January 2014

Business Building

Stop Giving Money Away

By George Hedley

Every dollar counts, and every penny wasted is precious. Losing small change on your construction projects can add up to thousands of dollars at the end of the year. So, what are you to do?

Maximizing profit must be a top priority, right along with getting your projects completed on-time. Setting aside a little time to focus on increasing your net profit will boost your bottom line and allow you to make a lot more money.

When you’re too busy working on the jobs, scheduling crews, or carrying out work tasks, you don’t take or have enough time to focus on finances, financial tools, and strategies that can help you hit your goals. Consider implementing these two proven strategies to maximize your bottom line and grow your bank balance.

Accurate general conditions General conditions in construction include the onsite administration, supervision, temporary facilities, temporary protection, and soft costs required to get your projects built. 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 that are rarely 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 40 men on the job, more than one toilet and more than one servicing a week are required. This might increase the actual job cost by as much as $200 per month. These extra costs will add up to lots of lost cash.

The estimator’s No. 1 job is to calculate an accurate estimate of what it will cost to build each project. After every job, he must look at the actual job costs to see if he miscalculated or under-estimated any of the project line items. Before pricing every job, the estimator should get with the project manager, field superintendent or foreman to determine what will be required to run the project he currently is bidding.

Charge for all the changes on change orders Change orders are written documents amending the original contract agreement between parties memorializing an additional or changed scope, price, time, schedule, terms or work item on a construction project. Most often, they require additional money for the additional work required by the change.

As contractors, if you had $10 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 with your customer. Your customer is in a great position to offer a reduced, discounted price with you; change his mind; or decide the additional work wasn’t really extra and should have been included in the original contract.

To avoid this problem, present a complete cost breakdown for every proposed change order your customer requests in advance of starting the work.

Don’t shortchange your company by not asking for everything you deserve. I see most change order requests presented as labor, materials and hard costs, plus a markup without extra required soft costs for the many items listed above. If your company does $5 million in annual sales, of which $250,000 is performed as change orders or on a cost-plus basis, not charging for everything you spend can cost you as much as $25,000 or more per year in lost revenue or net profit for things that you actually had to pay for.

Making money is not easy in construction. Look for every advantage you have to boost your net profit margin. Take the time to implement these tools and send me an email of the other tools you use to increase your net numbers. Email GH@HardhatPresentations.com to get your copy of “Project Management Forms For Contractors.”