Production Management Systems that Keep You from Busting Budgets

If you've been a reader of my articles for a while, or invested a little time hunting through The Contractor's Business Coach website, you will be familiar with the six critical systems for running a construction business (heck, really any business).

The six WERE:

  1. Marketing (lead generation)
  2. Sales (avoiding price competition)
  3. Staffing (building a winning team)
  4. Planning (solving tomorrow's problems today)
  5. Tracking (managing by the numbers)
  6. Financial Control (managing your cash and profits)

I narrowed down the vast array of candidates to those six many months ago. Since then, due to dozens of conversations with dozens of contractors, I decided it was time to adjust the six.

My partner, Guy Gruenberg and I holed up in my office for several hours the other night and tweaked the list. The NEW and IMPROVED list:

  1. Sales & Marketing (generating leads and closing sales)
  2. Production Management (controlling cost and quality)
  3. Staffing (building a winning team)
  4. Business Planning (solving tomorrow's problems today)
  5. Tracking - Monitoring (managing by the numbers)
  6. Financial Management (managing your cash and profits)

The original six systems were presented several months ago. This week I am going to present the newest of the systems: Production Management.

Guy and I have chosen to group all of the production management subsystems into four categories: Estimating, Productivity, Quality Control, and Job Costing.

Each has multiple pieces that will be presented and briefly explained in this article. For the sake of timeliness and simplicity, not to mention not wanting to scare the pants off of you, I am only presenting and explaining the major subsystems.

Estimating: Future Performance Is Driven By Past Results
There is much misunderstanding about an estimator's role. It's really quite simple. An estimator's role is to predict the number of hours it will take to complete the work. Labor Hours is the biggest wildcard when predicting costs. Almost everything else is a slam dunk.

REVIEW OF HISTORICAL PERFORMANCE
Estimates must be based on reality. Reality is based on past performance. Unless something significant has changed, assuming your crews will move faster than their history indicates is pure folly. Periodically study the job costing data across several jobs to see what typical performance is.

TUNING OF ESTIMATING PARAMETERS
Many smaller contractors rely on back-of-the-envelope methods for estimating jobs. That approach is both slower and may be more error prone than with a computer.  Computers allow you to set up templates and assemblies that quickly crank out the time and materials needed to perform work per unit of take-off.

From time to time, you will need to update unit prices and productivity factors based on changes indicated by your job costing data.

PREDICTING THE MARKET
Predicting the price your market is willing to pay does not have to be left to hunches and gut instinct. You should document each price you offer and the cost you predicted for the job. If possible, you should note the unit price commonly used by the market (for example: building owners often think in terms of cost per square foot). Compare your success against your pricing.

SUBCONTRACTOR QUALIFICATION
Should you use subcontractors you need a way to evaluate ones that are new to you yet may be able to perform quality work for less. Check their references. Check their experience in the type of work they'd be performing for you. Most importantly, check their financial situation.  Don't let their financial problems become your financial problems.

CREATION OF PROJECT BUDGET
Once the job is won, a project budget must be set up. The budget should be broken down into pieces the field crews can understand.  Hours and material quantities should be listed for each significant work task, phase, or area.

HANDOFF TO PROJECT TEAM
No reason to do things twice, right? Since estimators think through the job while pulling together their estimates, it makes sense to capture those decisions and share them with the project team. Hold a meeting right after the job is awarded. 

Productivity: Being the Low Cost Provider
It is very difficult to make money in the construction industry if your costs aren't competitive. As mentioned above, your costs are tightly tied to labor hours. Labor hours are directly connected to work speed.

Productivity is the term used to express the speed at which your crews work. The following systems impact your crews' productivity.*

*Note: Monitoring and tracking crew performance is vitally important but we consider it to be part of one of the other six systems: Tracking & Monitoring.

PROJECT SCHEDULING
Different types of projects require different types of schedules. Short projects can be run successfully via bar charts (Gant Charts). Longer projects should use Critical Path Management schedules and ideally would be man-hour loaded. Fast and furious projects should have schedules that are broken down by the day or hour.

DOCUMENT MANAGEMENT
Much valuable construction time is lost waiting on paperwork. Contract completion gets bogged down over legal details. Shop drawings are difficult to pull from suppliers. Requests-For-Information are held hostage at the Architect's office. The faster this paper work is processed, the less rushed your crews will be during the job. Rushed crews lead to mistakes and rework. Keep a detailed log and a calendar to remind you when to force the paper process.

CREW ACTIVITY PLANS
If your projects run more than a couple of weeks, your acting foreman or superintendent should create a detailed two week plan that lists all manpower, material, equipment and information needed to perform the job efficiently.

DAILY GOAL SETTING
Goal setting will be your most effective tool for increasing productivity. Tell your crews EXACTLY how much work you expect them to get done. Give them specific targets such as putting down 100 yards of concrete or framing out the second floor.

MATERIAL & EQUIPMENT LOGISTICS
You need someone to be coordinating the use and transportation of your equipment and the timely delivery of materials. You probably do not, and probably should not, have enough of the expensive equipment to stock each of your crews. Timely coordination of the equipment you own, and rental fill-ins, is necessary to keep your crews on schedule.

Quality Control: Doing It Right the First Time
You probably are quite proud of the work your crews perform, right?

My guess is that you're also frustrated from time to time about the boneheaded decisions your foremen and lead workers make. Once you leave the crew, quality control becomes a challenge. You need systems for setting and reinforcing the quality standards you and your clients demand.

OPERATIONS MANUALS
Your crews must be given clear guidance as to preferred, acceptable, and unacceptable work quality. Pictures are the best technique for clarifying the company's standards.

DAILY LOGS
Daily logs have been around construction sites for decades - and for good reason. They perform a valuable service as a written history of a project. They capture valuable information that is otherwise quickly forgotten such as: weather interruptions, delays caused by other contractors, and work performed. Daily logs are a great place to document the quality problems left behind by the previous contractor. 

SUBCONTRACTOR MANAGEMENT
When you subcontract, you remain responsible for their quality of work. Your foremen must know how to evaluate the quality of the work being performed. They must have the means, backing, and processes to enforce quality and safety standards.

STANDARD OPERATING PROCEDURES
SOPs almost define the concept of systems. That's exactly what SOPs are meant to do: establish crystal clear methods for performing important tasks. When followed, SOPs almost always result in superior quality and minimal re-work. SOPs should be documented for every task that proves difficult for your crews to perform reliably.

QUALITY AUDITS
Your crews need to hit their quality targets right in the bull's eye. Not below client expectations on one hand yet not too far above on the other. The only way to ensure proper quality is to perform quality audits. You need a system where someone in the know keeps tabs on quality by making the occasional inspection. 

Job Costing: The Life Blood of Production Management
Job costing is a hot button issue. Why wouldn't it be? Contractors are numbers oriented people who want to make as much money as they can. That leads them to focus on data collection that answers a single question:

"How much money did I make on the job?"

An important question, right?  A very important question. Here's the problem.

Focusing exclusively on that one question prevents you from collecting the information your estimator, scheduler, and project managers need to bring in ALL jobs profitably. You need job costing systems that collect and process all of the information you need to run every project profitably.

DAILY PRODUCTION TRACKING
Quantity of work performed using 80/20 benchmark codes.  Should not match up to the estimator's cost codes.

TIME CARD PROCESSING
I see so many time card mistakes. Timecards are a vital tool to success job costing. Time cards should have places to record: project, date, employee, total hours, hours by work code, and preferably amount of work completed by crew.  They should be turned in daily. The data should be entered into both payroll and a cost tracking software package (spreadsheets work well).

EQUIPMENT TRACKING
The size and cost of your equipment drives the decision here. If your equipment is fairly inexpensive, for example you use a handful of lifts, ladders, and hand tools, then you don't need to assign their hourly use to cost codes.

If you use expensive equipment, such as road builders and erection companies, then you should track your equipment usage by operating hour per cost code. Note that I said operating hour, not total hours. Calculate an effective rental rate for each piece of equipment and charge it to your jobs accordingly.

MATERIAL TRACKING
Whether from taken from inventory or drop shipped to site, material amounts should be coded by job and work code. The approach serves two purposes.

First, it gives you the ability to compare material quantities and price against the budget. Second, it helps you control your inventory.  Several methods are available. You can move to a purchase order system. You can use a combination of POs and material tickets. Or you can have your bookkeeper nag the PMs, supers, and foremen with constant phone calls.

Production Management: Controlling Cost and Quality
Whew. We've reached the end. Thank you for hanging in there.

This article demands about twice the amount of time to read as most. I try to keep them limited to short magazine article length however I didn't want to leave you hanging with a two-parter on this very important subject.

Despite having a reputation as being heavily focused on sales and marketing, all of my clients receive tremendous amounts of assistance with their production management. Virtually, every contractor I've ever met has had improvement opportunities on their production side. Usually, very significant opportunities.

Talking contractors into addressing production issues is easy. Talking them into addressing sales and marketing isn't. So, I bang the drum louder on sales and marketing issues than on production issues. Both are vitally important to your success, peace-of-mind, and happiness.

Ron Roberts, The Contractor's Business Coach, teaches contractors how to turn their business into a profit spewing machine. To receive Ron's FREE Contractor Best Practices Newsletter visit www.FilthyRichContractor.com.

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