Get in Control
By By John Emerson as featured in Construction Today
Having a good grip on your business practices will help you steer the company in the right direction.
The vast majority of construction company owners believe they are not in control of their destiny. They argue that outside forces, recessions, strikes, materials shortages, natural disasters and the like can cause them to fail and there’s nothing they can do about it. One of the most difficult accomplishments for business advisors is to convince owners that they do in fact have a great deal of control and can achieve the results they want, regardless of external circumstances. Getting that control is not terribly difficult, but it does take a lot of discipline and a willingness to leave one’s comfort zone.
Goals, Profits and Variables
When a company appears to be out of the owner’s control, it’s often because he or she is caught up in putting out daily fires. Therefore, the first item that owners need is a clear, long-term goal on which to focus, a clear realization of what they want to achieve in the long run. That way, they can target not only their own efforts, but the efforts of their employees, to reach the goal. Ultimately, the goal is always the owner’s exit strategy because determining how he or she is going to exit will help determine how the business should be managed. When does the owner plan to retire and how? What type of succession plan is in place? Are children going to take over the business, will it be passed on to a senior management team, or will it be sold? Every owner, regardless of age, has to answer these questions and plan accordingly.
Further, every company has to be managed to a minimum mandatory net profit percentage. Net profit is not simply what is left over at the end of the month. The net profit percentage varies from company to company and has to be determined by the owners depending on what kind of return they want on their investment of time, effort and personal investment in the company. Then, monitoring and managing four key variables will keep operations aligned to render the mandatory net profit and reach the ultimate goal.
The key variables are:
- Labor cost, which includes direct labor cost, as well as administrative labor, management labor. Unfortunately, direct labor costs are frequently not in sync with the estimates on which bids are based. One of several common root causes is poor supervision, perhaps by a relative or long-time employee who lacks supervisory education or capability. Another common reason why labor costs exceed estimates is poor time management. Supervisors don’t schedule jobs properly, don’t order materials on time or forget to rent needed equipment, so workers are waiting rather than working. Theft of time can also be behind high labor costs when employees arrive late, leave early, take frequent breaks, extend their lunch hours, use cell phones for personal business, or engage in long smoke breaks.
- Accurate job costing for each and every job – not just the big or special jobs. Evaluating the cost of each job against the bid will shed light on the quality of the estimate and estimator. In most companies, the bidding and estimating process is never measured against actual costs on the job, so there are no performance metrics for the estimator, or the employees who actually perform the work.
- Materials and inventories. When owners think about money, they usually think of accounts receivable, cash and payroll. They rarely consider their inventories and worry about their materials once they are purchased. When owners take the time to monitor the key variable of material cost, they discover that they don’t match the estimates. Digging deeper, they find one or more of several root causes. One is waste of materials because employees are not utilizing them properly on the job. Another is plain theft, by employees or external parties who have access to job sites. A third is poor estimating. For example, the company purchased eight widgets based on the estimator’s miscalculation, and then has to order two more at a higher price.
- The owner’s time – the most often overlooked key variable. In almost every company, owners manage their time poorly. They allow it to be consumed by a variety of unnecessary tasks, such as answering phone calls from family members or making routine management decisions on behalf of an employee who passed the buck to avoid responsibility. Owners who spend their time unwisely on such matters have little or no time left to work on the business – which should be a top priority.
Simply monitoring the four variables is not enough. They need to be managed, which means implementing working solutions to keep the variables under control. While it’s tempting to blame external circumstances for shrinking business, the only way to control one’s destiny and the future of the company is proactively manage the key variables. Staying ahead of internal and external conditions is a three-step process: Monitor the key variables, measure them (e.g., actual versus estimated labor costs or materials costs), and use the information that is gathered to plan and implement corrective measures.
The biggest mistake owners make is not to adjust their operations to changing variables. They’re like drivers who suddenly come into a rainstorm, but plow ahead rather than adjusting their speed to match road conditions. So, when company revenues drop from $5 million to $3 million, they retain the same number of office staff rather than adjusting the overhead.
Watchword: Accountability
Monitoring the key variables and implementing solutions to adapt to changing conditions is the responsibility of the owner and key management personnel (e.g., superintendent, job site foreman, project manager, estimator and the like). Accountability up and down the chain of command is one of the main reasons why one or more key variables are out of balance or headed in the wrong direction.
To drive accountability:
- Develop a long-term business plan with specific actions, objectives and milestones to achieve the goal.
- Create job descriptions for everyone. Every employee needs a written job description, including the owner. Owners who haven’t developed a job description for themselves can’t hold themselves accountable and therefore don’t hold their management team accountable for what they expect them to accomplish. They allow them to supply excuses instead of solutions. Without written job descriptions, managers are unsure of what is required of them. As a result, they run projects without actually managing them. Lacking the focus of clear objectives, they cannot keep their teams focused on the targets to be met.
- Identify specific goals and objectives every individual is expected to achieve on an annual basis. Then, put them in writing. This could be a dollar figure, a profit target or a specific number of projects to complete in a given timeframe.
- Establish processes to evaluate the performance of each individual.
- Hold regular management team meetings (including the owner) to create alignment and discuss the status of the key variables – daily, weekly or monthly as necessary. The meetings also serve as a vehicle for managers to communicate problems before they escalate. Without a forum to air bad news, managers tend to hide problems, hoping they will go away. Suddenly, the owner is blindsided by a project that is a week behind schedule because no one had the courage to come forward sooner.
Business Acumen
Owners who hold themselves and others accountable to plans, goals and job descriptions can keep their eyes on the big picture and manage their time effectively. They can work on the business rather than in the business. However, some owners prefer to remain within their comfort zone of technical proficiency, focusing on the nuts and bolts of the company’s product rather than strategic management. They just lack business acumen.
How much time someone wants to invest in education to learn new skills is a matter of individual choice, but owners who are willing to seek and implement sound advice will see their business improve beyond their expectations.