Business Building: Stop Profit Margin Shrinkage!

Words: George Hedley
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 without 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 bid 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 estimator turns over 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.  And the field job cost problems start 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 the job to meet with the foreman and go over the budget report. 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 is profit margin shrinkage! Profit margin shrinkage is unacceptable in professionally managed construction companies. It happens when owners, project managers, superintendents and foremen 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 management, inaccurate estimates, weak project managers not required to do their jobs, lack of job cost tracking, and no focus on knowing or tracking your numbers or making money.  Commit to end profit margin shrinkage! To make 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. Field supervisors and foreman must make knowing and tracking their weekly job cost crew hours and equipment budgets a top priority as well. And then they must manage their field production activities and expenditures to achieve the expected goals.  To get a copy of the Hardhat Workbook titled: “Construction Field, Project Management & Subcontractor Systems’ email GH@HardhatPresentations.com.

7 Steps To Eliminate Project Profit Margin Shrinkage

  1. Pre-Job Turn-Over Meeting  
    • Meeting is mandatory.
    • Estimator, project manager, superintendent & foreman attend.
    • Review scope of work, plans, inclusions & exclusions.
    • Approve project change order rate sheet.
    • Review and approve proposed subcontractors and suppliers.
    • Account for missing items not included in scope.
    • Draft a detailed work plan projecting daily & weekly crew size and cost.
    • Set project goals for schedule, milestones, completion date, crew and equipment hours.
2. Project Start-Up    
    • Hold project start-up meeting with customer to review:
      • Payment requirements and change order procedures.
      • Proposed work plan, phasing, schedule, crew size and work flow.
3. Change Orders    
    • No extra work can proceed without written authorization.
    • Provide rate sheet to customer for all extra work.
    • No trade-offs with customers over $100 without approvals.
  4. Job Cost Tracking & Update  
    • Set up project production scorecards to track job costs weekly.
    • Cost to date versus budget for labor & equipment updated with estimated cost to complete weekly.
    • Job costs reviewed by foreman & superintendent with project manager weekly at onsite meeting.
    • Project foreman and superintendents meet weekly to review production scorecards, schedule updates, and completion milestones.
    • Completed job cost report finalized and given to estimator & project manager.
  5. Crew Management  
    • Turn in Think-Ahead schedules weekly.
    • Hold weekly field crew meeting to review crew hours. 
    • No overtime allowed with prior approval.
    • Equipment must be used or removed from jobsite.
    • Start work @ 7am means start work @ 7am and finish work @ 3:30pm means work until 3:30pm.
    • 30 minute lunch means 30 minutes.
    • No smoking on jobsites and no personal cell phone usage on jobsites.
    • Punch-list performed weekly by foreman.
  6. Estimator  
    • Review job cost updates monthly on all jobs.
    • Review final completed job cost updates & adjust bid rates.
    • Verify labor and labor burden rates twice per year.
    • Verify equipment rates twice per year. 
  7. Close-Out Project Faster!  
    • Have the field foreman or superintendent do a weekly punch-list and make sure all punch-list items are completed every week.
    • Never let your crew leave a jobsite for any duration of time without a job walk and sign-off with your customer.
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. ---------------------------------------------------------------------------------------------------------------------- ABOUT THE AUTHOR George Hedley CSP CPBC is a certified professional construction BIZCOACH and popular industry speaker. He helps contractors grow, make more profit, build management teams, improve field production, and get their businesses to work for them.  He is the best-selling author of “Get Your Construction Business To Always Make A Profit!” available on Amazon.com.  E-mail GH@HardhatPresentations.com to sign-up for his free e-newsletter, start a personalized BIZCOACH program, attend a 2 ½ day BIZ-BUILDER Boot Camp, or get a discount at www.HardhatBIZSCHOOL.com online university for contractors.   George Hedley CSP CPBC HARDHAT Presentations BIZCOACH BIZSCHOOL Email: gh@hardhatpresentations.com     website: www.hardhatbizschool.com www.hardhatpresentations.com 
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