The construction industry is complicated, and this complexity allows problems to be “hidden” or buried in the everyday operations. The slightest problem on a job can be the difference between making money and losing money. What’s worse is those financial losses remain hidden, being discovered only after the damage has been done. That’s assuming the problem is discovered at all. With SGC, we can explore the top causes of hidden losses for contractors on construction projects.
A little history…I started out as a controller for a site development contractor. Following that I owned and ran my own high-end renovation contracting company. I understand clearly the money, estimating, costing and process side of contracting because I’ve been there, and here’s what I’ve learned is often the source of these hidden losses.
Missing Details in the Estimate
When writing an estimate, the details matter. The more accurately you can scope the project from beginning to end, the less chances there are of unexpected losses to come up. That means accounting for material costs, labor costs, and project management costs. A contractor not doing their due diligence during the estimating process can lead to major losses on any project.
Many construction companies estimate their projects off the cuff. An estimate is more than just notes on a clipboard and a handshake. Know that unexpected expenses happen and plan for them. If you leave them out of the estimate, they will just end up reducing your profit. And profit margins can be tight as it is.
This can include allowing some room for miscellaneous supplies/tools/equipment, additional mobilizations or taking weather impact into consideration. Think of all the scenarios where a cost can come in unexpectedly and make sure there is miscellaneous line item in your estimate to account for them. It’s an estimate not a guesstimate.
Poor Project Monitoring
Everyday problems in the field can often be fixed by “throwing more labor” at the problem, which can lead to overtime hours. Over the course of a project, overtime, even when it’s allowed, can easily get out of control, eating up a huge chunk of profitability.
Another problem that typically originates in the field but affects the entire company is change order management. I could write a book on all how change orders can lead to “hidden” losses, but the biggest problems with change orders all seem to boil down to one major factor: work is done on an unapproved change order, adding extra expenses that were not accounted for in the original contract.
Later on, when it’s time to settle up, the legitimacy of that change order is called into question, and the resulting invoice is disputed or declined.
So many things can go wrong in the field that it’s almost not fair.
Industrious workers and managers that possess a problem-solving mentality will proactively want to do everything in their power to fix the problems, all in the normal course of just doing their jobs.
Sometimes these fixes come with a hefty price tag, and winning too many battles (i.e., solving problems) might mean losing the war (i.e., losing money on the overall project).
Poor Organization
Without strict financial control and a capable, disciplined accounting, it’s easy for things to slip through the cracks. And every time something slips through, the bottom line takes a hit.
There’s a good reason the title of the person who’s in charge of accounting is the “controller.” That’s because they have to control things!
Too often, the accounting department gets an undeserved bad rap, described by others in the company as “bean counters” or worse.
Think about it…you’re in business to make money so wouldn’t you want the person watching all the money going in and out to be the toughest S.O.B. in the entire operation?
Let the people pleasers and the nice guys work in sales–for accounting and office managers. I want TOUGH.
Credit management in the construction industry is so specialized, and so challenging, that it practically stands apart in the business credit world as its own specialized discipline.
Having a strong credit and accounting team is an absolute must for any construction business that wants to achieve financial success.
Poor Communication
In order to solve a problem, you have to know about it first. The earlier that problems are dealt with, the easier they are to fix.
This means that effective communication is a must for any successful company, and when communication breaks down–or when the communication level wasn’t very healthy to begin with–minor problems go unnoticed or unattended to, becoming huge problems that can have a significant impact.
What causes communication about problems on a construction project to break down?
Sometimes, the lack of communication is the fault of the people that are closest to the problem, but maybe not for the obvious reasons. We’ve seen cases both in the field and in the office where an employee “hides” a newly discovered problem in the earnest belief that they will correct the issue before it affects things.
If they’re successful, then no harm, no foul. But if the slight problem they initially hide spirals out of control into a big problem, then good intentions really don’t matter–the damage is done.
While casting blame is an easy (if sometimes foolish) exercise, it’s not always fair to blame the lack of communication about a problem on the employees in closest proximity to the problem.
Sometimes, the real reason behind a communications failure isn’t a lax, inattentive employee, but the company’s workplace environment that discourages people from alerting management to any problems they might discover, for fear that the management would be more apt to “blame the messenger” instead of rewarding them for sounding the alarm.
Final Thoughts
The best owners and managers in any industry recognize their own weaknesses, or a weakness that exists in their organization, and manage it by hiring people whose biggest strengths are in the very areas where those weaknesses exist.
The best of the best learn from their mistakes and use those hard-earned lessons to make their businesses stronger, smarter, and more profitable.
Of course, stuff happens, problems are to be expected on any construction project, and people make mistakes.
Avoiding problems and mistakes is obviously important, but one of the biggest keys to improving your company is learning from the problems that arise and the mistakes that are made, taking each incident as an opportunity to make the company better.
Last but not least, the responsibility is on the leadership of a company to foster a collaborative workplace culture that rewards the activities that will help the company meet its goals (like proactively communicating problems) and discourages activities that can hurt (like blaming the messenger).
Sometimes changing a company requires a long, hard look in the mirror, a tough conversation with a colleague or peer, or another similar course of action that’s equally uncomfortable. But when you make it through to the other side, you and your company will emerge stronger and better for the effort.
About Susan Giddings Business Coaching and Consulting
At SGC, our mission is to support, encourage, inspire and empower our clients to achieve their business objectives by providing innovative solutions and unparalleled expertise and support that enables them to achieve a sustainable edge in the marketplace and drive the results they want.
