Lean Financial Management…for Construction Leaders /06-25-2014

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In my previous article on Lean Financial Management, we directed insights to the contractor/owner.  In this article I will be addressing the leaders who work for the contractor. 

With as many decisions that a construction leader must make during the day, having greater empowerment to make financial decisions must be part of the construction leader’s profile.  For example, how many of the decisions listed below have some financial impact on the company?

  • Purchase needed tools from a local supplier because the distance to return to the shop and retrieve the needed tools is too costly
  • Change material provider from what was considered in the bid due to closest plant’s poor quality or delivery history
  • Hire or fire workers with more or less experience
  • Development of a budget for a project, department or company
  • Decision to move company services into a new geographical market that has not been traditionally served
  • Move workers to a better role for them…one that should pay more
  • Giving a pay raise to a worker worthy of the increase
  • Heck, even what will be served at an employee appreciation luncheon

The size of the financial impact made by a decision can certainly depend on the level of responsibility of the leader.  Obviously a president or vice president (both nonfamily members) making a decision might have a greater financial impact than the decisions made by a project manager or crew foreman.  However, a similar approach can be employed that guides any level of leader in a construction company.

Guidelines to Improved Lean Financial Management

1. Know Your Budget and Expenditure Boundaries. Just like an owner, you cannot spend more than you have.  Every construction leader, no matter his level, must know the financial “boundaries.”  Now, just because the budget states you have $30,000 for capital expenditures (for equipment) doesn’t mean you have to spend the full amount.  Rather, this amount projects what the estimated budget might be, or what the “expenditure boundaries” are for the year.

One common mistake made by contractors, especially smaller contractors, is not having a budget: for the year or for a significant-size project.  If you are a construction leader (not the contractor/owner), work with your owner to develop some projected costs, revenues etc. for the company.  Realize that a budget, like a job estimate, might not always be down to the penny, but it does provide some framework for what we are trying to stay within in order to run a profitable business.

2. Cost Comparison Shop. The word “shop” is not always a welcome effort for some construction leaders, unless they’re shopping for new truck, bass boat or shotgun.  However, for any construction leader, it pays to be a conscientious shopper of tools, equipment, materials, uniforms etc.  Unfortunately many construction leaders are so busy that they tend to take the easy route when buying needed items.  Spontaneous purchases normally mean more money spent.  Such purchasing is often what “nips at the heels” of profitability.

Now, part of this dilemma is directly tied to many other principles and practices that I’ve written about in previous articles (developing a look-ahead schedule, setting strategic direction, making strategic decisions) designed to prevent poor decisions and improve profitability.

Cost-comparison shopping can be made easier just by applying a few simple ideas, including:

  • Keep a database of what items you are purchasing, including price when bought, where the item was purchased, were discounts in play etc.
  • Have an administrative assistant run some “comps” periodically for items often purchased during the course of the year
  • Don’t be shy about shopping a “good price” from one supplier to another.  You might be surprised to find one supplier giving you another 5% - 10% off their first price.
  • Approach suppliers about discount purchases based on volume.  Gas, maintenance supplies, tires etc. often can be purchased with volume discounts.
  • Begin to negotiate with suppliers of important items in the fall before next year to stabilize pricing; this allows you to improve your budget for the next year.

3. Return Leased Items ASAP! A fairly common mistake made by construction leaders is to be slow about returning rented safety equipment, construction equipment, scaffolding, forms etc.  Remember, most rental suppliers won’t be quick to call and remind you of the leased end-date, unless they are super busy and need the equipment back in time to clean-up the items and re-lease to other contractors. 

The reason that this cost-killing mistake is easy to experience is because there is often confusion about who is supposed to return the rented items.  There is an extreme example of this that was experienced by a large general contractor who failed to return a rented scaffolding…for about six months.  This tallied up to about $500,000 in rental overage fees.  While this might not happen to most contractors, it does point to the fact that even at large contractors there can be confusion as to who is supposed to call the supplier to come and get their equipment.

4. Place a Financial Limit on Credit Cards. This guideline is easy to execute but is still by many contractors.  While using credit/debit cards is not new, placing a realistic ceiling for each employee is.  What limits should be placed on such cards?  I think that this is most related to the level of authority of the user.  Consider a few examples below.  Don’t get locked on the amounts as much as the spread of limits related to the different leadership level.  Amounts are based on annual limits.

Crew Foreman                                 $   2,500

Superintendent                                $10,000

Project Manager                              $10,000

General Superintendent               $15,000

Senior Project Manager               $15,000

General Manager                             $20,000

Vice President                                  $30,000

The use of the card should be limited to fuel, minor purchases of tools, needed items related to a project etc.  It’s a foregone conclusion that receipts must be strictly maintained, no excuses.  Capital purchases of equipment and vehicles should not be paid for with the card but emergencies might be allowed.  Still, all who have company credit or debit cards must maintain strict accountability.

5. Require a Weekly Expense Report…with Receipts & Explanation. This is another guideline that most contractors agree with -- but seldom require of others.  Every construction leader should have expense envelopes in their possession and should be required to turn in a completed and documented expense report (or electronic version of the same) along with receipts.

With federal and state financial laws tightening up on all businesses, including construction companies, every construction leader must be more accountable for any credit/debit card expenditure.

6. Make Financial Updates Part of Weekly Staff Agenda. Any expenditure should be part of the normal discussion among construction leaders.  This does not mean that every construction leader is to present his weekly expenses, that’s what turning in a weekly expense report is for.  However, there should be a regular update about how many purchases have been made against the annual or monthly budgeted average.

The reason for this added agenda guideline is that such expenses incurred by construction leaders can often be overlooked or “hidden” in the project expenses.  This is less about holding construction leaders honest and more about overall company financial accountability.

Contractors continue to win work on smaller margins than ever.  It’s still very competitive for most construction companies so there is little margin for error.  One error that is, for the most part, preventable is failing to build greater “lean” financial steps into your company process to encourage accountability for everyone.

Here’s to stretching that dollar!

Brad Humphrey  

© 2014 Brad Humphrey, Pinnacle Development Group/The Contractor’s Best Friend™