Where Have The Dollars Gone?
There is a song called “Where Have All the Flowers Gone,” but my question is, “Where have all the profits gone?” Profit dollars that you don’t even realize you were holding in your hand, and they slipped through your fingers without you realizing you were holding onto them. There are many areas in the contracting world that money is made and money is lost. Let’s examine some of them so that you will understand that besides adding a profit of 10 percent to a job and hoping you make it, controlling your business through good management, a set of rules that everyone follows, and the accountability of employees will increase your bottom line.
Overhead is a factor that I have found many contractors do not understand, i.e., direct costs and indirect costs. Direct costs are items that should be charged directly to the job. Besides labor and material, a project manager’s time, your superintendent’s time, vehicle leases, and fuel are just a few of the items that should be part of the estimate. Indirect costs would be actual general and administrative costs, rent, office utilities, office wages, etc.
It all starts with the invitation to bid a job. What does it cost you to bid a job? What are your chances of getting the project? How many general contractors are bidding the project? How many electrical contractors are bidding the project? Are the contractors bidding the project contractors that have a good reputation (in other words, if you are successful, do you want to do work for that contractor?)? If you are the low bidder, will anyone of these contractors shop your price? The list of considerations that go into a bid goes on and on, but what is important is that have you taken time to weigh these items so that you make an intelligent decision to bid or not bid the project.
What would it cost you to bid a $1 million electrical project? Maybe $2,000 or $3,000 or maybe a little more. So evaluating the items above may give you a better chance to go after the projects that you have a better chance of winning. Your rate of wins should then increase, and your cost of estimating jobs will decrease and that is money in your pocket.
Let’s assume that you were the successful bidder and you enter into a contract with the general contractor. All of sudden, are there now negotiations that the general contractor wants to finalize before issuing you the contract? If so, can you live with the terms? Is there an opportunity to give and take? In other words, can you agree to the terms if you can do some value engineering? You have won the project, have not started the project, but you now have an opportunity through value engineering to increase your bottom line with a little negotiation.
Meeting of the Minds
Let’s look at an example of a direct cost. Once you have been awarded the project, one of the next steps would be to have a hand-off meeting where the estimator, project manager, and foreman sit down and discuss the project. I have met many contractors that have been awarded a project and hand it off to a project manager, and the first time the project manager sees the foreman is on the jobsite. You need to know how the estimator looked at the project when he took it off, and if there are questions, three heads are better than one.
Giving the foreman the opportunity to review and plan the project before he goes on the jobsite will ensure a better chance of success. These items should be included in the estimate just like labor, materials, incidentals, etc. Estimating is not an exact science, but understanding what goes into making up a job can bring you closer to a good bid and help move towards a profitable job.
Another idea is a kick-off meeting with the foreman, project manager, superintendent, foreman for the general contractor, and any other critical trades that should be involved. This will give everyone a chance to start off with hopefully the same goals in place. If there are any problems, they can be ironed out early on. A general contractor’s superintendent or foreman can help make or break a job, and you need to have a meeting of the minds at the beginning of the project. This will save a lot of time and aggravation down the line.
One other item to consider is the payment schedule. Setting this up in the beginning as to how the pay applications will be submitted and when payment can be expected can add dollars to the company’s bottom line. Although this is rarely a factor in charging the job time for collections, collecting your money on time will give you the ability to take advantage of distributor discounts. Not chasing the money will give you the time for evaluating the next project. Also, you don’t have to go to the bank to borrow money that had the general contractor paid you on time, you would not have needed.
These meetings and considerations all add cost or profits to your bottom line. Figuring out these items in advance can help save on costs and boost the profits so you don’t have to wonder, “Where have all the dollars gone?”
Harvey Friedman is a past National President of IEC, a retired electrical contractor, and President of Hatfield Management, LLC, which conducts seminars and consulting on the business end of the contracting industry. He can be reached at (602) 558-1000 or e-mail email@example.com. For more information about Hatfield Management, visit www.hatfieldllc.com.