At the heart of a profitable construction company is an accurate bidding process. An accurate bid involves much more than your expected materials or your sub-contractor and labor costs. There are also other variables to consider related to the site, the weather, the subs (or GC), customer expectations and how you expect your competitors will bid. The more you factor in those variables across all bids, the closer you can get to a bid that is competitive but will also match true costs.
Construction companies can get very efficient at estimating the expected costs per job; however, they don’t always factor in “hidden” job-related costs in developing the bid:
- Labor-related benefits
- Fleet vehicles (owned or rented) and maintenance
- Fuel
- Small tools and other job consumables
- General liability insurance
- Safety program
If these costs are not considered, the company is at risk for missing the expected job profit, particularly in longer-lived jobs.
Reducing Job Costs and Increasing Margins
Identify the areas where your company has historically experienced cost overruns and develop incentive plans for the project management or field supervisory team to minimize those costs. If their bonuses are tied to the following key performance indicators, it can help to improve per job realization:
- Cost-effective materials sourcing
- Efficient and timely use of labor
- Waste reduction
- Safety management
- Early troubleshooting on budget or timeline concerns
- Timely work in process updates
- Quality standards (minor punch lists)
If you have never instituted a specific accountability program for these KPIs, develop standards for two or three and incorporate them into the next round of new work. If there is already some level of accountability in place, audit the results and look for additional areas for improvement.
When designing the incentive plan, it is important to keep parameters in place so that cost savings achieved do not come at higher costs in another category. For example, a labor savings incentive program may inadvertently incentivize the foreman to bypass safety protocols. An accident on the job will potentially result in long-term increased costs in worker’s compensation insurance (not to mention legal claims) that far outweigh the labor savings. Additionally, design the program so that any bonuses are not paid until the warranty period has run in order to assure cost savings do not come at the cost of quality.
Does your company schedule a realization meeting after every completed job? These meetings can identify jobs that provided a healthy margin as well as jobs that lost money. By reviewing past performance, you can get a better sense of where bidding and costs were not aligned, the drivers for cost overruns and even whether a project type is still worth pursuing. For these meetings to be effective, however, you have to have accurate cost reporting. When looking at past jobs in which a company made or lost money, it’s a good exercise to understand exactly what drove the costs. Even though every company at some point has experienced a freak of nature, an accident or a materials shortage, there are usually more cost drivers that the company and its management can actually control.
One of the other areas that a company can review — and this ties to a longer-term shift in the business strategy — is the type of job bid.
Conditions change, and the jobs that used to be lucrative for a company can slowly whittle away margins due to higher competition, compliance issues or threadbare budgets. At the company I served, it was determined that K-12 school construction projects had experienced tightened margins, shortened project timelines and increased competition. Shifting the segment focus to junior college improvement projects, a market segment with less competition, helped the company to improve profit margins.
Continue Reading: Balancing Overhead, Budgeting and Risk to Increase Project Profits
Cornwell Jackson’s Tax team can provide guidance on reigning in costs by reviewing your profit and loss statements, work in process and general accounting ledgers. Contact our team with your questions.
Scott Allen, CPA, joined Cornwell Jackson as a Tax Partner in 2016, bringing his expertise in the Construction and Oil and Gas industries and 25 years of experience in the accounting field. As the Partner in Charge of the Tax practice at Cornwell Jackson, Scott provides proactive tax planning and tax compliance to all Cornwell Jackson tax clients. Contact him at Scott.Allen@cornwelljackson.com or 972-202-8032.
