Construction Today

Up with Profits

If you made the effort to understand the exact costs for each project, you could also make the right changes needed to improve your bottom line.

By Richard Fineman

Ask a contractor about the amount of profit generated from a past job, and most likely the owner won’t be able to come up with an exact figure. That’s because many owners do not track costs during the job, and rarely do they track them even after completion of the job. Those who do track these costs soon realize—after examining how much was paid for labor, overhead and materials—that the profit generated was much lower than originally anticipated or believed.

Yet, even after recognizing they may have lost profits because they were and are far too busy chasing the sale, very few make the adjustments necessary to protect their profit margins. This cycle perpetuates imprecise and poor job estimating. If owners took the time and effort to understand what the exact costs are for each job, they could make the changes necessary to improve their bottom lines.

Inaccurate Job Estimating
Construction companies bid their jobs and then perform the work. Many hope they’ve estimated the job high enough to cover all of their costs and still have some funds left over for profit. And yet, even after completing the job, most are still unaware whether they’ve made or lost money, all because they didn’t take the time to track the job costs.

The simple truth is that only by tracking these job costs will owners discern if a job was profitable. Just like revenue is tracked to show what source the income is from, expenses should also be tracked in a similar manner.

In post-mortem attempts, many owners flip through their paperwork after the job was completed and “autopsy” the job costs. They examine how much was paid in labor and overhead, materials and other costs. It’s only then that they realize their profit was a very small three percent, for example, instead of the 15 percent profit they expected. With this information at hand, you would think contractors would make adjustments to future job estimates. Most don’t.

Instead, they believe if they simply charge higher fees to their clients and also expect employees and subcontractors to do the job in less time, they will be more profitable. This rarely happens. Instead, by tracking and managing the job costs, owners can eliminate mistakes made through miscalculations on labor time and other costs while improving job estimates and bidding.

Tracking Time
An owner who uses outside contractors to complete jobs must be careful when estimating time on bids. For example, say an owner uses a bricklayer who is a great craftsman and can do the proposed job in two weeks, which is what the owner puts in the estimate. But when it comes time to do the actual job, the bricklayer sends out his employees. They take three to four weeks to complete the job because they aren’t quite as skilled. Therefore, the job costs more and eats into the owner’s profits. With experience, contractors learn to allow for this variance in managing job costs.

Tracking time as a component of job costs allows owners to realize when they’ve used up 50 percent of the time on a job, but are only 20 percent completed with the job. Clearly, there is a problem either with the job estimate or with the employees; however, if the owner is tracking this, changes can be made immediately, before the project runs out of money. Conversely, if 20 percent of the time was used up on a project that was 50 percent done, the owner can use some of the overestimation as employee incentives. These incentives reward and encourage superior workmanship, team efforts and timely job completion.

Tracking Material
Learning when to order material and how much to order assists with more precise job costing. If materials are ordered too early, owners pay for them before they are actually needed. When that happens, the owner’s money is tied up without producing an associated benefit. Also, if material is paid for with borrowed money, it costs more because of the interest being charged.

Another way to manage material is to control the amount of product needed for a specific project. For example, say there are two different methods to wire a house and one method requires 200 feet more wire. If one method is not better than the other, choose the method that involves less wire, and teach employees to do the task this way. The dollars saved add up quickly.

In addition, create a culture that expects and promotes high-quality workmanship among employees. In this environment, it is less likely material will be damaged or ruined. This, in turn, eliminates the need for repeat purchases and the associated increased costs that come with it.

Companies can get creative about managing material. One example comes from a recycling program. At company job sites, electricians often have wire scraps leftover at the end of each day. Instead of just throwing these scraps away, one company requests that excess wire be brought back to the office where it was recycled. The funds were then used to pay for the company Christmas party— a novel use of extra material. There’s no reason why companies can’t investigate other ways to save money through regular tracking of job materials.

Technology Helps Track Job Costs
Many accounting systems let owners track the cost per job via spreadsheets or other reports such as balance, cash flow or cash management sheets. Additionally, some companies use software programs like Quick Books for billing purposes. Yet many companies are unaware that these programs also have the ability to track job costs and employee time. In addition, industry specific software allows owners to run a profit/loss statement per job to track every expense and bill, including how overhead was allocated.

Some owners report they are too busy doing the construction work and estimating to deal with job costing and tracking. However, it’s not crucial for owners to input the figures—another employee such as the bookkeeper or an office manager can set it up and use it. What’s important is for owners to take the time to track each job cost, manage these costs, review them regularly and make changes where appropriate to ensure the success of the company.

The Silver Lining
Every owner went into business for specific and personal reasons. Yet, if the business isn’t profitable, how feasible is it that the owner will achieve the business goals? The repercussions from little or no job costing are obvious, while the benefits of knowing where and how the money is being spent aren’t always so evident.

For example, costing assists owners in bidding correctly. Bidding correctly allows companies to finish jobs on time, improving a company’s reputation. Another benefit from tracking job costs is helping the owner find a marketing niche. Many construction owners love to do commercial work, but realize after job costing that they aren’t making money and thus make the switch to residential work.

Doing proper job costing helps owners manage the margins more effectively. And, tracking job costs and making effective and efficient business decisions based on these trends help ensure that every job is a profitable job.

Richard Fineman is a consulting services director for IPA and IBA. IPA and its related companies provide comprehensive business consulting, tax planning and business valuation services to companies in the United States and Canada. For more information, call 847-495-6786 or visit www.ipa-iba.com.