Stop Giving Money Away
Originally published: 05.01.15 by George Hedley
Setting aside a little time to focus on increasing your net profit will boost your bottom-line and allow you to make a lot more money.
Every dollar counts and every penny wasted is precious. Losing small change on your construction projects can add up to thousands of dollars at the end of the year.
Maximizing profit must be a top priority right along with getting your projects completed on time. Setting aside a little time to focus on increasing your net profit will boost your bottom-line and allow you to make a lot more money.
When you're too busy wrking on the jobs, scheduling crews or doing work tasks, you don't take or have enough time to focus on finances, financial tools and strategies that can help you hit your goals.
Consider implementing these two proven strategies to maximize your bottom-line and grow your bank balance.
Accurate General Conditions
General conditions in construction include the onsite administration, supervision, temporary facilities, temporary protection and soft costs required to get your projects built. Estimating accurate general conditions for projects can be a simple task when the estimator is accountable to get it right.
Most estimators use unit prices, which are rarely checked against the actual final job costs. Extra costs add up to a lot of lost cash.
The estimator's number one job and accountability is to calculate an accurate estimate of what it will cost to complete each project. After every job, he or she must look at the actual job costs to see if he or she miscalculated or underestimated any of the project line items.
Before you price every job, the estimator should get with the project manager, field superintendent or foreman to determine what's required to run the project he or she is currently bidding. Take a hard look to determine if you're charging the right price for everything needed.
Charge for All Changes on Change Orders
Change orders are written documents amending the original contract agreement between parties, noting an additional or changed scope, price, time, schedule, terms or work item on a project. Most often, they require additional money for the additional work required by the change.
As contractors, if you had $10 for every extra work item your company, project manager or technicians did without a signed change order before the work was performed, you probably could have retired several years ago.
When your customer asks for extra work, you need to get it in writing and everyone should know the contract requires signatures on change orders prior to starting extra work.
When you postpone getting a formal approval for extra work until days, weeks or months after the event occurs, you have no leverage with your customer. And, when you have no leverage, your customer is in a great position to settle or offer a reduced discounted price with you, change their mind or decide the additional work wasn't really extra and should have been included in the original contract.
To avoid this, present a complete cost breakdown for every proposed change order your customer requests in advance of starting the work. Use a standardized format, cost template and rate sheet to make sure you include everything the additional work actually costs.
Every time extra work is performed, the followings costs occur:
- Project management to process the paperwork
- Supervision to supervise the work
- Accounting to process the payment
- General condition costs, as the job will take longer
- Liability insurance
- Overhead and profit
When you don't ask for everything you deserve, you shortchange your company. Many change order requests are presented as labor, materials and hard costs, plus a markup without extra required soft costs for the many items listed above.
If your company does $5,000,000 in annual sales, of which $250,000 is performed as change orders or on a cost plus basis, not charging for everything you spend can cost you as much as $25,000 per year in lost revenue or net profit on things for which you actually had to pay.
George Hedley, a construction business owner and nationally recognized professional business speaker, is the founder of HARDHAT Presentations. His book "Get Your Business to Work!" is currently available at his online bookstore at hardhatpresentations.com. Contact George at firstname.lastname@example.org or call 800-851-8553.