Masonry Magazine December 1988 Page. 10
Figure # 2 R.O.O.I. Results By Type of Contractor
| | General Contractor | Heavy Construct | Mechanical Contractor | Electrical Contractor | Interior Specialty | Exterior Specialty (Masonry) | Your Company |
| :-------------------- | :----------------- | :------------- | :------------------- | :-------------------- | :----------------- | :----------------------------- | :----------- |
| Level III | | | | | | | |
| Markup Rate | 1.11 | 1.17 | 1.23 | 1.25 | 1.28 | 1.32 | |
| Volume | 100.00% | 100.00% | 100.00% | 100.00% | 100.00% | 100.00% | |
| Cost of Sales | 90.1% | 85.00% | 81.3% | 80.0% | 79.0% | 76.0% | |
| Gross Profit | 9.9% | 15.0% | 18.7% | 20.0% | 21.0% | 24.0% | |
| Level II | | | | | | | |
| Direct Overhead | 0.5% | 0.0% | 3.3% | 3.3% | 5.7% | 6.0% | |
| Indirect Overhead | 3.5% | 5.6% | 6.2% | 8.6% | 5.2% | 5.9% | |
| Operating Overhead | 1.5% | 3.0% | 3.6% | 3.0% | 3.2% | 4.4% | |
| Total Overhead | 5.5% | 8.6% | 13.1% | 14.9% | 14.1% | 16.3% | |
| Level I | | | | | | | |
| PreTax Net Income | 4.4% | 6.4% | 5.6% | 5.1% | 6.9% | 7.7% | |
| R.O.O.L | 80.0 | 74.0 | 43.0 | 34.0 | 49.0 | 47.0 | |
These figures present R.OO.1 results in terms of the conventional profit and loss statements prepared for the 150 contractors who have installed the CDS Model of Strategic Business Planning for their companies. To calculate the values for your company, obtain your most recent financial statement. Reclassify your overhead items to reflect the conventions of the CDS Model. Calculate markup rate by dividing volume by cost of sales. Calculate R.0.0.1 by dividing pretax net income by total overhead. To compare your company to other companies, show your data as a percentage of volume, with the exception of markup rate and ROOL. Heavy Constructors show zero dollars invested in direct overhead given the assumption that equipment costs are written off to cost of sales at full utilization.
R.O.O.I Standards For The Construction Industry
Since this benchmark is so vital to success, we have prepared some norms derived from our work with 150 selected clients that have installed the CDS Model in their companies. This data-shown in Figure 2-presents the expected R.O.O.1 for six major types of construction trade contractors, reflecting their true operating income and expenses. While further research is necessary to expand the size of the sample base in each category, Figure 2 shows that there are substantial differences in the R.O.O.I. that can be expected for different types of contractors. For example, a general contractor is likely to generate an 80% return for every dollar that he spends on overhead; but for masonry contractors shown in the exterior specialty category, the average is 47%.
These substantial differences in R.O.O.I. have to do with the level of risks that a given type of contractor must take on each job. As we have reviewed our client's statistics on overhead, volume, markup and profit relationships, we have seen that, in general, the greater the risk taken at the level of the project, the greater the markup on cost is likely to be. In turn, we have found that the greater the markup on cost, the greater the overhead investments required to support the company's operation. This result can be observed in Figure 2 by reviewing the changes in markup rates and overhead percentages as you read the table from left (general contractors) to right (exterior specialty contractors).
Using The CDS Model To Plan For Profit
Figure 2 provides you with a blank column to insert your own operating statistics into the R.O.O.I. data base. Simply take your financial statement, reformat it to reflect the conventions of the CDS Model, and make the appropriate calculations as shown in Figure 2.
Knowledge of these figures and familiarity with the R.O.O.I. standards can help you use the CDS Model to plan for profit for the particular market niche in which you may be operating.
Consider how you can use R.0.0.1. to shape and direct your planning efforts. Suppose you want to move your company into a growth mode. Since you know that overhead expenditures will have to be made before profits will be earned, you must be prepared to sacrifice R.O.O.I. for a time, until the new volume level is achieved.
By contrast, suppose you anticipate a slowdown in the marketplace and decide you ought to downsize your operation by laying off members of your estimating or project management staff. In this case, you should be looking for an artificially high R.O.O.I. prior to the time that your company settles into its new position of economic equilibrium.
Alternatively, if you choose to remain in a steady state of equilibrium, then your task becomes one of carefully monitoring the variables of overhead, markup and volume to ensure that the R.O.O.I. goals of your company are achieved.
In all three cases, you can develop your objectives in a clear and crisp fashion. You will be thinking in terms of spending a certain number of dollars in overhead in order to get back a certain profit on the bottom line. This objective can be stated directly in the form of R.O.O.I. allowing you to communicate the expected economic benefits of your strategic business plan to all of your employees in a very straightforward manner. For example, if you plan to invest $1,000,000 in overhead to generate a $470,000 bottom line, you can simply state to your employees that for every $1.00 you invest in overhead to support the operations of your company, you are looking to get back 47 cents on the bottom line. That's language everyone can understand!
Thus, the challenge of strategic business planning is significantly simplified through the application of the CDS Model. Now, you can truly plan for profit armed with the knowledge that you have considered all of the elements which are necessary to develop a rational and predictable plan of action for your company.