The economic recession has taken a serious toll on my construction business. I feel as though I’ve completely lost control. The future of my company looks grim and I’m contemplating closing my doors for good. I’m just not sure how I can pull myself out of this mess. Do you have any advice for companies on the brink of collapse?
Getting control of your business is not terribly difficult, but it does take a lot of discipline and a willingness to leave your comfort zone. You probably feel as though you are losing control because you are caught up in putting out daily fires. Therefore, the first item that you need is a clear, long-term goal on which to focus, a clear realization of what you want to achieve in the long run. That way, you can target not only your own efforts, but the efforts of your employees, to reach the goal. Ultimately, the goal is always your exit strategy because determining how you are going to exit will help determine how the business should be managed. When do you plan to retire and how? What type of succession plan is in place? Are your 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 owner depending on what kind of return you want on your 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 you think about money, you probably think of accounts receivable, cash and payroll. You may not consider your inventories and worry about your materials once they are purchased. When you take the time to monitor the key variable of material cost, you may discover that they don’t match the estimates. Digging deeper, you may 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.
- Your time—the most often overlooked key variable. There’s a chance you could be managing your time poorly. You 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. If you spend too much time on such matters, you will 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. The variables need to be managed, which means implementing working solutions to keep them under control. While it’s tempting to blame external circumstances for shrinking business, the only way to control your destiny and the future of your company is to 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 you can make is not to adjust your operations to changing variables. You may be operating like a driver who suddenly comes into a rainstorm, but plows ahead rather than adjusting your speed to match road conditions. So, when company revenues drop from $5 million to $3 million, you retain the same number of office staff rather than adjusting the overhead.
Monitoring the key variables and implementing solutions to adapt to changing conditions is your responsibility and that of your 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 you. If you haven’t developed a job description for yourself, you can’t hold yourself accountable; therefore, you can’t hold your management team accountable for what you expect them to accomplish. You may be allowing 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 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, you are blindsided by a project that is a week behind schedule because no one had the courage to come forward sooner.
If you hold yourself and others accountable to plans, goals and job descriptions you can keep your eyes on the big picture and manage your time effectively. You can work on the business rather than in the business. However, you may prefer to remain within your comfort zone of technical proficiency, focusing on the nuts and bolts of the company’s product rather than strategic management. How much time you want to invest in education to learn new skills is a matter of individual choice, but if you are willing to seek and implement sound advice, you will see your business improve beyond your expectations.