Question For George From A Subscriber
I have seen George speak at several events and have been reading many of his articles in Construction Business Owner magazine, and obviously done a little research on his Profit Builder Circle, so I am somewhat familiar with his ideas and concepts.
I am a second generation owner of a 50 year old site-work and utility contractor in the Atlanta area. We have been extremely successful over the years, but the housing collapse over the past two years has completely eliminated our private construction market. We have been forced to transition to the municipal sector. The pressure on that market has also pushed most of those jobs to go for less than cost. Because of these dynamics, we have seen many of our competitors dissolve or go bankrupt. Unfortunately, we are experiencing a very tough time as well. We have not had a break-even month in over a year, and have had to sell off many assets just to survive. I think the only reason we have lasted longer than others is we had built up enough retained earnings over time.
All of this background to say this, I am very interested in advice and strategy that will help me effectively navigate what is left of my business through these times. Our current balance sheets and financials don't give an accurate picture of where we have been in the past. Our business is a lot different from most others as we are so asset (equipment) heavy. I have seriously thought about stopping operations and waiting until things change, but what does that mean? In Atlanta, there is a projected 10 year supply of subdivision lots, which means a long road back to normal. I value your suggestions.
Thanks, James King, King Excavators
George's Answer To James
I don't have a crystal ball, but I do concur that a recovery to 2007 levels may take five or ten years. The current statistics show all construction starts have dropped 43% since early 2008 to mid 2009. I believe 2010 and 2011 will get much worse. The problem is that the number of competitors currently chasing 43% less jobs has wiped out the potential to make any profit in most markets. In the meantime, most contractors have failed to make enough changes to right their ship and do what's necessary to stop the bleeding and eventually make a profit. Cutting your expenses is not enough. It won't give you a net profit.
If the number of jobs available is 50% less, the number of competitors double, and your mark-up gets cut by at least 25%. This means to break-even, you would have to cut your overhead by 75%, your markup by 25%, and hope to land 50% of your 2007 volume. These numbers won't work in a world where your competition will do anything to keep busy and pretend they're still in business.
So now what? Try to break-even and not lose money for several years, change how you do business, close, or take your money and invest it into growth opportunities. Tough decisions. The economy and the stimulus plan may help a little, but not enough to keep going and keep trying until you are completely out of money. Can you shrink your operations into one crew to keep your doors open? Can you seek joint ventures and strategic alliances with large national engineering companies who may need your experience as they take on more stimulus work, clean water jobs, energy and green projects? Can you merge with another contractor who doesn't do what your company does (roads or waste water treatment) so you can cut your overhead in half? Or can you sell most of your equipment at a discount, continue in business by leasing equipment on an as-needed basis, and then take the money and invest it in distressed real estate properties or other businesses? Now is the time to make the tough decisions. The longer you wait, the less you will have to work with in the future.
Call me if you want to have me coach or mentor some ideas with you or your management team.
Earn More, Work Less, Live Life! - Series #4
The 5% Factor!
- Produce More To Make More!
By George Hedley
In the good old days, construction companies were owned and run by builders. These proud, tough, hard working men and women learned their trade in the field, had years of practical experience, and knew what it took to get their projects finished on-time. If they didn't produce quality workmanship, they didn't last long. Back then it was all about getting the work done no matter what it took to meet their obligations. It was about delivering solid structures with unsurpassed craftsmanship. The contracts were negotiated face to face and enacted with handshakes, based on integrity, reputation, trust, one's word, and doing what's right. It was all about building a project the contractor could remember, be proud of, and then rely on their customers for recommendations and new work.
Fast forward to today. Now successful construction companies are run by professional managers, engineers, and accountants. These business leaders are focused on the bottom-line and following what is only required by the contract. These managers have college degrees and little or no construction field experience. It's now about paperwork, documentation, notices, claims, and tracking systems. Building the project isn't as important as getting the work, doing the paperwork, and getting paid, even if it involves litigation.
Combine this lack of real field construction experience at the top of many companies today with the lower and lower profit margins. Years ago there was not enough qualified construction companies to handle all the work available in the marketplace. Under this business climate, contractors could afford to always do a little extra to insure a perfect project and still make a good profit.
More demands = less profits!
But over the last 40 years, the number of contractors has tripled while the total amount of construction has stayed relatively flat (adjusted for inflation). Therefore now there are more contractors than needed to do all the work required by the market. This has created a price squeeze and reduced contractor's ability to do more than the minimum required by their contract. In addition, with increasing competition, construction customers are now demanding more than ever before. They now demand faster schedules, safer projects, better quality, more communications, and better technology, all at much lower prices.
These added customer demands on contractors who are willing to sign contracts for less than they should, have killed the construction business as it once was. Add to these demands poor architectural plans, problematic engineering, incomplete specifications, conflicting contract documents, material shortages, price fluctuations, more regulations, added paperwork, lender's requirements, third party inspections, construction managers, and red tape, has all but eliminated a fair profit for the risk contractors take.
It's time to refocus on the field!
These issues have put pressure on contractors to save more and more money in the field. The average crew size has increased, while the number of experienced field workers on the crews has decreased. Training is a thing of the past as most employers have eliminated it as an unnecessary expense. Superintendents and foreman are younger than ever which also translates into less experienced field leadership and less efficient crews. This has resulted in poor or flat field productivity improvements over the last twenty years. Consider your challenges fighting against competitors who charge less than they should, have inexperienced and untrained field crews, and building projects that now require more paperwork and increased risk. A need now emerges for contractors to refocus on improving field productivity as their only viable solution to compete and improve their profit margins.
Construction profitability is about reducing risk. Contracts require contractors to assume more risk than ever today. Have you considered what's at stake?
Types of Construction Business Risk:
| Project Location & Access |
Project Type & Size |
| Project Schedule & Duration |
Constructability |
| Customer |
Architect, Engineer & Consultants |
| Contract Terms |
Financial, Funding & Payment |
| Regulations & Inspections |
Subcontractors & Suppliers |
| Material Costs & Availability |
Plans & Specifications |
| Approvals & Acceptance |
Project Management |
| Supervision & Coordination |
Manpower, Productivity &Safety |
| Quality & Workmanship |
Estimate & Budget |
| Factors Beyond Control |
|
So how do you reduce risk and increase your bottom-line? Your choices are many. But consider which will give you the biggest return on your time, energy, and money. In other words, where can your company gain the biggest advantage over your competitors?
__ Lower Material Costs
__ Better Subcontractor Costs
__ Better Equipment
__ Better Supervision
__ Better Project Management
__ Labor Productivity
Construction risk is a 5 letter word!
The biggest risk and opportunity to make or lose money is ...LABOR! Let's look at a typical job breakdown to see what happens if labor runs over budget by 5%.
Typical Construction Contract Budget
| Labor |
$40,000 |
| Materials |
$40,000 |
| Equipment |
$10,000 |
| Subcontractors |
$10,000 |
| Subtotal |
$100,000 |
| Overhead @10% |
$ 10,000 |
| Profit @ 5% |
$ 5,000 |
Contract Amount $115,000
The 5% Factor = 100% More Net Profit!
Most construction companies only make an average annual net profit between 2% to 3%. If you can IMPROVE your LABOR costs by only 5%, you can IMPROVE your net profit amount to 4% to 5%. This can be as much as a 100% increase in your bottom-line!
If you can improve your labor by 5% in the example above, your net profit will increase to $7,000, or from 5% to 7% net profit. And if you improve your labor by 10%, your net profit will increase to $9,000, or from 5% to 9% net profit. This is real money and will put you far ahead of your competition and give you some breathing room to invest back into your company.
But, if you overrun labor by a small 5% amount, you'll spend $2,000 more than your labor budget and reduce your profit margin to only $3,000, or to 3% net profit. If you overrun you labor by 10%, your net profit will be reduced to only $1,000, and 1% net profit.
Is your crew working efficiently?
Consider how productive your crew is everyday out in the field. Studies of typical construction field crews show revealing facts and much room for improvement. Field employees spend some of their time planning the work. Then they produce the work. Some of the time they support the work doing layout, seeking information, fixing equipment, looking for tools, repairing tools, locating the right material, and asking questions. And of course some of the time is wasted goofing off, standing around, starting late, quitting early, extending their breaks, smoking, making personal cell phone calls, waiting deliveries, running out of materials, or taking care of their dogs loose on the jobsite.
Typical Construction Field Productivity
2% Planning work 0.2 hours / day
40% Producing work 3.2 hours / day
25% Supporting work 2.0 hours / day
33% Wasting time 2.6 hours / day
Do these results shock you? Go out to any jobsite and look around for a few hours or days. Just sit and watch what really goes on. You will be under-impressed and appalled. So where do you start to improve productivity? It starts with identifying the areas that take away form your crew's efficiency. Look for things that slow down production, create down time, or allow them to be less than productive. Some things that hurt your field productivity include:
- When the superintendent or foreman leaves the jobsite
- 5 trips to hardware store per day
- Run out of materials or small supplies
- Tools break or don't work properly
- Wrong equipment for the job
- Waiting for the right equipment to show up
- Smoking while working
- Cell phone calls
- Dogs running wild
- Not starting on time
- Quitting early
- Breaks and lunch time extended
- Bad attitude employees
Win the race!
NASCAR is a good model to follow. At each pit stop, there is no time to waste, as every second counts and can cost the team millions of dollars if they loose any time. How can you get your crew to win the race and become:
- Super efficient
- Super fast
- Super productive
- Super organized
Focus on the 5% factor!
The dilemma for most contractors is a downward spiral and never ending treadmill. When you try to do it all yourself, you aren't focused on field productivity. You get too busy taking care of small tasks that need to be done but don't make you money. When you're too busy to meet with your supervisors regularly to help them plan properly, problems continually happen. You only have enough time to react and fight fires. This causes your crews to stand around and wait for you to get them answers or needed materials.
You know you are losing money and your crews are inefficient as they waste more time than they should. But you don't have enough time to stay out on the jobsite all day to tell them what to do and keep them working faster. So you rely on the untrained foreman to get the work done. These supervisors have no incentive to work at a high productivity rate, so they do what they feel is fast enough based on their experiences over the years. Besides, what's the worse that could happen to them? You come out a few times a year and tell them they're over budget and try to get everyone working a little faster. Not much of a productivity improvement program.
5% Faster jobs = More profit!
How can you make your jobs finish only five or ten percent faster? Many of these critical scheduling factors can cause major delays:
___ Permits
___ Procurement
___ Submittals
___ Approvals
___ Material selections
___ Long lead items
___ Probable delays
___ Potential problems
___ Anticipated conflicts
___ Critical decisions
___ Phasing issues
Time is easy money!
Those major factors can cause your projects to take longer. But we are looking for the little things that really cost you money. When you don't focus on faster, it doesn't happen and you let your crews go with the flow. When you focus on speed, you get the whole team moving faster and becoming more efficient. When you start every project, get the easy money flowing by getting your supervisor and crew together. Explain the projected and budgeted schedule. And then ask them to brainstorm ideas how they can improve the schedule by a minimum 5% to 10%. Explain to them how 5% faster will translate into dollars and will keep your company competitive in the tougher marketplace. For example:
Squish the Schedule 5% or more!
Total projected project schedule = 100 crew days
Total crew budget @ $3,000 / day = $300,000
Beat the schedule by 5% = Save 5 crew days
Total crew savings = $ 15,000
Beat the schedule by 10% = Save 10 crew days
Total crew savings = $ 30,000
In addition to saving on your crew labor budget, the overall project will finish faster as well. You will save even more money concurrently on general conditions, equipment, clean-up, temporary facilities, and supervision costs. This money adds up fast!
Miracles can happen!
Years ago in July, I was on a jobsite meeting with my superintendent and concrete foreman. I asked them when they were going to erect and tilt-up the exterior concrete wall panels on a large warehouse project. They both told me they were planning on tilting-up on November 15th. That seemed too long a schedule to me for our 20 man crew to get the work done. So I asked them how they arrived at that date. They told me they met with the crane company and thought that date was 'doable' and they could easily make it happen.
I didn't like their answer so I asked if they could finish a few weeks faster. They both squirmed and didn't want to answer or commit. Then I asked if they could finish by October 25th if I offered them each a $1,000 incentive. In less than ten seconds, they both said they could make the faster October 25th date; A miraculous change of mind by two veterans. And they made the new date. It cost me $2,000 and saved me 15 days for 20 men. You do the math.
Sometimes we have to get creative to get the results we want. When we go with the flow, we don't push our people, and it costs us real money. When you compete, you run a little faster. When I used to swim in high school, I always went faster in the meets than in practice. Competition makes people go faster. Challenges make people work harder. So do games where you keep score and can declare a winner. I like to say: 'No score, no game!' What incentives can you offer to get your crew excited about beating the schedule?
Annual Savings @ 5% Faster
| 20 Crew Members @ 200 days @ $35.00 /hr |
= $1,120,000 total labor |
| Labor savings with 5% faster schedule |
= $ 56,000 saved |
| Equipment costs saved -4 pieces@ $50.00/ hr |
= $ 16,000 saved |
| General conditions costs saved 4 jobs @ $1,000/day |
= $40,000 saved |
Total Annual Savings = More Profit = $ 112,000 saved
Trash your old tools!
Another consideration is the working condition of your tools and equipment, and their overall effect on your crew efficiency. When is the last time you did a tool inventory or a detailed equipment analysis? Some you should keep, trash, replace, or upgrade. Field workers tend to use old, broken, or bandaged tools and equipment rather than admit to the boss that they might be broken or worn out. How much money are old unproductive tools or broken down equipment costing you?
The added benefits of having quality tools and great equipment will be increased crew teamwork, improved morale, more pride of workmanship, better quality, less mistakes, safer projects, and more efficiency. This will translate into even faster jobs and more bottom-line profits for your company.
Poor Production = Poor Profits!
Do you think your crew wastes at least 3 to 6 minutes per hour? Those few minutes are costing you a ton of money.
| 20 Person Crew |
5% Time Lost |
10% Time Lost |
| Time Lost / person |
= 3 minutes/ hr |
6 minutes/hr |
| Time lost / day / crew |
= 8 hrs / day |
16 hrs / day |
| Total hours lost |
= 1,600 hrs/ year |
3,200 hrs / year |
| Crew labor rate |
@ $35.00 / hour |
@ $35.00 / hour |
|
Annual Production Labor LOST |
$56,000/year |
$112,000/year |
There are many ways to improve crew efficiency and finish your jobs faster. Start by taking a hard look at your start time, break time, lunch time, and quitting time. Does stop working at 3:30 pm mean start rolling up at 3:00 pm or 3:10 pm or 3:30 pm? For a 20 person crew, every minute you lose per day costs you as much as $2,500 per year or more.
Double your Profits!
Call an all crew team meeting and discuss ways to improve your schedule, save a few minutes every hour, define your exact hours for production expected, create meaningful incentives, improve your tools and equipment, increase efficiency, and strive to implement the 5% factor to get more everyday from everyone.
