There are two primary reasons why construction contractors fail to achieve their desired profit margin after winning a contract:
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Underestimating the real time or materials required to complete the project, resulting in an inaccurate bid price
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Poor project planning and management during the construction period
It Starts With Good Project Management
If you were to ask me which reason is the biggest factor, I would say poor project management.
Good project management is simply not easy for a host of reasons. The main problem contributing to poor project management is ineffective and poor communication between all parties involved in the contract at hand. Is project management a challenge in your business?
Put First Things First
In Stephen Covey’s seminal work, The Seven Habits of Highly Effective People, Habit #3 is “Put First Things First.”
It is interesting that this principle was written before the 24/7 world of emails and texts, which has only complicated the problem because many of us (myself included) are wired to immediately respond to every call, text and email that comes our way. I am convinced that I could spend each day doing nothing but reading and responding to emails and be “busy,” but very ineffective. I am sure you can relate!
Many people, including project managers, put urgent things first. Effective mangers, however, put important things first.
In his book, Covey offers a matrix of four quadrants (see diagram) dealing with activities that are important / not important and urgent / not urgent. For example, putting out fires is an “important and urgent” activity (Quadrant I) that we all have to deal with.
When we focus too heavily on Quadrant I activities, the important but not urgent matters (known as Quadrant II) will be drowned out. As you can see from the diagram, Quadrant II is where preparation, planning (project management), relationship building and values clarification reside. While these tasks are important, they are not urgent, and therefore often get pushed aside.
I believe Quadrant II is where profits are maximized. It is important that your construction company’s leadership creates a climate that fosters this Quadrant II culture.
In all my years doing construction accounting, I’ve observed that the most successful contractors place high importance on routine planning meetings between key project and accounting / finance personnel. These regular meetings include a review of the status of open contracts.
Project Management Case Study: Reports Were Missing
One of my construction clients was using QuickBooks, which did not have any built-in capabilities to quickly create a report that would help with project management. To remedy the problem we designed a work in progress (WIP) calculator, which automatically calculates the over and under billings adjustment. Not only is this required by construction accounting principles, but bonding companies require this with any financial statement. Without a timely recording of this adjustment you will not have an accurate picture of the company’s bottom line.
We have used this WIP calculator for several construction clients. Those clients run the report monthly and have created a culture where the report is used as a platform for discussion of ongoing projects.
We helped one client create a separate worksheet for each month and insert a column that clearly highlights the monthly change in estimated total costs. These changes in costs are then explained by the in-charge project manager. Clients have found that this report also assists in getting change orders approved, which is a key area where profits are lost.
Whether you use this template or one that is created within your construction software package, it is important to routinely review it. Make sure your accounting and production teams are talking to each other. It can only produce positive results.
Feel free to leave a comment below to let us know which project management approaches have worked for you.
Need Help?
Gross Mendelsohn’s Construction & Real Estate Group provides audit, review, compilation, tax, business valuation, succession planning and consulting services to construction contractors, architects and engineers. For help, contact us online or call 800.899.4623.
