It’s difficult to keep all the balls in the air, when you’re trying to manage your business.
It’s great to have a number of projects in the field, but working multiple projects presents some real challenges:
- Managing cash flow is more difficult
- You have to supervise more employees
- With all the extra work, the quality of your service may suffer
If you manage a construction firm, you’ll need a big investment in machinery, equipment, and vehicles. Most important, you have to constantly manage the safety of your workers, and avoid damaging the customer’s property.
Understanding the industry
Get everyone on your staff on the same page.
If people understand the “why” behind each process, they’re more likely to do each task correctly, and they’ll feel empowered to improve results.
That way, when you hit busy season, everyone on your team can stay on track.
Here’s a process for finding and completing work in the construction business:
Firms in the construction industry use job costing, because each project has a unique set of costs, and no two jobs are alike.
Residential construction firms find new projects based on their marketing efforts, or through referrals from prior customers. If you work within commercial construction, however, the client will require you to submit a detailed bid proposal, and your firm will be in competition with other companies.
Preparing a bid
Your experience guides you in submitting a bid that estimates both material and labor costs for each phase of the job.
If you can find and hire reliable carpenters, plumbers and other professionals, who complete the job as close to on time as possible, you can accurately budget and provide a realistic bid for projects.
Also, a project manager is essential for each job that you’re awarded. As Smartsheet explains: “Construction project managers shoulder the responsibility of keeping the project moving according to plan. The goal is to manage the project so that it finishes on schedule and within budget, while still meeting building codes, plans, and specs.”
When you win the bid, you’ll review and sign a contract. This contract will include milestones, with most projects requiring payments on each milestone.
The partial payments allow the builder to pay for raw materials and labor costs, without using company funds. This arrangement means that the construction firm can work on multiple projects without the need to borrow money to finance construction.
Roles and responsibilities
Before you start a project, assign and communicate roles and responsibilities to each team member.
A plumber, for example, needs to know what plumbing work needs to be completed, how the materials and equipment will be organized at the job site, and the dates when work must be performed.
When you’re planning, every document should include the roles and responsibilities for every team member, so workers and clients can understand the current status of a particular job.
The procedures manual eliminates any confusion about who performs a certain task, and is a great training tool for new employees. It’s important to have written procedures for each task you perform in a business, particularly for routine tasks that are performed every week or month.
Let’s pretend this is your process for generating invoice:
- Your accountant gets contract information from a salesperson
- The accountant reviews the contract, which includes the invoice dates, amounts, and the client’s contact information (email, address)
- Your administrative assistant generates the invoice using accounting software
- You (the owner) review the invoice before it is sent to the customer
You need to document what records are required to generate the invoice, and who performs each task.
Communication, monitoring progress
Once you start the project, you need systems in place to manage your staff, monitor the purchase and usage of materials, and a process to keep the client informed.
All construction projects have change orders, which are project changes that you and the client agree to in writing.
Put these steps in place, so that you stay on track when things get really busy. A reliable system allows you to take on more business and still work productively. You can work on multiple projects with confidence.
Formalizing the bid process
When you’re putting a bid together for a project, consider these factors:
Factors that impact profit
You must consider a number of factors to decide on an appropriate bid price. A key driver of your bid price is the amount of profit you hope to generate from each project, and you should consider these factors related to profit:
- Profit margin: Profit margin is defined as (net income/sales), and this ratio explains the profit earned on each dollar of sales. This metric is a great tool to compare the profitability of different projects, and you should start your bid process with this metric.
- Industry: Your profit margins will be affected, in part, by the current state of the construction industry. Profit margins can change, based on economic conditions and other factors, so research your area.
- Competition: Most construction customers (residential and commercial) get multiple bids, and the market is very competitive. So, what do you know about your competition? Construction firms often purchase materials from the same vendors, or even hire the same carpenters and plumbers for projects. If you gather information about your competitor’s costs, you can use that information to submit a profitable bid.
- Perceptions of value: Perhaps the biggest profit factor is your customer’s perception of the value of your product or service. If clients strongly believe that your product solves a problem, they may be willing to pay more. If your construction business has a history of producing quality work, for example, you may be asked to bid on larger, more complex projects.
Successful construction firms turn down projects that don’t generate a reasonable profit, so use these factors to assess each job carefully.
Perform cost analysis
Can you generate a higher profit margin by reducing costs, without cutting corners and increasing a project’s bid price?
Insurance premiums and utility costs are just two of the many examples of overhead costs that are difficult to assign to any project.
These costs are allocating to a project, based on an activity level, such as labor hours or machine hours. Assume, for example, that you allocate repair and maintenance on equipment, based on the number of machine hours worked on all projects for the year.
You budget for $10,000 in repair and maintenance on equipment for the year, and that you expect to use your equipment for 5,000 total hours. You decide to allocate $2 per machine hour ($10,000 / 5,000 hours) to each project. If a project requires 100 hours of machine time, you allocate $200 for repair and maintenance on equipment.
Next, consider direct costs, which include the amount of lumber used for a building addition, or the amount of labor cost needed to complete the carpentry portion of a project.
You may be able to reduce your costs by negotiating a lower price with a vendor, or by training your employees to eliminate waste in the construction process.
You only have one shot to submit a bid, and you need to make it count. Your profit and cost analysis can help you make a bid that’s competitive, and still generate a decent level of profit.
It’s also important to document your process for analyzing profits and managing costs. This information is part of the “secret sauce” that drives your firm’s success. Make sure to add the information to your procedures manual.
However, managing your construction business involves far more than simply bidding on projects.
Implement a safety program
Nothing is more important than worker safety, and you need a comprehensive plan to address safety on each job site.
Someone in your firm should be assigned the responsibility for safety, and larger firms have a full-time safety officer. Your procedures manual should include a section on safety, and each project should have a specific safety plan that must be reviewed by everyone working on the project.
Your safety plan should include:
- Equipment: Your plan must include requirements for hard hats, gloves, boots and other protective equipment.
- Job site access: Everyone who enters and exits the job site, including subcontractors and vendors delivering materials, must understand how to move around the site. You should have clearly marked signage and have workers at each entrance and exit.
- Work schedules: You may require dozens, or even hundreds, of workers over the course of the project. To maintain safety, you need to minimize the number of people on the job site, and control the flow of vehicles. The project manager must know everyone who will be on the job site each day.
Document all of these procedures and keep them updated, so everyone on your team will follow your guidelines.
Workers compensation insurance is a big expense for every construction firm, and your safety plan can help you minimize these costs. Focusing on safety will minimize worker injuries, and you’ll pay less in insurance premiums over time.
Minimize the risk of employee theft
Obviously, you can manage growth by hiring more people. Before you hand off work to a staff member, however, you need to have some controls in place to protect company assets, including your cash balance. If not, your business will have a higher risk of employee theft.
You increase your risk of employee theft when you company is busy and your controls break down
Segregation of duties
One way to reduce your risk of theft is to segregate duties between different employees. Let’s think about your company’s cash account as an example. Whenever possible, these three specific duties should be kept separate:
- Custody of assets: The person who has physical custody of the checkbook should not have any other duties related to cash processing. Another good example of custody is the keys to a company warehouse where equipment is stored. Let’s assume that the administrative assistant has the checkbook in his desk.
- Authority: Who has authority to sign a check? Your project manager can have the authority to sign checks for materials that arrive at the job site, but that same employee can’t have access to the checkbook. The project manager can only sign a check written out by someone else.
- Recordkeeping: This duty refers to posting accounting entries and reconciling the bank account, and an accountant should never be allowed to sign company checks. Accountants record cash-related activity, but cannot be responsible for moving cash in or out of a business.
As you add managers who supervise staff, you’ll need to communicate your segregation to duties process to them. Your managers represent another set of eyes to watch for employee theft. Keep your procedures manual updated, and share the manual with your managers.
If you segregate duties, you’ll sharply reduce the risk of theft. If theft does occur, these controls help you uncover the theft quickly and take steps to recover stolen assets.
Action steps to take
Meet with your entire staff, and document each routine task that they perform in your business.
Safety is an issue that must be constantly monitored. Review and make changes to your safety plans, in order to protect your workers from injury.
Within 30 days
Formalize your process for bidding on projects using the discussion above.
Within 90 days
Review of your entire operation, including the bidding process, and each worker’s role in your business. Make any necessary changes to work more efficiently.
Every business should have a formal budgeting process that takes place in the fourth quarter of each year. Review all of your procedures during the budgeting process, and update your plans as needed.
Get feedback from everyone in your organization and find out what’s working, and the tasks that cause problems. Review projects that were finished on time and under budget, and identify best practices that you can use going forward.
Sure, this process requires a big time investment, but you’ll see a financial payoff. Making these changes will help you identify all of your costs, and submit bids that generate a profit. You can start each project with confidence, knowing that every worker understands his or her role.
Construction projects involve risk, and your new systems will protect workers from injury and minimize employee theft.
Best of all, you can take market share away from competitors who don’t implement similar plans. Well-managed construction firms gain business over time, because they do quality work and finish on schedule. As your reputation grows, you’ll be asked to bid on more work and larger projects.