Construction Today

Morale Booster

Incentives can motivate employees to be more productive and boost profitability, but only if they are measurable and relevant to the work force

by Tom Ryan

Virtually every business faces the challenge of how best to motivate employees and, not surprisingly, most use some kind of incentive program. Unfortunately, many construction companies simply hand out bonuses without basing the reward on predetermined, established productivity standards. This sets a bad example that's hard to abolish and, worse, can contribute to inferior performance and unmet obligations.

What works better is a productivity based, excess-profit incentive system. This means when the company reaps higher profits, employees who meet their goals share the financial gain. This is the most effective motivator of increased productivity.

Performance Standards

Typically, employees are not interested in the "big picture" goals that executives strive to reach. The lofty targets construction company owners set to grow their firms by a certain percent for an entire year do not motivate those responsible for creating the bids, nor do they motivate managers and employees out in the field. Instead, most personnel are interested in their own areas of activity.

That's why it's important to use targeted incentive programs that motivate all employees at an appropriate level to improve specific performance and positively impact the company financially. For instance, when a construction crew completes a job with 10 percent less labor cost than allocated in the original bid, the savings goes straight to the company's bottom line. A plan can be created to pay back a portion of this savings to the job site foreman and the crew. Additionally, by tracking bid-to-award ratios, a performance standard can be created to reward bidders.

Most businesses set categories of performance standards for their employees. What varies is how these standards are generated. When they are based on specific and attainable goals to increase the level of current productivity, employees are motivated to achieve them.

In reality, most incentive programs are ineffective and demotivating. For example, take the yearend bonus programs – very few employees are inspired in January and February to accomplish goals that won't be acknowledged until December. The distance between the activity and the reward is too long for an employee to be truly excited about doing a better job.

Another danger that lies within these year-end bonus programs is that employees come to expect them, and they become an entitlement program. Eventually, there will be little impact on performance from this type of bonus program, and it will become part of the cost structure of the company. Then if for some reason (i.e., budget cuts), it is taken away from the employees, morale will be negatively impacted.

For incentives to have the expected outcome – increased productivity – they need to be relevant for the employees. An incentive that is based on the bid-to-award ratio may not motivate construction job site crews. Alternatively, an incentive to increase productivity on the job site will not motivate those responsible for developing the construction bids. Accordingly, for incentives to work, they must be based on the employee's specific performance; measurable; given regularly, such as monthly, weekly or job-by-job; linked with areas under employees’ control, such as labor hours, material costs, overtime, small tools and consumable supplies; and financial in nature, either in the measurement or in the reward.

Responsible and Accountable

The challenge lies in creating productivity based, excess-profit incentive systems. This is not structured on length of service or an entitlement paid out at the end of a good year.

Rather, the bonus is tied to the increase in productivity the employee produces. It's called responsibility and accountability. To accomplish this, companies need the ability to track their true costs for every job, including labor time, material cost, waste and overtime to help create realistic and effective incentives, which are financially and activity based.

Every company has a base or a benchmark level of activity that employees produce to generate a certain level of profit. Using the right information, systems can be developed to identify which activities should have incentives. For example, a construction company has an acceptable labor standard for certain jobs. Using properly developed information systems, the company can determine which employees to target to ensure all projects come in within or under bid to ensure a profitable job. If the employees are able to reduce the time to complete a project phase by 10 percent within a given time period, then the value of the difference between the planned time and the actual 10 percent reduction is used to reward these employees for reaching their goal of increased productivity on the job.

Break-Even Margins

Good information systems not only detail who is responsible for specific activities, but also help determine break-even margins – how much profit a given level of activity produces after fixed expenses are covered. This margin is realized when the company reaches a certain level of sales that produce a certain level of revenue to cover the fixed expenses.

Knowing the break-even margin gives some construction companies a competitive advantage. That's because once the margin is reached, only costs that vary with new projects need to be covered providing a higher level of profit for each new contract beyond the break-even point. This "excess profit" can be used to create an incentive for employees to increase productivity. By knowing the break-even point, businesses can create more effective incentives because they'll know how much extra margin is available to set incentives for increased levels of productivity.

Similarly, this approach enables those responsible for bidding to generate a higher bid-to-award ratio as new bids reflect the lesser overhead burden included in the bidding for new work. Say a contractor realizes a 10 percent profit yearly, and 20 percent of every dollar covers the fixed overhead expenses. Once these expenses are paid for, the margin now becomes 30 percent. The company can use part of the additional 20 percent for incentives with employees or to lower the overhead burden added to each bid to generate new business for the company.

Keep in mind incentives need to be determined by a cost analysis to establish profitable jobs, not just more jobs in general. When a business owner does not know the true cost of a construction project and just " shoots from the hip" to create unrealistically low bids, he or she may unwittingly increase work and hurt overall profits.

In addition, incentives that focus solely on decreasing labor costs – but do not seek to maintain the already established standard for quality – can have a similar negative effect on profits if jobs are completed in less time but at a lower standard of quality. The key is to create an incentive plan that increases productivity while maintaining the same standard of quality.

Tom Ryan is director of sales development with IPA and IBA. IPA and its related companies provide comprehensive business consulting and valuation services to companies in the United States and Canada. For more information call 800-531-7100 or visit www.ipa-iba.com.