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By focusing on five key areas, contractors can use their information system more effectively to uncover new profits that are often hidden in plain sight.

To Find Hidden Profits in Construction You Have to Know Where to Look

  • 2/4/2013

To Find Hidden Profits in Construction You Have to Know Where to Look

by Craig Olsen and Bob Sniegowski

Maintaining profitability is a constant struggle in construction, one that has become even greater in recent years. Some companies have thrived by knowing where to find “hidden” profits. They have significantly improved their margins by taking full advantage of information that is typically available but often overlooked or underutilized.

By focusing on five key areas, contractors can use their information system (formerly known as the accounting system) more effectively to uncover new profits that are often hidden in plain sight.

1. Convert bid estimates into budgets

Bid estimates should be converted into a budget and compared to actual costs based on measurable production. Comparing bids to actual costs leads to:

  • Early identification of variances from bid assumptions
  • Better support in proving and quantifying changed work
  • More accurate production assumptions when bidding future work
  • More consistent forecasts of completion costs, leading to improved credibility with creditors

Converting the bid to a budget allows early identification of productivity issues, provides information for determining expected productivity and costs of future projects, and helps identify and prove additional costs for change orders. Accurate production estimates can also help prove the cost of delays.

2. Insist on timely and accurate production reporting

Construction is very dynamic, and timeliness is essential to meaningful production reports. At a minimum, production reporting requires that the hours and quantities be gathered by phase. Therefore, meaningful and realistic phases should be identified for each project, with measurable quantities of work (for example 500 feet of pipe laid, 50 tons of steel placed, or 200 square yards of asphalt) and time reported consistently for each phase. Finally, production reports should compare actual versus estimated production. This lets project managers and superintendents monitor productivity, identify work outside of scope, and estimate costs on future projects.

3. Timely and accurate reporting of construction costs

In order to monitor and compare contracts, the information system should report the true costs of the contract. These costs should be reported by the individual cost centers, including labor, equipment, subcontracts, materials, and indirect costs. The job budget should include expected costs by phase and production for each of these cost centers. Also, costs charged to the contracts for labor, equipment, and indirect costs must be based on the company’s actual costs rather than industry averages. Using averages or estimated costs will hide problems that may be uncovered later, but only after the end of the year. Best practices suggest that a purchase order system, whereby committed costs for materials orders are recorded as a pending job cost but not posted to the general ledger in the current period, can improve the accuracy of cost reporting.

4. Document change orders and claims

An effective change order management system begins with the expectation that consistent processes will be established and followed by all members of the project team, and that best practices will include the following components:

  • Promptly identify changes in work scope
  • Superintendent should get initial approval from the owner’s representative
  • Give notification within the time limits defined in the contract
  • Only expect approval of the additional cost if the cost of the change is provided to the owner
  • Get full or conditional authorization in writing from the owner’s representative
  • Log, track, and update potential changes as part of the month-end process

The information system is an important component of the change order system in a number of ways:

  • Productivity reports can isolate the impact of changes in site conditions or delays
  • A change order is easier for owners to accept if the documentation supports the changes
  • Documenting additional work costs can assist in negotiating the change order price or proving the amount needed from the claim
  • It is easier to document changes as the job progresses versus attempting to reconstruct them after the job is completed

5. Create feedback loops

One of the keys to improving profitability using data reported by an information system is to create an effective feedback loop. These feedback loops provide an opportunity to learn from success and failures. Making the expectations and realities available and the topic of creative problem solving makes good organizations great. An effective feedback loop should include all the necessary members of the project team and/or management. Feedback on job costs or productivity reports should be consistent, accurate, and timely. Improvement initiatives should be methodical, purposeful, and attainable, and should be provided as early as possible to identify issues. Some business owners require meetings after every project closes and others on a monthly basis. Regardless of the approach, the meetings should be timely, consistent, and use information available from your system.

With an effective information system in place that’s accepted by all members of the team, more time can be spent analyzing the information (and uncovering more profits) instead of wasting time trying to determine whose information is correct.

Feedback Loop

Better information is the key

Improvement in any one of the areas above may uncover hidden profit. A logical first step is converting a bid into a budget for every project. Once a budget is prepared, true growth and profitability require methodical, purposeful information improvement initiatives. Better information helps management identify other factors that will improve profitability of the company. Knowing what types of work are most profitable, and the project managers or superintendents that are better suited to a particular size or type of project, will reveal hidden profits.

Remember, this is a continuous process. Management should expect to continually improve its gathering and analysis of performance data. As the quality and reliability of the information improves, those hidden profits are sure to be revealed.

Craig Olsen, Construction Partner or 715-852-1150

Robert Sniegowski, Construction Principal or 612-376-4659