Editor's Note: This is the sixth in our 2008 series of "Get Your Business to Work," written by our regular columnist George Hedley. Hedley offered his first fifteen of twenty tips in his last two articles on how to boost your bottom line. Tips sixteen through twenty follow. To read the previous article, click here. To read the next article in the series, click here.
Increasing your bottom line is a tough task.
Many competitors price work too low, which doesn't allow you to charge enough for the service and quality you want to provide. Your employees aren't as efficient as you want them to be. The weather and other trades get in your way, slow you down on the jobsite and hurt productivity. Poor plans and specifications stop your progress while you get clarifications from the architect or engineer. And then, trying to get paid is not an easy task either.
Every dollar counts. Every penny wasted is precious and can add up to thousands of dollars at the end of the year. So, what are you to do? Maximizing your profit must be a top priority right along with getting your projects completed. Focusing on increasing your net profit will boost your bottom line and allow you to make a lot more money. Don't get too busy working and forget to take enough time to focus on your finances, financial tools and business strategies, which will make you more money. Consider implementing these tips and tools to grow your bank balance.
16. Multiply Your Money!
When I ask construction business owners specific questions about their finances, many say they don't really know much about their numbers. They let their wife or bookkeeper worry about the money. To me this is an oxymoron-work all day stressing and struggling to get things done but don't really care or know how much money they're making. The main purpose for owning and managing a company is to make a profit and increase the company's net worth. To make this happen, focusing on your numbers should be part of your everyday activities to stay on track and get the results you want.
A simple way to multiply your money and increase your net profit at the end of the year is to manage your cash aggressively. It doesn't take much time but can return a nice sum of money for your efforts. If your company is generating $3 million in annual sales, you will average $250,000 in monthly revenue. Most likely you collect your money throughout the month but only pay your bills twice a month. This means, on average, you should have a bank balance of around $125,000 at all times. If you average $50,000 monthly in materials and are offered a 2 percent discount for quick payment, this will generate an extra $12,000 annually. And if you invest your cash balances in interest bearing accounts or programs, you should be able to make another $5,000 to $15,000 every year-not bad for a few minutes spent each week focusing on your money.
Make an appointment with your business banker and discuss the many options and programs they offer to maximize the return on your bank balance. Ask them about "sweep accounts," "overnights," "money market accounts" and "treasury bills." A good banker wants you to make as much money as you can. After the meeting, decide how you will invest your company's money and then delegate the task to your accounting manager. Track your monthly progress and watch your money multiply.
17. Stop Giving It Away!
If you had ten dollars for every extra work item your company, project manager, field superintendent or foreman did without a signed change order before the work was performed, could you have retired several years ago? When your customer asks for extra work, why is it so hard to get it in writing? Everyone knows the contract requires signatures on change orders prior to starting extra work. But when you postpone getting a formal approval for extra work until days, weeks or months after the event occurred, you have no leverage. And when you have no leverage, your customer is in a great position to negotiate the final price with you, change their mind or decide the work wasn't really extra and should have been included in the original contract.
Present a complete cost breakdown for every proposed change order your customer requests in advance of starting the work. Use a standardized format and cost template to make sure you include everything the additional work actually costs. Every time extra work is performed, the following costs occur:
- Project management to process the paperwork
- Supervision to supervise the work
- Accounting to pay for the work
- General condition costs as the job will take longer to build:
- Trailer and toilets
- Power and power poles
- Utilities
- Trucks
- Equipment
- Small tools, ladders, etc.
- Small items: nuts, bolts, hardware, etc.
- Temporary protection, barricades, etc.
- Liability insurance
- Overhead
- Profit
Don't shortchange your company by not asking for everything you deserve. I see most change order requests presented as labor, materials and subcontractor costs plus a markup without extra costs for the many items listed above. If your company does $3 million in annual sales of which $300,000 is performed as change orders or on a cost plus basis, not charging for everything you spend can cost you as much as $30,000 or more per year in lost revenue for things that you actually had to pay for.
18. Two Heads Are Better Than One!
As a progressive leader of a growing construction company, I wanted my key project managers and superintendents to accept more responsibility. As a result, I tried to delegate as much of the work to them as possible including writing subcontracts, ordering materials, signing contracts and approving change order requests from subcontractors. Time went on and my inspection of their actual work became less and less as I trusted them more and more. But then the worst scenario happened and we experienced some major financial setbacks. A customer pressured a project manager to agree to some contract clauses that seemed innocent. Months later, when the project was nearing completion, the customer held us to these clauses, which added lots of items into the scope of work we never intended to do. Upon my review, it was obvious the project manager had agreed to contract terms he didn't understand.
This caused me to take a hard look at how we do business. I discovered many problems with our "trusting" system. Some project managers were not getting the complete scope of work included in many subcontracts they were writing thus causing cost overruns on several projects. Some managers were not tracking their employee timecards properly and keeping track of all the vacation time they were taking. Some managers were approving expense accounts without reviewing all the bills in detail. The payroll department wasn't charging costs accurately to the right jobs and cost codes. And I found some people stealing from the company by using "creative accounting." Oh well, so much for trusting your long-term employees 100 percent.
I believe people over time feel entitled to a little bit extra the longer they work for your company if you give them the chance to take advantage of the situation. Little things like leaving early without docking their own pay, asking a supplier for some material for their home remodeling project, using the company credit card to fill their car up with gas, and lots of other little things that add up to big bucks.
To remedy our situation, we re-implemented our company policies and made it clear there would be no exceptions for anyone regardless of their tenure, relatives or position in the company. These new rules required two people to review, approve and make every decision involving company contractual commitments, financial obligations, payments or monetary transactions including the following:
- All contract terms and conditions
- All subcontract pricing, awards, terms and conditions
- All checks issued
- All change orders
- All expense account approvals
- All employee reimbursable items
- All overtime pay or requests
- All vacation or time-off requests
- All payroll preparation
- All sick time approvals
- All project payables
- All job purchases
19. Accurate General Conditions
Estimating accurate general conditions for projects can be a simple task when the estimator is accountable to get it right. Most estimators use unit prices, which are never checked against the actual final job costs. For example, creating a budget for temporary toilets seems easy. An eight-month job should cost 8 x $100 per month = $800. But when the field superintendent sees there are forty men on the job, more than one toilet and more than one servicing a week is required, this might increase the actual job cost by as much as $200 per month. These extra costs will add up to lost cash.
The estimator's job is to calculate an accurate bid of what it will cost to build each project. After every job, he must look at the actual job costs and see if he miscalculated any items. Before he prices the next job, he should meet with the project manager or superintendent to determine what will be required to run the project he is currently bidding. Take a hard look to determine if you are charging the right price for:
- Project manager, superintendent and their vehicles
- Project photos, signs, as-built drawings, etc.
- Temporary facilities such as trailers, toilets, sanitation, etc.
- Temporary utilities such as electricity, power poles, water, phones, etc.
- Temporary fencing, gates, barricades, site lighting, heating, etc.
- Safety, first aid, shoring, access roads, security guards, etc.
- Water quality control, dust control, etc.
- Trash, cleanup, window washing, final punch list, etc.
20. Motivate with Money!
At every convention I get asked about profit sharing programs. Incentive compensation can be broken down into two types: earned or arbitrary. Earned incentive compensation is based on a specific formula that rewards for results based on tasks, accomplishments or otherresults you want to measure. Arbitrary compensation bonuses are based on what the boss feels is the right amount to pay for good work, reward a positive attitude or a thank-you for a job well done. It is often based on what the boss thinks is expected to keep employees happy.
I don't think arbitrary compensation encourages employees to do their jobs faster or better. But often, it is expected as a part of the overall employee compensation package because other companies do it or employees feel entitled to something at year-end. To me, this is no more than a gift of generosity from the employer as it is not required. It's a nice gesture and will keep some employees from looking for jobs elsewhere until after they receive their year-end bonus. But they usually don't make the company any more bottom-line profit.
Extra compensation based on measurable results will produce positive bottom-line results. If employees know what's expected and are compensated for hitting their targets, they will hit them.
If they don't know the exact results expected and don't have a reason to achieve them, why should they want to go the extra mile? This requires the boss to determine the exact results that will make the company more money. For example, if you want an eight-month project finished in seven months, a generous bonus for the crew or superintendent will keep the team focused on achieving the goal and motivate them to hit the early completion target. Without a financial incentive, the target is a nice idea but of no benefit to the crew to finish early or work harder.
Our workers' compensation insurance rating was suffering due to field employee claims for jobsite injuries. We implemented a "Safety Bucks" program to motivate the crews to work closely together and watch out for unsafe workers or conditions. Each worker received $1 per day if the entire crew had no accidents. If anyone on the crew had an accident, no one received the safety bucks for the period. We paid this cash bonus out quarterly. This instantly focused our field crews on safety and making sure there were no jobsite accidents. This program really worked because it kept everyone focused on the target. Plus, I always enjoy giving out bags of bucks to my field crews for no accidents! Examples of measurable clear targets can include:
- Total man-hours to complete a job
- Hours without an accident
- Project milestones completed by a certain date
- Customer referrals
- Project punch-list or close-out completion
- Bid-hit ratio improvements
- Customer satisfaction
- Project profit
- Project completion and customer sign-off
- Change order profit
- Estimating accuracy
- New customers
- Average job size increase
Making the most money you can is fun if you make it your priority. Too often, you're so busy that you don't have time to do the little things to boost your bottom-line. Give several of these twenty tips and business tools a try and you will make more money. See you at the bank!
George Hedley owns Hedley Construction and Hardhat Presentations. He is the author of The Business Success Blueprint Series available in eight workbook and audio CD sets. He is available to speak on his proven system to build profits, people, customers and wealth. Call 800.851.8553 or visit his website at www.hardhatpresentations.com.
Construction Business Owners, June 2008
