Know the factors that lead to profit margin shrinkage to avoid it altogether
By George Hedley
In the construction business, the most irritating thing that happens is when you bid a job at a nice profit margin and several months later, the final job costs end up higher than expected. Profit margin shrinkage starts when the estimator prepares a bid based on what he thinks a job should take to complete versus looking at the cost history of several similar completed jobs. He then reviews his estimate with the owner who looks at the plans quickly, studies the proposed inclusions and exclusions, adjusts and lowers the crew production rates, and then gives it the final approval to submit. A few weeks later, the customer awards the contract to your company, you agree to accept the terms, and therefore become the contractor or subcontractor for the project. Then the problem really starts…
The er the bid estimate and folder to the project manager who’ll be in charge of the job. They meet for a few minutes with the proposed field superintendent or foreman to review the contract, bid estimate, scope of work, and proposed subcontractor or supplier list. Everyone’s now vaguely clear on what’s included and how it was priced. So the team gets started ordering materials, writing subcontracts, and scheduling crews to build their scope of work for the project. The bid budget is next entered into the accounting system so the foreman and superintendent can order materials, and charge time to the job.
Field cost problems continue to mount
During the project duration, the customer asks the foreman to stop and start working in several different areas, the workflow plan is changed a few times, extra move-ins are required, things don’t go as they should, a few change orders are completed without approvals, extra manpower is needed to keep the job moving, additional overtime is required to keep on schedule, extra equipment is on the job just in case it’s needed, and a few extra men are working on the crew to keep them busy until the next job starts. The project manager is too busy managing and bidding other jobs and can’t get to job meetings, change order requests, documentation, correspondence, notices, and job cost updates as he should. Some of the subcontractors won’t move forward without signed change orders causing field delays. Some of the required work inclusions were excluded and not covered in the subcontracts causing more cost overruns. Little by little, small things add up to a large amount, and the job ends up eventually costing a lot more than the budget estimate.
Making sure profit fade does not occur takes a strong commitment to getting your numbers right all the time.
During the project, the construction company owner regularly asks the project manager and field superintendent if the job is going well. They answer that everything’s fine and they have it handled, even though they really don’t. And to make matters worse, the project manager continues to present the estimated final job cost at the bid budget on the monthly job cost report update without adjustment for delays, unrequested change orders performed, missing holes in the scope of work, and crew production cost overruns.
The result: profit margin shrinkage
Profit margin shrinkage is unacceptable in professionally managed construction companies. It happens when owners and managers don’t have a clue about their job cost numbers. When your profit margin shrinks from the project bid mark-up to a lower amount, something is very wrong with how you do business. Shrinkage occurs when the final project profit margin comes in less than bid or projected. Shrinkage usually happens when project managers and supervisors don’t have a clue where their job costs are on their projects until their jobs are completed, or never. Profit shrinkage is an outward indicator of poor company ownership and management, inaccurate estimates, lack of job cost tracking, and no focus on knowing your numbers or making money.
Commit to end profit margin shrinkage!
Making sure profit fade does not occur takes a strong commitment to getting your numbers right all the time. Construction company owners must make one of their must priorities accurate and timely job cost estimating, tracking, and reporting. Estimators must make accurate estimates their number one priority. Project managers must make projecting, tracking, and knowing their estimated final jobs costs a top priority. Plus writing tight subcontracts without holes in them is a must. Field supervisors and foreman must make knowing and tracking their weekly job cost crew hours and equipment budgets a top priority as well, including managing their field production activities and expenditures to achieve the expected goals.
It takes a dedicated investment and effort to eliminate profit margin fade in your company. Your choice is to do nothing about maintaining your estimated profit, or invest time and energy to reduce it and make more money.
George Hedley, CSP CPBC is a professional construction BIZCOACH and popular industry speaker. He is the best-selling author of “Get Your Construction Business To Always Make A Profit!” available on Amazon.com. He may be reached at GH@HardhatPresentations.com.