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Hey Contractors - These Tracking Systems Keep Your Eye On The Ball
In an article titled How Contractors Get Rich, I introduced you to the six systems that control the fate of your construction business. Once again to refresh your memory, they are:
We have covered the first four in detail. Now it�s tracking�s turn.
The purpose of tracking systems is to make sure your business is performing as you need it to. Today, I am going to expand on the numerous tracking systems you would be wise to install.
I have grouped the tracking systems into four categories: financial, operational, marketing, and sales. You may notice that I left staffing out.
Most construction companies are so small, monitoring the effectiveness of their staffing systems is unnecessary. Staffing performance should be readily apparent: Are you finding and keeping good workers?
Onward to tracking systems. We will start with financial tracking.
Your annual budget is your plan for creating the net income you seek this year. The same holds true for project budgets. You need to keep a close eye on their progress.
Only by monitoring your actual expenses against the expenses you planned for will you be able to make adjustments on the fly as your year or project unfolds differently than planned.
REVENUE VS. BUDGET
You need to track your sales closely. If they drag behind your plan, you may need to adjust your overhead. If they exceed your plan, you may need to add overhead to keep up with quality standards and client expectations.
GROSS PROFIT vs BUDGET (JOB and COMPANY)
Gross profit is the single most important financial number to track. You cover your overhead and increase your wealth via gross profit. Your budget assumes you are going to hit a specific gross profit goal. If you don�t, the company will not generate the net income you counted on. Gross profit is the fuel that feeds your company�s growth.
Paper income is all well and good but it needs to be turned into cash at some point in time. That�s why you should monitor your receivables closely.
Remind (pester) clients that are over 30 days out. You may need to pull the plug on some very slow paying clients.
Contractors must watch their cash flow closely. Cash flow is a serious problem in the construction industry, especially at the end of jobs when trying to collect retention.
LABOR PRODUCTIVITY (JOB and COMPANY)
Labor productivity is the key to operational success. If your crews don�t hit their productivity targets consistently, your business is going to struggle mightily.
At the very least, you need to track the hours budgeted for a job and the hours used on it. If your projects last more than a day, you should be tracking their productivity by major work activity (see the next subtopic).
LABOR TIME by PRIMARY TASKS
When a typical project lasts more than one day, you should break the work down into major activity based cost codes and direct the crews to track and record their time accordingly. This information is very valuable to estimators, schedulers, project managers, and superintendents.
It is also very valuable to the crews. It lets them know how fast they should be working. That way they know when they�ve done well and know when they haven�t. It�s a motivation thing and it works.
Since productivity is a ratio of work quantity divided by time, you need to determine the best way to measure the amount of work your crews are performing. That item varies for each trade. Refer to my newsletter on job costing for more direction.
You should track how frequently you meet project deadlines, regardless of the man-hours used.
If you cater to home owners, bear in mind that they expect you to finish when you initially tell them you will. Excuses will not cut it. If you are working through general contractors, the call on whether you are on-time or late will be more difficult to make.
Obviously, on-time completion is not cut and dried. Use your best judgment when deciding whether the job was legitimately delayed or whether your crews were simply late finishing.
You need to know how much it costs you to own and operate your major equipment on an hourly basis. Otherwise, you will have trouble determining whether you are better off owning or renting your equipment.
A term commonly used for the calculation is Effective Rental Rate. It should be updated once a year.
The rate is based on the EXPECTED lifetime cost of the equipment and the equipment�s life expectancy. When the ongoing Effective Rental Rate climbs above the cost of buying new, you should start thinking about replacing the equipment.
SAFETY EFFORTS and LOST TIME INJURIES
I�m not going to lecture you on safety. Either you believe it�s the moral thing to do or you don�t. Regardless, you need to keep track of your safety efforts (weekly talks) and accident reporting. It�s the only hope of staying out of OSHA�s crosshairs when something goes wrong.
Monitor your Experience Modification Rate (EMR) closely.
Hire someone to perform a detailed review of your EMR annually. He or she may save you thousands of dollars by catching rating errors. They are very common.
Doing it right the first time is ALWAYS cheaper than doing it twice. Doing it twice is called re-work. You need to track it and address it.
You will always experience some re-work, either due to unrealistic customers or to new employees. Address on the re-work that keeps popping up consistently. That�s the re-work that can be fixed.
Each employee�s performance should be formally reviewed and documented annually. Significantly improper behavior should be documented upon occurrence (especially actions that endanger others).
ADVERTISING EFFECTIVENESS (LEAD GENERATION)
There is a reason many advertisements contain strange codes - it helps management determine whether the ad worked. Since more money is wasted on advertising than on any other business investment, it is imperative that you track the effectiveness of your advertising investments.
Advertising is expensive. And it is tricky. The simple rewording of a headline often improves advertising response by a factor of 10.
Don�t let a marketing consultant, or anyone else, tell you they know EXACTLY what words and phrases will produce the breakthrough results. They don�t. They can�t. Ad copy has to be tested.
As the opportunity arises, ask how the prospect found you and ask what motivated them to call. If one of your ads isn�t pulling its weight, change it.
All salesmen are not created equal. The great ones really stick out. The rest you need to keep an eye on.
Sales effectiveness is best measured by the quantity of gross profit generated. Keep track of the gross profit each of your salesmen generates. Pretty simple, huh?
If you are in the mood to split hairs and complicate the measurement, track the amount of gross profit each salesman landed above the low bid or through negotiated work. You see, that is the salesman�s role: land work that pays better than your estimator could get just by winning a bid on low price.
A backlog of attractive work is a beautiful thing. It gives you a bit of financial security and peace of mind. It strengthens your resolve to only accept work at the prices you want.
You need to keep track of your backlog. You should have targets for it and compare it against your detailed budget. If your backlog starts to slip, you need to re-prioritize some of your time towards selling.
This one is pretty simple. Your estimator�s chief responsibility is to accurately predict the time it will take to complete the work. You need to verify that he or she is doing that task well.
It�s a pretty simple calculation to run. Divide the actual man-hours used on the job by the estimated man-hours. Focus on the average from several jobs.
If the ratio is consistently above 1.0, the estimator is probably being too optimistic with his predictions. If the ratio is considerably below 1.0, the estimator is probably being too cautious.
Before you start howling that your estimator doesn�t control field performance, remember that it�s the estimator�s job to guess how long it will take your field crews to perform their work. If they are consistently running over budget, it�s probably not the field leader�s fault. I�m not saying that the field leader couldn�t speed up the crews, I�m just saying that to assign all blame to the field leader is probably misguided.
If you don�t systematically track the effectiveness of your pricing, you will never know what your customers are willing to pay. When you leave money on the table, you give up the easiest money you will ever make.
Track mark-up success by comparing close rates against offered markups. The markup should shrink as project size grows. Look for that trend. If you are winning more than 50% of the work with new customers, you should be able to raise prices quite effectively.
DISPLAYING THE INFORMATION
The best form or format for presenting the information is whichever one works best for you. Some people prefer to look at graphs. Some prefer to look at tables. Some are comfortable with hand-written tables and graphs. Others want them printed from a computer.
It doesn�t matter which format works best for you. What matters is that you and your team review the performance information in time to correct ugly trends before they rob you of the money you are working so hard to make!
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