In order to maintain profitability, account for changing costs, and thrive in spite of the surrounding chaos, it is imperative that green industry entrepreneurs have an information management system (IMS) for accounting, estimating and job costing that’s granular enough to compensate for such volatility.
While you may have a granular system, it has to encompass correct management principles, methods and philosophies. Unfortunately, there are numerous mistakes (I refer to them as false mathematical assumptions) built into many of the management ideas and software being used in the green industry today. The purpose of my next few articles is to first, explain what a granular IMS looks like and how to use it. Then, I’ll expose some of the false mathematical assumptions being espoused in today’s marketplace.
How it works in the real world
Eric Wewerka, president of Wewerka Construction Management (WCM) in northern Virginia, is a student of his business. As a result, he has embraced the management and financial systems that I teach. At the heart of my system is a detailed annual budget and cost estimating system. It may sound a bit circular, but the primary purpose of a cost estimating system is to estimate costs (materials, field labor, field trucks and equipment, rental equipment, etc.) accurately. Eric uses QuickBooks and a popular estimating and job costing software package to run WCM.
Eric and I create WCM’s annual budget in July for the upcoming year. We make any necessary adjustments at year’s end. This budget primarily projects four important items: revenue, field labor man-hours and dollars, field labor burden and general and administrative (G&A) overhead costs — all broken down by division (construction, maintenance, snow, etc.). It also includes projected divisional costs for materials, field trucks and equipment (T&E), subcontractors and rental equipment. While these costs are estimated in the annual budget, they are more accurately identified in specific bids for maintenance accounts, construction projects and snow accounts.
The four primary items from the budget that we calculate allow us to manage and control risk. Risk management should be the primary focus of a management team. The purpose of risk management is to create certainty in the business. For instance, if you project $1 million in revenue with a 10% net profit margin (NPM) at the end of the year, can you and your team make that happen? If you can, great! You are certain that you can meet or exceed your budget projections 100%.
Budgeting direct costsMaterial costs:
We project such costs based on history, knowing that we’ll estimate these costs much more accurately on specific jobs being priced.Field labor costs:
We project field crew man-hours and dollars by division.Field labor burden:
This is the portion paid by the company and usually calculates to be between 15% and 30% added to the cost of field labor. It includes such things as FICA, FUTA, state unemployment, worker’s compensation and general liability insurance costs; holiday, vacation and PTO pay; health insurance and 401K costs for field labor.Trucks and equipment:
We project these costs based on historical percentages for fuel, repairs, maintenance and mechanics, auto and inland marine insurance, registrations, wraps, paint and set up costs and depreciation.Subcontractor and rental equipment costs:
We project these based on historical percentages.
Once each division’s direct costs are calculated, we obtain its gross profit margin (GPM) and compare it to industry benchmarks. This provides an important key performance indicator (KPI) that we can use as a scoreboard for individual jobs and for the division as a whole.
Budgeting indirect costs
Indirect costs— I refer to them as general and administrative (G&A) overhead costs — are often misunderstood in the green industry. They make up all of the company costs that cannot be directly attributed to jobs. Hence, they are referred to as general costs. G&A overhead costs total about 25% of revenue for companies under $10 million in annual revenue. Salaries for overhead staff and owners at pre-dividend levels normally total 50% of G&A overhead costs or 12% of revenue. This accounts for about 99% of all green industry companies. Larger companies experience lower amounts of such costs usually in the 15% to 20% range.
Net profit margin
Once you subtract G&A overhead costs, net profit margin (NPM) is what remains. This is earnings before tax, dividends and bonuses. My benchmarks for NPM are as follows: 10% tells me that the company is doing OK, 15% is excellent and over 20% means you’re hitting it out of the park.
As you can see, this system is very granular and, as such, entails a lot of detail. You have to study it and your business to properly understand and use it. Next time I will explain how Eric uses this system to price construction and maintenance work and establish critical KPIs throughout Wewerka Construction Management.
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