Controlling Your Labor & Materials
Taking advantage of the new technologies that are available to market, bid, secure and manage your work is a great step toward success. But for a project to be truly successful, it needs to be profitable. In Part 1 of this article, we'll discuss a few of the ways money can slip through your fingers when you fail to control your labor costs. In Part 2, we'll move to discussing how material management can help preserve and improve your bottom line.
Part 1 - Labor Management
Whether employing critical path methodology or a more complex Q scheduling technique, the accuracy of the information being utilized from your estimate will significantly affect the value of your schedule. Knowing and managing your labor budget is critical in these times of "lower margin" opportunity. Referring to historical information on manpower demands and production capabilities provides the most realistic basis for scheduling expectations. Production rates like "units per manhour," or "lineal feet per man hour" should be referenced in unison with quantitive take-off data to ensure proper manning of the project on a "per task," or "per work item" basis. Failing to dissect your labor demands to this extent can be critically damaging to the success of the project. There is no denying that ANY overruns are paid out of your anticipated NET profits. In consideration of your full bid, if your labor were to account for 20% of the total amount, an overrun of 10% would reduce those potential profits by -2%. On a percentage basis, that -2% may represent a significant loss in your NET opportunity. Overruns of 20% - 30% are very possible if your labor is not managed properly. These types of costs could result in the market having one less competitor next year.
Just as with your scheduling of the labor on your project, understanding the impact of overtime expenses is also critical to your projects success. People have argued that the expense of the overtime is really just the "half-time" additional compensation. When you say it like that, it really doesn't sound too bad. But when you look at the numbers, you may take on an entirely different perspective. Let's take another look at the example we just reviewed in the "Scheduling" portion of this article. Nationally, burdens on labor run somewhere between 15% and 25% depending on local expenses, benefit packages and the definition/substance of the term. If you have controlled your "total hours," but the 10% overrun, as discussed previously, is represented by overtime hours that were paid on the project, your labor costs for the project have been significantly increased. After 20% burdens are added to the hourly wage, your $15.00 per hour employee just went from costing you $18.00 per hour to $27.00 per hour! That's a 50% increase in the cost of that individual's labor as bid. With a mere 10% of your labor hours being paid at an overtime rate, your 20% labor projection for the project is exceeded by a full 5%. As we pointed out earlier, that additional expense for overtime comes off your bottom line and could represent significant dollars. So as you can see, it's not "just the half-time." It could be significant profits lost.
Manning vs. Crewing
The creation of specialized crews to perform unique tasks in the construction industry is certainly nothing new, and the effectiveness of this philosophy is seldom questioned. However, that very construction philosophy can be a deterrent to your success if you are "crewing" your project rather than "manning" it. With the technology being utilized in the estimating process, projects are built "item-by-item" and often "task-by-task" - each with specified man-hours derived from historical data or professional analysis. The days of sending a 5-man crew to do a 4-man project because "they operate as a crew" are gone. We've seen how labor excess can destroy the opportunity of a project. The philosophy of scheduling work by "crew" rather than by "man" or "man-hour" is the first step to a failed labor budget. Just as the estimator built the project in his mind while creating his estimate, scheduling of labor must be done in the same fashion. Budgeted hours for the performance of specified tasks cannot be ignored in consideration of past crew structures. Unique tasks require unique consideration and so does the composition of an effective, labor-cost considered crew. A good working knowledge of what it takes to "get the job done" is a vital skill set in properly managing the labor on a project "to budget." That same knowledge should be employed in the structuring and scheduling of crews to perform the work at hand.
Time Collection / Job Costing
Your labor budget is being diminished by the minute. To ensure you are reacting to the elements on site that are affecting your productivity, or just to monitor the performance of your crews, it is essential to employ some form of time collection that empowers you on a real-time basis. In times past, the practice of reviewing labor budgets on a 2 -3 week delay may have been considered acceptable. However, in these times of limited opportunities and technologically-advanced competition, you need to have the information necessary to make adjustments on an hourly, or at minimum, a daily basis. The advanced technology that is regularly employed for estimating purposes is essentially wasted if you don't put comparable tools in place to ensure your labor costs consistently line up with the expectations of your estimate. Focus on managing to increase profitability through improved labor management rather than reviewing aged data and managing to reduce your losses.
Until you start doing some serious gardening into your operations, you may not be aware of the opportunities being missed as a result of uninvoiced work beyond the scope of your contract. This is work that eats away at your labor and materials budgets, taking dollars directly out of your profits. Creating a system that centralizes control and holds everyone accountable for their responsibilities can hold two rewards for you. The first is the immediate increase you will see in your invoicing dollars. To pickup an additional 5% in gross revenues is not uncommon. At first, that may not sound very earth-shaking until you consider this . . .That 5% increase is on total gross sales. These are dollars that otherwise would have gone from a revenue-generating consideration to 100% costs to be covered by profits off the project. With the double gain of taking those costs and turning them into revenues, you can expect to see as much as a 5% increase in NET profits. All because you put controls in place to ensure the work was being performed as per the scope with billable POs and change orders becoming so integrated into the process that the project cannot continue without the proper dotting of the "i's" and crossing of the "t's." The second impact to your organization will be the creation of a culture of accountability. Not founded on your people being worried about being "blamed" for something, but rather the kind of accountability that can lead to valuable analysis, development and growth for your employees and your company. The development of a healthy culture in your organization is an extensive topic for coverage in another issue.
These are just a few of the many money-saving opportunities you are presented while managing your labor on a daily basis. In our January issue, we'll delve into other opportunities you may not have even considered in the management of your materials budgets.
Joseph Bauer, Contributing Writer