Masonry Magazine June 1992 Page. 9
Improving Contractor Profitability
Suggestions for taking the necessary steps to improve profitability and, if on the road to disaster, change course from failure to success.
Contractors can, by sensitizing themselves and taking the necessary steps, improve profitability and, if on the road to disaster, change course from failure to success. The suggestions which follow result from having been in the position of being responsible for either completing projects for bonding companies, and then helping to liquidate the unfortunate contractor. Or, on the brighter side, helping to turn things around before they degenerated to the point where nothing could be done to save the contractor.
Monitoring Bid Spreads
The first sign a contractor has that something may be wrong either with a job or with his organizational setup for putting together the bid or proposal is at bid opening time. This holds true even if the bid is much higher than everyone else's. Unless you know something that no one else does, a price that differs substantially from the competition's should alert you that something may be wrong with your system.
If you're bidding too low just to get work to keep your organization busy without covering your expenses, quit while you're ahead. You are pretty much like the car dealer who claimed he sold every car at a loss, and when asked how he managed to stay in business, answered, "I make it up on volume."
Heavy "Front Loading"
The chain reaction is not limited to fog-bound freeway accidents. We all accept the fact that a little bit of front loading is normal, necessary, and not fatal. But when you have to heavily front load Project B to finish Project A, and Project C doesn't come along in a timely fashion, you will suffer the chain reaction.
Cash Flow Projections
You should have cash flow projections for each job and a combined one for all projects.
If you don't have a cash flow projection based on anticipated progress for each job, you can't tell whether you're ahead of or behind your cash flow needs; and one of the surest signs of trouble is negative cash flow. A projection should be prepared for each project and a master kept for all projects combined. The projection should be kept current (current working estimate) for each project and all projects combined.
Knowing the Cost of Work
You should have a cost control system-not a complicated cost control system, just one suitable to your needs. It will help you spot many problem areas before they get out of control and you also will develop historic cost information that will help you bid the next job with better information based on your own experience.
Without a cost control system, it's extremely difficult to know the true cost of all the items of work in the project. By not accounting for all costs involved you are hurting yourself in two ways. One, you don't have a true picture of the projected profit or loss on this job and two, you are not building a historic cost data base from which to bid the next one.
A properly run cost control system also may warn that the work being done in the field is not what you anticipated when you signed the contract. It may be the first sign that you are entitled to more money for unanticipated work or unforeseen conditions.
Scheduling
It would be superfluous for me to list all the costs that run and accrue every day a job is late. Every job, no matter how small, must have some kind of projected schedule. You should start taking corrective measures.
Contractors very often go to any length to avoid being hit with liquidated damages. Before you do, make sure that the cost to avoid a day of liquidated damages isn't more than the liquidated damages that may be assessed. Also, and more important, is the fact that the delay may be costing you, the contractor, more in indirect costs because of the delay than the cost of eliminating the delay.
The cost and effort of putting the job back on schedule will improve your profitability and your reputation.
Collecting Extras
If you do extra work you are entitled to collect for it. In order to collect for it you have to know you are doing it and whether it's extra. You also must take all the steps required by the contract and within the time limits set by the contract to request payment.
Closing Out the Job
Cleaning up a job in a quick, clean and efficient manner is essential. You too often get involved in the start-up effort of a new job or trouble shooting some other ongoing job and forget how quickly a job that "just has to be cleaned up" can drain your resources by nickel and dimeing you to death. Not only do you lose track of the money you're spending, but by not collecting your retainer you are putting a crimp in your cash flow and adversely affecting your overall financial condition.