Profit
Enhancement Strategies for Contractors, Fall 1999
Construction
contractors work in a challenging industry in which to generate profits.
Obtaining work through both negotiated contracts and competitive bids,
many contractors end the year with profits that are only a small percentage
of gross revenue. Apart from generating additional revenue, contractors
need to find other means to increase net earnings. The following are
some profit enhancing strategies for contractors:
- Understand your market.
Find your niche. Know what type of work is most profitable for the
company. Concentrate your efforts in this area to make this division
of your business grow.
- Know who your best
customers are. Your best customers are most likely the most
profitable. Contact your good customers, solidify these relationships
and provide top service. This will make you stand out from your
competition when a company attempts to undercut your price.
- Track the profitability
of your estimating department. Track the success rate of your
estimators. Make sure you have systems in place to compare estimators'
bids to actual results, money left on the table, type of job and
size of project. Proper estimating can increase your profits before
you even walk on the job or break ground.
- Negotiate the cashflow
of the project. When can you bill and for what percentage? What
is your retention percentage and when is it released? Increasing
the cashflow of a contract can reduce your interest expense or increase
investment income.
- Plan the job properly.
Have prejob planning meetings to involve the field and get their
input on innovative cost and time saving ideas. Communicate the
profit goals of the job and hold the field accountable for meeting
these expectations.
- Have good reporting
of job status. Make sure the field gets accurate to date cost
vs. budget reports on a regular basis as the job progresses. Hold
job progress meetings to increase profitability. Statistics indicate
that most job profitability is lost when the job is 40% and 90%
complete. Make sure you have meetings at these stages of the job
to discuss problems and provide solutions.
- Have proper documentation
on the job. Make sure you obtain signed change orders before
you do additional work. Have a system for billing these change orders
timely. Maintain daily job reports in case there is a dispute or
a claim; most claims are lost due to inadequate documentation.
- Have meetings after
completion of the job. Discuss the strengths and weaknesses
of the job and identify areas that were controllable and uncontrollable.
Look at final job cost reports to compare budget vs. actual. Use
this meeting to determine opportunities for improved efficiency
to carry forward to the next jobs.
In the competitive construction
industry where net earnings percentages are small, it is necessary
to have a well managed company that focuses on profitability. Taking
the above steps will provide better communication between departments
and result in a company wide focus toward increased profitability.
This will ultimately result in larger net earnings at the end of the
year.
Stein
Larsen, CPA
Principal
