Construction Business Owner, January 2008
In today’s tough economic climate, it can be a real challenge to survive until things improve. In good times, work is plentiful, and even marginal or poorly managed firms can be successful. Tough times present an opportunity for you to review your operations, make an effort to understand what works and doesn’t work for you and intitiate constructive change that will make you a better managed operation. This will not only help you get through today’s tough times, but it will also better prepare you to thrive and grow once things get back to “normal.” In a nutshell, you need to revisit some basics and be open to change.
Focus on Accuracy
Time to sharpen your estimating pencil! “Tough times” usually mean increased competition and tighter margins. You need to review your estimating methods and cost information to make sure it is as accurate as possible. Depending on the type of contractor you are, material, labor or equipment costs are going to be the primary elements of cost you can control. Make sure you have current information with which to work. This would include the bare cost, delivery or set-up costs, production factors (labor efficiency, equipment usage and material shinkage), as well as any relevant mark-ups—especially for labor. In addition, make sure you are up-to-date with any changes in the economic climate. Many states and localities are modifying the taxability of items or the rate at which items are taxed, and many are doing it during mid-year. Make sure you are aware of what is going on and either factor it into your calculations or insist on contract language that protects you in case of things like unexpected tax increases.
Know Your Margins and When to Walk
After you have ensured that the base information you are working with is correct, look at the margins you are using to get to your final bid amount. What may have worked before may not work today—nor may it be necessary. If your direct costs are accurate and you have provided for the indirects that are directly tied to the direct component of the work, you then need to focus on the amounts that you are adding to cover overhead and any profit expectation you have for the job. At a minimum, try and cover as much of your overhead as you possibly can. It does not make sense to take work that only covers the direct components and contributes nothing toward covering your other costs. If you are a one-man operation, the situation is obviously different, but if you have non-productive overhead to account for, make sure you cover as much of it as possible. If you can also make a small profit, do so. Many contractors find it difficult to do this during a slow time and consider anything in excess of recognized cost a blessing. If you can’t cover your costs, don’t be afraid to walk!!
Take What Is Yours—Only
Cash is the lifeblood of any construction organization, and managing it is more of an art than a science. The way we bill for our work is one of the primary reasons cash is difficult to manage in the contracting environment.
Most contractors practice “front-loading” during the billing process. This is the practice of weighting work progress more heavily in the early stages of the job. The natural tendency is to consider all the money you bill as earned. If you have sufficient construction volume, you can survive not managing the amount of over-billing for an indefinite period. That is not the case when money is tight. If possible, segregate the excess cash collected so it will be there when the time comes to pay the “rightful owners.”
Profits in Action: The IRS requires calculation of the over or under billing for contractors that meet certain criteria. If you are not at the volume level where percentage completion revenue recognition is required, you should still follow this practice. If your volume has been decreasing, you may be entitled to switch income recognition to the completed contract method. Check with your CPA to see if there may be some advantages if you qualify.
Bill Early, Bill Often and Collect Your Money
This is another no brainer, but we often do not bill as aggressively as we can. Review each of your jobs to ensure that you are billing the maximum you can, as early as you can. Something often overlooked is the right to bill for stored materials or pre-purchased engineered items before they are installed—many times without the requirement to withhold retention. Then, stay on top of your collections. If your billing is subject to review for completion percentages, make sure you have as much agreement on them before the billing is submitted. A classic delay tactic is for the owner to dispute an item but not until you call them to see where your money is. Try to anticipate this behavior if a client has a tendency to act in this manner. The more excuses you take away, the quicker you will see the $$$.
Profits in Action: If your billing involves agreement between multiple parties (subcontractors, the GC and the owner’s rep), consider setting up a time to walk the job, and make sure all parties are in agreement as to what will be billed.
Accelerate Change Orders
This is an ideal time to review your in-house procedures for recognizing and getting paid for change orders on the job. It begins with making sure that everyone involved with the job understands the scope of the work for the job. More money is lost in construction companies because of work on unrecognized changes than any other preventable cause. Make sure your eyes and ears in the field understand what is and is not included in the contract, then make sure you have the proper mechanisms in place to get approval for the work before it begins. Once you have started the change order process, pursue it doggedly. Make sure someone is responsible for knowing the status of each of your change orders and ensuring that the ball is always in someone else’s court.
Profits in Action: Try including unapproved change orders in your monthly billing. Depending on the client, you might just see early payment!
Focus on Customer Satisfaction
We should never take our previous customers for granted, yet many of us do. The time you have spent developing a relationship with those customers is invaluable and something your competition does not have. How often do you check in with your previous clients to see if they might have something in the works? Odds are they will share with you if asked, and you don’t wait for them to call you! In addition to keeping in touch, you should make customer satisfaction a goal of everyone in the organization. Wherever possible, under commit and over deliver.
Profits in Action: A subtle psychological technique is to focus on each customer as if they were the only customer you had—or ever would have. It’s amazing how dramatically you can see attitudes change within your organization.
Seek Out New Opportunities
Review your current market. Has it changed while you have not? Remember the buggy makers back in Henry Ford’s day? Most had lucrative, long-established businesses, but the introduction of the automobile changed all that. The change in your market is certainly going to be more subtle, but you owe it to yourself to spend some time contemplating where you got business five years ago, where you get it today and where you will need to get it five years from now. Now is the time to begin retooling for any shift you need to make—you will need the extra time to cultivate any new markets or skill sets you need to develop. It will be much easier to monitor and control this now when your decreased volume allows you the “luxury” of time to think.
Overhaul Your Overhead and Control It
Look for ways to cut fat from your operating costs. One of the key areas where costs have changed dramatically in the past few years is communications. Cell phones, landlines, websites—as competition for your business has increased, the array of services has expanded considerably, and the cost of most has come down. You should analyze what you really need to get by for now, and cut costs wherever you can. Look at replacing or eliminating high cost vehicle leases, and either move to lower cost vehicles or have your employees furnish their own transportation. One of the easiest ways to understand your overhead structure is to develop a monthly/annual overhead budget and monitor it. This is another smart business practice that most of us neglected during the good times. You may not catch everything the first time, but as you begin to categorize and analyze your overhead, “unbudgeted” items will begin to pop out at you. Accuracy will improve with time. Getting started is the important first step.
Involve Your Employees
The key to any successful business is the people who make it go. We all understand that. As work slows down and there is less to go around, you need to think creatively to manage the human side of your business. If it is possible, look at doing some job sharing—a part-time paycheck is more attractive to most than standing in the unemployment line. Wherever possible, look at replacing fixed salaries with incentive-based components. The better the company does, the better your employees fare.
If reductions in your workforce are required, make every effort to explain the circumstances to all employees. If you are not required to reduce your workforce based on last in/first out, take the opportunity to assess the skill sets of your employees, and keep the most productive ones—not simply the ones that have been with you the longest. Getting more out of less will be critical to your survival, and you want to make every effort to keep the most productive people you can.
Morale is a problem that only you can deal with. It is important to affirm the value of your employees, keep them informed of the company’s status and try to ensure that everyone is treated fairly. At some point, you will need to woo these people back. Make sure they will want to come back to work for you.
Involve Your Vendors
Tough times are a good time to “test” the value of your vendor relationships. You have probably been dealing with most of the people you do business with. They have a vested interest in your survival. Be open with your vendors about needing their help to be more competitive in bidding work. You may also be able to secure either better payment terms, better cash discounts for prompt payment or a longer due date on payments without penalty. Regardless, keep your vendor in the loop. Tough times can help temper your vendor relationships, and you will be in a position to make some decisions about who to do business with long term. Business is business, but your vendors will always need you to survive—they should be as interested in your long-term success as you are.
Invest in Technology
As you look to implement change in your organization, whether it be improving your estimating accuracy or better controlling your overhead, look to the tools you are employing to accomplish your goals. Now is a good time to review the business software applications you are using to make sure they are industry specific and capable of helping you perform more accurately and efficiently. The same goes with other technology areas. Set up a checklist to review the tools you use in the field, the communication tools you employ and your methods for managing your business. Technology for actually doing the work continues to evolve. As an example, laser layout tools and GPS devices are helping contractors do things better and save money. One of the current “hot” areas for contractors is customer relationship management (CRM) software—it helps you organize your prospect and customer activities to ensure that you are “touching” this area on a regular basis. Regardless of the technology you choose to explore, make sure you understand the true return on investment and value proposition involved. You need to approach these expenses as the investments they actually are.
Be Open—Get Creative and Communicate
You do not hold sole license to creative problem solving. Too often, the owner of a company keeps problems and issues to themselves. As long as you do not have legal or moral restrictions on what you can share, be as open about your company as possible. You will be surprised at some of the good suggestions you will receive for cutting costs, improving productivity, finding new work and most of the other “little” things that can make the difference between surviving and going out of business. The people you interact with everyday—vendors, creditors, employees—can come up with ideas that can add up to some major impacts to your bottom line, and your ability to survive tough economic times. Remember, your business health impacts the lives of a lot of other people who have just as much of an interest in seeing you “make it” as you do. Capitalize on this.
Executing the basics well is the key to success in any business. The things you put in place now will help you get through the current situation but more importantly, will give you a strong foundation to grow your company on as times get better. Good luck!
Vic Marshall is president of Leveraged Resources LLC, a solution provider to the construction community offering expertise in technology and information services, as well as a suite of professional services.