The Ps of Success

By Tyler Burgess as featured in Construction Today

Thriving in a down economy takes a little business savvy and drive to increase performance, productivity and profit.

Despite the public perception that the economy is in a downturn, many contractors are thriving and turning a profit. That’s because these owners spend their time managing “the business of the business” rather than overseeing individual construction projects. By doing so, they more easily adapt to fluctuating economic conditions that can wreak havoc on performance, productivity and profits.

Managing the business of the business involves knowing, understanding and acting on a set of critical variables that defines success (profitability) or failure (losing money and eventually closing one’s doors). By doing so, owners gain a top-line/ bottom-line perspective that’s based on reality rather than upon emotion or wishful thinking. This commitment to an accurate, data-based business view is how successful owners stay on the higher end of the median – in every important category – relative to their competitors. Some critical variables are common to all construction companies; others are unique to individual enterprises. Here are a few examples involved in running a business on a daily basis:

• Profitability – Determine what projects are consistently profitable and those that are not, profile one’s ideal customers and which products and services make money. Finally, determine who among the sales force is generating profitable business and who is not. Try to understand the underlying reasons for each category.
• Price point – Identify at which point the business breaks even and begins to turn a profit. Establishing the price point goes beyond traditional breakeven calculations. Price point focuses on the true cost of a construction project, from start to finish. It includes variables such as building materials, fuel costs, labor expenses, overhead, equipment purchases and much more.
• Marketing and sales – Nearly every contractor today specializes in a specific type of work. Analyze the marketability of one’s specialties and measure the effect of established sales policies and practices, promotions and advertising. What are the costs and returns on investment associated with each? How well do sales efforts and expenses correspond to actual finished projects? Where and to what degree should sales efforts be focused to maximize profits? Finally, analyze how marketing and sales efforts affect the price point and the bottom line of each specialty.
• Administrative variables – Maintenance, financial planning, inventory control and any other company-specific administrative variables should all be aligned with sales forecasts and production needs.
• Finances – Examine whether working capital is adequate to see each project through and whether the established credit lines are sufficient to support growth and expansion. Identify the business’s key financial ratios and keep the percentages in line with proper budgetary controls.
• Productivity – Where and how can personnel recruitment, training and assignments be improved? Are sufficient numbers of dependable employees at work every day? How can project estimating, planning, workflow and scheduling be improved to reach peak efficiency?
• Material costs – Review how much the company is paying for materials and make reasonable estimates concerning what these expenses will be in the near future. Always be on the lookout for alternate sources that

Adapting to the Economy

A challenging economy presents contractors with additional factors to consider while managing their critical variables. Fluctuating fuel costs and the rising prices of certain raw materials are two current and painful examples that highlight the following basic truth: Profitable contractors flex with and adapt to economic changes. Conversely, construction companies that don’t change with evolving market conditions inevitably face stagnation and shrinking profit margins.

When it comes to making hard choices like these, it’s important to analyze the critical variables involved before taking action. Price increases, for example, should be strategic and targeted, not random or across the board. The same applies to increasing production as a means to boost profits. Ramping up one’s overall sales volume will not necessarily translate into higher profit margins. In fact, it can actually reduce profits if not undertaken wisely. That is why it’s important to carefully examine which construction projects and specialty services are the most and least profitable.

To increase profits, seek to increase the number of construction projects that are proven money-makers. The best way to achieve this goal is to appoint a leader – the owner, president, CFO, general supervisor or shop foreman – and grant that person full oversight authority for productivity management, operational processes and proper alignment of production and sales numbers. The key to making the system work, of course, is an integrated set of tracking systems that monitor the business’ critical variables.

Don’t Manage by Emotion

Far too many otherwise outstanding construction companies struggle for survival because they’ve failed to identify their critical variables. These owners tend, as a rule, to manage by emotion rather than by the numbers. Managing by emotion is not only ineffective; it is the least efficient way to motivate people. Because of the arbitrary and unpredictable nature of human emotions, a management style based on them usually alienates and confuses employees instead of providing the consistent, intelligent direction people need and want. It is far easier and infinitely more profitable to hold people accountable to numbers than to an emotion.

Managing a company by the numbers simply means that owners focus on the business of the business and leave operations and project- related details to other key employees and managers. In a profitable business, critical variables are monitored daily and its managers are provided with actionable data on which they can make informed decisions, minimize waste and hold departments accountable to the company’s established standards. In such companies, every department and each employee within them is responsible for generating a proportional and clearly defined percentage of overall revenue. Managing a company by the numbers nearly always results in significant increase in sales and profitability.

Do it by the Numbers

Some decisions and managerial actions, however, are going to provoke strong emotions no matter how analytically a company’s owner approaches them. Managing by the numbers, however, can actually take the sting out of those painful decisions that no one likes.

Seasonal employee layoffs are a perfect example. Many construction company owners let emotion dictate their staffing levels; even when there’s not enough work to keep everyone busy, they often keep the same number of employees year-round. Although well-intentioned, this emotion-based management decision wastes precious company resources and ends up hurting everyone by putting the company’s long- term financial health at substantial risk.

It’s far better for everyone concerned when staffing levels are based on economic cycles rather than on emotion. Despite the negative manner in which the media reports layoffs, the reality is that layoffs are frequently a positive sign.