A man with a small plumbing business was excited because he had a project that would pay him $1,500.
A friend, listening to the project’s description, asked the plumber if he’d taken into account time, travel, materials, and other expenses. As he heard the explanation, the man said to the plumber that he was on the cusp of losing money on the project.
“No,” the plumber said. “I’m making $1,500.”
Welcome to the strangely all-too-often-similar world of construction project financial computation.
One of construction contractors’ biggest obstacles to financial success is that they look at projects as a construction task and not as a financial process. Construction professionals are generally very good at building. That doesn’t mean they’re expert business people.
There are some practices that are, surprisingly, sometimes overlooked in the cost-versus-revenue process of a construction project that, if rigorously employed, will grow your profit as your projects come out of the ground.
- Have an accounting team, or a financial professional, in place counseling you even during estimating or bidding the project. Let them help design the project’s financial process – including cost controls. Strong cost controls from the start of the project are crucial to its success. Otherwise you’ll wind up like the plumber who thought $1,500 was a good payday when it wasn’t.
- The contract may provide late penalties if the project isn’t completed on time; on the flip side, negotiate incentives for early completion.
- Compare the cost of paying employees mileage for use of their personal vehicles to the cost of buying and maintaining company vehicles. The savings can be significant, but it’s important to ensure complete guidelines are established to show that your company is protected from liability if the employee has an accident in a personal vehicle while not on company time.
- Poor change order management can kill a project’s profit. Change orders have multiple components: identification; planning; materials; time; labor; and schedule. Sometimes these are owner-desired; sometimes due to errors in construction documents; sometimes because it’s just a better way to do things.
- Change orders should be absolutely justified. There should be an understanding among all affected parties before the project begins about what the process will be for approving change orders, what the management system will be; who is at-risk for costs; and how any change orders will affect the schedule (if penalties or incentives are built into the contract).
These are some of the major areas in which construction contractors can make a huge difference in the amount of money that goes to third parties, or stays in their pockets.
By far, the most important recommendation is to have a financial team on your side. It’s as important to a contractor as it is to a baseball pitcher to have a defensive team behind him. They can help ensure you win, financially.