Can You Still Meet Your Margin Goals?

With costs on the rise, make sure you’re managing construction project bids and costs to keep margins intact.

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The year is half over. So where do you stand in terms of backlog, profitability of current work and ability to meet budget or bid price? And as far as the issue that counts most is concerned, how does the bank account look?

In terms of work-in-process, do you have proper accounting to determine cost over billing and billing over cost? Are you using realistic overhead rates? Are you billing on a timely basis?

How is the staffing process going? Do you have the right people to do the work, or are you still running around trying to find people who can do the job right the first time and on budget?

What I’m really asking is whether you know what is going on in your business, especially related to the costs you incur to complete your work. If you don’t, you better find out because I suspect costs are going to increase (if they have not already) and continue to do so for at least the next year or so.

Outdated Cost Data Could Cost You

We all know interest rates are rising. We also see that anything made with oil or fuel is increasing. From what I see, the cost of most building materials is headed higher. And let’s not forget equipment cost, and the 4% to 5% increases you are seeing this year for both units and parts.

The point here is if you are bidding using cost data that is over six months old, you may be kidding yourself. Price increases usually come about just prior to the start of your busy season and could be as much as 5% higher than what you started using at the beginning of the year. That 5% increase can be a big number for most of you.

For example, if you are running a 30% gross profit margin, a 5% cost increase reduces that margin to 26.5% — or a 12% decrease in margin. That is a big number. You would have to raise your pricing by 15% to get back to a 30% margin.

If you have been underestimating costs, the additional billing required to make up, say, three months of improper billing may not be sufficient to get you back to a 30% margin. Consequently, you are not going to hit your margin goal no matter what you do unless you make some drastic changes.

The bottom line is if you can’t increase the billing, you have to become more efficient to make up the difference. This requires cutting both your fixed costs and variable costs.

Higher efficiency and proper bidding will get you to the break-even point faster. If you lower your fixed costs, you will also reach break-even faster, with a shorter period before you start making a profit. Do both and you will be happy with the results as you head to the bank.

Should You Spend Money to Make Money?

But what if you increase fixed costs? Can you get any benefits from doing so? The answer is yes, if you spend the money the right way.

Suppose you invested in new industry-related software that gives you the opportunity to get better and faster information that enables you to make adjustments more quickly, as opposed to waiting until the end of the month to figure out that costs are out of line. Suppose you invested in new equipment that requires less personnel hours to do a job.

Whether you invest in soft costs or in equipment, you will most likely take on a monthly fixed payment in order to pay for it, thus increasing fixed costs. But fixed costs that are more than offset by efficiency gains or the ability to make adjustments will reduce job costs and improve margins.

On the other hand, you can invest in more efficient equipment without a long-term fixed cost by renting what you need. Assuming you can get what you need when you need it, I suggest you go with rental, which provides “trial by fire” to see if the results offset the costs.

As you have heard from me in the past, rental may also be the way to go if you do not utilize and bill the cost of the equipment at least 70% of the time at a rate that recovers the cost, plus interest plus maintenance, over the likely 60-month note period. If you don’t know — and I mean really know — that this is the case, stick with rental until you do and lower those fixed costs.

Know Where You Stand

I guess the point of this month’s comments is to remind you that costs are increasing and need to be accounted for when bidding current work. On the other hand, it is to inform you that your competitors may be bidding jobs taking into account more efficient ways to cut both manpower and other job costs that you will have a hard time meeting.

In short, review your costs as well as those of your competitors where possible. Find ways to be more efficient. It will be a must going forward. Do not get caught in the squeeze!

I have mentioned this previously but I am going to do so again. Do yourself a favor and take your 2017 tax data and have your accountant use it to estimate your 2018 tax liability (the best they can) to give you an idea how you will fare with the new tax rules. Quite frankly, not many folks understand the new tax bill, so find out what to expect to avoid big surprises (spelled: cash flow).