2 Strategies Subcontractors Can Implement to Survive Shrinking Margins During an Economic Downturn
Updated: May 14, 2020
Bear Market Forces Construction Businesses to Take Actions to Control Costs
Only one thing is certain amidst the pandemic we’re facing today, and that’s the unfortunate fact that the market is not (and likely won’t be for some time) the raging bull we’ve been enjoying for several years now. Though we’d like to say we approach business the same way regardless of the economic climate, the reality is that we don’t.
During times of economic prosperity, everyone is making money with a full pipeline of jobs and overflowing workload. We hire more tradesmen to ensure we can accommodate the surge in field work, and may even add office staff to deal with the piles of paperwork that come with it. It’s either that, or just somehow make room for the extra work in our schedules by letting things like cost control go by the wayside. Let’s face it; when we are buried in work, we just don’t concern ourselves with the details as long as the checks are rolling in.
We know this isn’t how we should run our businesses, but we are too busy putting out fires at all of our job sites to think about anything else. But what happens when the work isn’t flowing like it was and the checks stop rolling in?
It’s hard to say exactly how long we’ll have to endure this bear market, but the numbers aren’t inspiring. Housing starts plunged 22.3% in March -- the worst monthly decline since March 1984. This has led to homebuilder confidence plunging 42 points in April, the largest single monthly decline ever. Which has, in turn, prompted some of the largest homebuilders to ask subcontractors for 3-10% price reductions across the board.
If businesses continue to let costs run rampant, they might not survive the profit drought. It’s a sad, but not unavoidable, potentiality.
The good news is that there are two major actions companies can take to ensure their future without having to take desperate steps like undergoing layoffs or slashing wages. By (1) managing field costs and (2) streamlining business operations, you will not only survive the current economic downturn, but thrive in the next bull run.
1. MANAGING FIELD COSTS
Until recently, the construction industry had a good excuse for lacking control of budgets, schedules and personnel. The majority of data surrounding these aspects is created out at job sites where it was nearly impossible to effectively gather.
However, mobile technology and web-based softwares have drastically improved over the last five years. Taking advantage of these technological advancements to enhance business operations has been par for the course for almost every industry out there - except construction.
To our credit, these advancements were timed with a bull market that, as discussed above, kicked us into high gear and it seems that we forgot to adapt. Well, it’s time to catch up!
First off, it’s important to realize that technology is not the enemy. Well, the DOS system someone built for you back in 1995 might have been, but we promise you it’s come a long way. For the first time ever, you can get real time information on what’s happening on every one of your job sites with a few clicks of a button. But this information is only useful if we have the proper ways to analyze it. I suggest following this mantra: “Know your cost. Control Your Cost. Lower Your Cost.”
Knowing your costs takes place during the bidding (estimating) process. While using historical data and approximating budgets using percentages have been the touchstones of the bidding process so far, it’s not going to cut it any longer. You might think these bidding solutions are saving you time, but the truth is that it’s hurting you.
Taking the time up front to calculate every man hour, along with all material and equipment needed to complete each task, ensures you have clear-cut benchmarks to compare against actuals when it comes to job costing. Having a better handle on what it will cost to complete a job can help you avoid underbidding jobs or even taking on jobs that will lose you money. Also, it will allow you to set realistic expectations for your staff during the build. Being more detailed during the bidding process will actually dramatically streamline your bidding process in the long run - a point that I’ll illustrate in greater detail later on.
Controlling your costs isn’t something that most subcontractors have a good process for. I’ve come up with a quick analogy to illustrate how it’s currently done (in most cases). Let’s say my wife sends me to the store to buy everything she needs to host a dinner party. Once I get to the store, I realize she forgot to hand me the list. I continue the shopping trip with nothing to reference, praying I get some of the items based on my limited knowledge of what she has planned. It might not be a total failure, but there’s no chance I nail it.
Imagine this scenario and multiply it tenfold. That’s what you’re doing to your field staff. Each task performed on the job has thousands of data points involved; even Albert Einstein wouldn’t be able to calculate how much material has been used, how much is available and how much more is needed without some sort of technology to keep track of the details. They’re working with little standards or expectations to aim for. It’s the same feeling as grocery shopping for someone else without a list.
Instead, I’d suggest empowering field staff by offering a system that provides real time information on costs remaining, so they can reference those numbers AND their prior experiences to deliver on expectations. Providing tools to make field staff successful won’t just result in better work, but happier employees. Why? Because with greater transparency comes better communication and more trust.
Lowering your costs is the final step in field cost management, and what we really mean is getting closer to budgets. Only 31% of all projects came within 10% of the budget in the past 3 years according to KPMG. That means almost 70% of jobs exceed their budget by 10%, resulting in 10% less profits than expected or even losing money. I guarantee that if you take steps to know and control field costs, you will be able to dramatically lower costs and become an anomaly by consistently hitting your budgets.
2. STREAMLINE YOUR BUSINESS
Streamlining your business will not only reduce your overhead costs, but empower your team to focus on the most important tasks. Currently, 35% of construction professionals’ time (over 14 hours per week) is spent on non-productive activities including looking for project information, conflict resolution and dealing with mistakes and rework [Autodesk + FMI]. Just as technology collects data for cost control, it can easily share that data to eliminate these non-productive tasks.
Streamlining your business happens by modernizing your processes and systems. The great thing about construction is that all of our business processes are tied directly to the project cycle. The downside is that the project cycle is spread out over months and is handled by many different departments, typically through many different systems.
Currently, bidding, or estimating, is usually handled by inputting takeoff numbers into a spreadsheet system. Then if we are awarded the contract we have another process for getting information to field staff so they will know what to build. That system is nothing more sophisticated than a 1980s filing cabinet filled with pages and pages of documentation on paper sold to us by Dwight Schrute over at Dunder Mifflin Paper Supply (where my Office fans at?!).
We also have processes for ordering materials and equipment and tracking our labor costs. Typically material and equipment is ordered by someone in the field or a purchaser, who creates a new list of products for each order and calls, emails, or (god forbid) faxes the information over to the supplier. Someone in the office is responsible for inputting totals taken from supplier invoices into an accounting system, along with hours deciphered from handwritten paper time cards that a field manager has spent hours driving from job site to job site to collect.
From there, job costing reports are done verbally with field staff, and someone in the field must communicate with the billing department on the progress of each job site. Lastly, we have a process to make sure all the project costs, billing information and other company costs get organized into an accounting system. That’s a lot of disparate, time-consuming processes and systems!
The right technology can help streamline the entire process by pushing data from the bidding phase all the way through accounting. It also has the power to make your day-to-day life on the job easier, save money and also save on opportunity cost by eliminating unnecessary tasks. After all, any time we save an employee from doing inefficient work, we’re allowing them to accomplish something productive instead.
We need to start looking at the bidding process as our game plan for the build. This means that instead of using simple square footage calculations or historical data, we need to factor in all of the detailed tasks that will need to be completed and calculate the material, equipment and labor time that will be needed to complete each of those tasks. It might sound like a lot of work, but it will save a lot of time in the long run and a good software program can actually do most of the work for you.
Because we accomplish the same exact tasks for most of our projects and use the same exact materials, a bidding software should be able to find a similar project and copy the information to the new project. All that’s required at that point is plugging in the new takeoff numbers and adjusting for any changes to the new project in task or products.
If you can set the stage with detailed and accurate bidding, then you can streamline every single process that follows it, considering you have the right systems in place. The key is to have your bid system automatically connect to your others systems. Operating your company using fragmented or old school systems has the power to drive you crazy. Instead, I’d recommend finding a solution that does it all to streamline business operations. For best results, a well-rounded software program should be able to handle the following:
If your bidding data can be transferred directly to your project management system, then your field staff will know exactly what tasks they must complete and what material they will need to complete the project. When it comes time to order material and equipment, a comprehensive, accurate list of all products needed will already be available because it was created from the bid. With a few clicks, it can be emailed directly to suppliers for fulfillment. No phone calls necessary, less room for mistakes to be made.
This submission will automatically trigger the system to input those costs into job costing and create a transaction in the accounting portal with the total price that your vendor should be charging you. Not only does this eliminate two data entry processes, but it also eliminates your staff from having to check every line item from the invoice the supplier sends you to make sure you're getting billed the correct prices.
The image below breaks down the potential savings in terms of time and cost.
As discussed previously in regard to controlling costs, providing foremen with benchmarks for the time allowed to complete tasks is essential to their success. With a system that ties the bidding system to the scheduling and labor tracking systems, time allowed and men needed calculated during the bidding phase can automatically transfer to the project phase. They will be set up to manage their jobs with agility and ease because they know exactly how much time a task should take and how many men they’ll need to accomplish it.
The labor tracking system itself can even be streamlined with mobile time clocking, implemented in place of the paper time card system that the majority of subcontractors currently use (as mentioned above). The benefits of using mobile technology for labor tracking are multifold, and that’s without getting deep into the whole record keeping and labor lawsuit drama that so many trade contractors deal with.
I can tell you they’re killing trees, but I have a feeling the discussion about your pocket book might be more convincing. They’re time consuming and inefficient to manage. Employees have to fill them out, field managers have to drive around and collect them from various job sites and deliver them to the office. Then, an office staff member must take the time to decipher the handwritten notes and input the information into a payroll processing system. In some cases, this information might even have to be input again into a separate job costing system.
Clocking in and out using a mobile device takes the same amount of time or less than filling out a paper time sheet, but all the work that would usually follow is eliminated. In addition to ensuring employees are taking breaks and keeping an accurate record of overtime, all labor hours can automatically be input into payroll processing and job costing systems.
Not only will switching from paper time sheets to mobile time clocking eliminate travel time, mileage and data entry costs, but it allows your billing department to have real time insights on what draws they can bill without having to call someone in the field. All of this frees up time for field managers who were previously bogged down with handling the time cards to spend time on managing costs on their job sites.
The image below breaks down the time and cost that technology can save your team.
Streamlining your business saves time and money. It also significantly reduces the opportunity for miscommunication. Too often we have the field and office pointing fingers at one another for mistakes. Sometimes a subcontractor might even lose a job as a result of a communication error. But when everyone is working with the same data, transparency is created and the blame game is eliminated. We can start having meaningful conversations across departments that lead each individual and the team as whole to make better decisions for the company. We can allow our employees to learn from every job and empower them to become better in their careers. All of this facilitates a less stressful environment and a more profitable company.
Choosing a Software Program
In summary, the two major strategies a trade contractor can implement to ensure their survival in this bear market are to control costs and streamline business processes. But in order to put these practices into motion, owners must choose the right tools. Finding a good software program with robust capabilities will save you time, money and headaches.
A.C.E. Construction Software is one of the most complete tools available for construction companies, and it was designed specifically with trade contractors in mind. It’s a cloud-based system that can handle the entire project cycle from bidding to job costing, collecting and analyzing data every step of the way. A rough overview of capabilities:
Bidding Center - improve estimating accuracy with detailed bidding and lay the foundation for a seamless project phase
Project Management - improve communication and decrease data loss when all info is stored in one view
Documents Storage - upload company and project documents of any file type in the platform for easy access, make comments and set permissions according to who needs to view them
Material Ordering - save time and ensure pricing accuracy on supplier invoices with auto-generated material and equipment orders
Scheduling - easily map out and change schedules for seamless project flow
Labor Tracking - mobile time clocking allows laborers to clock in and out from the field with all data transferring directly over to job costing, payroll processing and accounting
Job Costing - all cost data automatically flows into the job costing portal, so users can view job performance in real time with visual graphs comparing bid numbers vs. actuals.
Accounting - built-in accounting functionality means that you can get all necessary financial reports including your general ledger, P&L, balance sheet, and WIP done with a few clicks of a mouse
By implementing a smart tool like A.C.E. Construction Software to help you control costs and streamline your business, I’m confident that your company will make it through this economic downturn. And who knows, you might even find that you’re more successful than before.
Visit www.aceconstructionsoftware.com for more information and to schedule a no obligation software presentation.