02 May

Improving Contractor Profitability: 5 Important Steps

Having discussed profitability issues with many contractors, here are the 5 most significant profitability drivers identified.


Reduce Wasted Time

This is the big one.  Streamline communication and avoid redundant or unnecessary work.

Talking, and waiting to talk, wastes time.  After all, both parties have to be available at the same time just to be able to have a conversation.  Until then, one must wait.  Even then, it's a distraction.  How to improve?  Rely less on live conversations and more on recorded, well organized communications.  Let everyone place information -- in a written, visual or voice format -- in a place everyone else will find it, then let each of them retrieve it as often as they need it.  This will also enable you to have information immediately available in ADVANCE of when people need the information.  Recorded communication tends to be precise, concise and persistent, relative to typical live oral communication. Currently, field employees call their managers to find out how to get to job sites, how to perform a task, to order supplies, to update them on how each job is going, etc.  Administrative employees call the field employees to decipher their illegible time sheets and field employees call each other to see what they did on the job yesterday to perform their own work on the same job today.  Sometimes, a second call is required.  Often, progress can't be made until that conversation is able to happen, and it can't always happen right away.  Lots of wasted time.   It's better to provide written directions to a job site, written instructions or diagrams for properly performing a task, and legible time and materials usage reporting already organized in a format others can easily interpret and use.  The more you can cut down on phone conversations, the more efficient you'll become.

Doing the same thing twice wastes time. Many companies have their field employees take 15-20 minutes each day to complete their daily time sheet.  Then an office employee copies this data into a timekeeping system.  If the timesheet is not legible, the office employee must call the field employee to get the information.  Then, if the work was performed on a T&M job, an office employee must repurpose this data -- it's not usually as easy as simply copying the data -- into an invoice, along with separate information about materials costs from a supplier.  Record information ONCE, as soon as it happens and "at the source," and automatically organize and store this information centrally, where it can be used for monitoring, reporting and transactions such as payroll and invoices.  Recording "in real time" and "at the source" avoids the inaccuracy of reporting "from memory" and the "straight through processing" of data eliminates work cycles that add little to no value to the business.  For example, think of the time and energy currently required to collect data from different sources in order to prepare invoices, payroll or compliance (e.g., "prevailing wage") reports.  It doesn't have to be that inefficient.  Get an operations management system and use it.  Leave the manual methods behind.

"Avoidable" work activity that does not generate revenue wastes time.  A prime example of this is having to leave a job site in the middle of the day for an emergency supply run because you discover a shortage of necessary materials ONLY ONCE they are actually needed to complete tasks at the job site.  It’s often a 2-hour loss of productivity for the field employee and it negatively impacts the completion schedule, which frustrates your customer.  A system that lets you know what you'll need on the jobsite and what is in (or missing from) inventory IN ADVANCE of heading to the job site enables you to avoid such costly mistakes.

Bid Fixed Price Jobs More Effectively

Bidding new jobs without having an accurate, well-organized understanding of your historical cost of performing similar work – on a task-by-task basis – is a little like playing “Russian Roulette.”  It sets you up for a “lose/lose” experience.   You’re either going to bid too high and lose the job to someone else who, understanding his own costs well, bids to make a reasonable profit, or you’re going to bid too low, win the job and, as a result, lose money.  Paraphrasing Sean Connery’s “Untouchable” advice to Kevin Costner in a quiet church pew, “Never bring a knife to a gunfight.”  Prepare your bid with solid information about your true costs, not just a “gut feel.” 

Track Everything and Update your Customer

If you’re like most contractors on T&M jobs, you’ve provided an estimate of what you think the costs will be to perform the requested tasks.  The customer (whether the owner or a GC), in turn, will look to understand your final bill in relation to that estimate, adjusting for changes to the work scope or the extra expense associated with unforeseen job site conditions.  Thus, when the invoice is submitted, often a week or more after the work is completed, with the inevitable cost overrun, you find yourself in a defensive position, having to explain yourself in order to get paid your actual T&M costs.

To reduce your risk of not getting paid, let you customer know as soon as the project starts looking like it's going over budget, so you can get their approval for the extra cost BEFORE you perform the work.  This way, you don't take on the risk of trying to get paid for an amount in excess of what you and the customer agreed AFTER you finish performing the work.

Also, in order to optimize your revenue collectability, you need accurate, documented data, on a task-by-task basis, so you can demonstrate to the customer, if necessary, why your ultimate price, even if higher than initially projected, is reasonable.  Ideally, all labor and materials costs for each task performed for the customer are tracked, and any unforeseen job site conditions that increase the actual cost, relative to the estimate, are independently documented.  With this evidence, any reasonable customer should understand and accept the actual costs, as long as your team worked efficiently under the circumstances.  With detailed, well-documented invoices that relate the final cost back to the estimate originally discussed, customers generally feel obligated to pay without drawn out discussion and negotiation.  If you structure your fixed-price job contracts to specify assumed job site conditions, then tracking and documenting all exceptional job site conditions, and your related additional task costs, can help you get paid reasonable overages on fixed-price jobs, as well.

Order In Advance

Don’t send your field employees to the supplier to order materials, send them only to pick the materials you’ve already ordered.  Many managers tell us their guys spend an average of an hour at the supplier, which is crazy.  Why does this happen?  Everyone generally needs supplies at the beginning of the day.  The “morning crunch” — everyone wants to get to work with everything they need and focus only on revenue-producing work until the day is done – no midday supply runs!  However, because everyone’s workday hours are basically the same, everyone shows up at the supplier at roughly the same time.  With everyone there at the same time, waiting to order and waiting for fulfillment wastes a lot of time.  By the time your guy gets out of there, he’s clogged his arteries with doughnuts and killed an hour kibitzing with anyone and everyone in the store, just to keep from going crazy with boredom and frustration.  And, who pays for this?  You do, both directly (paying your guys) and indirectly (paying more for your supplies, because the "morning rush" requires the supplier to overstaff, increasing supplier costs).  If the order had been placed earlier — say the night before — the supplier could have the entire order boxed and ready to go the moment your guy shows up to pick it up – no waiting, because the time-consuming processes (ordering and fulfillment) were already done before your guy ever showed up at the store.  

Reduce Working Capital Required by the Business

Working capital is generally tied up in customer receivables and materials inventory.  It is typical that both could be more efficiently managed.  It often takes contractors several weeks from the time work is performed or billing milestones are achieved to send invoices to customers.  This delays the starting point for the receivables cycle and may even lengthen the receivables cycle, itself.  After all, a prompt (nearly immediate) invoice not only starts the receivables clock ticking sooner, but it also sets the tone for timing of the response to (payment for) that invoice.  Obtaining accurate invoicing information on a timely basis and immediately processing invoices will accelerate receivables, accelerating cash flow and reducing the period such receivables must be financed. 

Maintaining an inventory of materials also requires financing.  When contractors are unable to track their inventory levels accurately, they tend to stock more materials than would be required if they could accurately monitor inventory levels in real time.  After all, you don’t want to get caught without the necessary materials, given your high labor costs.  Automated inventory monitoring, however, permits more of a “just in time” inventory stocking approach, enabling contractors to reduce excessive inventory stocking levels and free up cash flow currently tied up financing this excess inventory.

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