes good business sense to sustain growth and profitability.

Mike Rudd is the assistant managing director of International Profit Associates, one of the largest management consulting firms in the United States. Based in Buffalo Grove, IL., the firm helps clients implement proven methods, systems, controls and incentives that enable business owners and their managers to maintain positive cash flow, control costs and accelerate the growth of their companies. Call 847-808-5590 or visit the company Website at www.ipa-iba.com.