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Recently, during a conversation with a client of many years, he remarked, “I’ve been using your system but I don’t seem to be making the profit I should. What am I doing wrong?”
About 20 years ago, I had a similar conversation with a client and his chief estimator in Michigan. This contractor complained that he wasn’t making the kind of profits that he thought he should be experiencing. The estimator added that in the previous three years, this company had not had a job that went over budget. He had estimated and tracked every job and, amazingly, to his credit and to that of the field crews, not one job was a “bust.” So the owner wanted to know why he wasn’t flush with profit.
The Triumvirate Mantra
The chief estimator and I immediately knew what the issue was. The estimator not only knew how to estimate the costs and production rates for labor and equipment on individual jobs, but he also knew how individual jobs – won or lost – tied into the overall budget for the company for the year. He understood the importance of both the “little” picture (individual jobs) and the “big” picture (the budget of the company for the year). What was surprising was that both contractors were clueless as to why these items were only two of three critical elements that needed to be constantly monitored in order to achieve success in their businesses.
Price it Right
Fortunately, both companies had a good estimating system and accurate cost estimating. They were able to calculate material costs, labor hours, labor burden and equipment hours accurately. G&A overhead costs were accurately included in their bids, and profit margins were monitored to ensure market competitiveness.
Produce it Right
And both companies had good production, the one in Michigan especially. The chief estimator and production supervisor worked very closely together. Every crew knew how many man-hours were estimated in each job, and actual man-hours were tracked and compared to the estimated man-hours on a daily basis.
Produce Enough of It
Both contractors were so focused on individual jobs that they developed a form of job fixation. We called it “target fixation” in the U.S. Marine Corps. Jet pilots would be so focused on shooting at a target that they were strafing on the ground that they would sometimes fly their plane right into the target. Not good! This is what was happening to these two contractors. They were thinking primarily about the little picture and bringing individual jobs in on budget, but they were ignoring the big picture – their sales goals for the entire year.
The Rub
As Tom Peters says, “What gets measured gets done!” As is so common with contractors, a critical metric for the business wasn’t being monitored. Sales volume was being ignored. Neither company was developing business strategies to ensure that they achieved their sales goals for the year. Yes, individual jobs were priced accurately and produced as they were priced. However, there weren’t enough jobs with enough margin to cover all of the fixed costs.
Conclusion
As a business owner, you have to be somewhat schizophrenic. You cannot allow yourself to become fixated on any one aspect of the business. When this happens, you miss things.
This is what happened to my two clients. Their focus was incomplete. Smart contractors have a “split” focus. They’re focused on producing jobs on a daily basis and about their annual sales goals.
As we all know, however, in the current economy volume is the most difficult to achieve of the three success factors. At least now the second contractor knows what the main problem is and can work on solving it.
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Jim Huston
