Why Should You Promote Business Acumen Among Project Managers?

Contractors need to do all they can to sharpen superintendents’ understanding of construction industry finances.

By Mark Lund

Despite the critical role project managers and field supervisors play in the success of a construction project, key managers often don’t know everything about their company’s financial health. That’s because most contracting firms are privately held and don’t want to share all bottom-line financial information with those who don’t have a share of ownership.

Mark Lund, CPA, CCIFP, is partner-in-charge of construction industry services at Weaver and Tidwell (www.weaverandtidwell.com). The company has offices in Houston, Dallas and Fort Worth.

It may seem odd, considering that project managers and supervisors influence or control nearly 90% of a project’s direct costs. However, managers and supervisors may eventually go to work for a competing firm. Any proprietary information they take with them can diminish a competitive advantage held by their previous employer.

At private contracting firms, withholding some financial information is not a mistake. What is, however, is when contracting firms don’t promote strong business acumen. At the best firms, owners help project managers and supervisors look past hands-on responsibilities and take a broader view at turning a healthy profit.

There are numerous ways owners can strengthen their managers’ business acumen, such as continuing education classes, seminars, conferences or just explaining aspects of the business. The goal is to get managers to delve into issues they previously felt were outside their influence. More than just hands-on supervisors, they should become the front-line brain trust, always focused on issues such as cash flow; the cost of loss, theft and mistakes; ways to improve return on investment; the cost of rework; equipment expenditures; wasteful overhead; the newest technologies.

Gross profits On most projects, gross profit margins are thin. They can range from 20% at specialty contractors to less than 4% at general contractors. Revenues of $1 million per month may yield only $50,000 of gross profit to cover company overhead including rent, salaries, insurances, maintenance and marketing. Project managers and superintendents should understand that less than 5% – or $2,500 – of the $50,000 gross profit typically makes it to the net income.

Labor costs Labor costs are more than just the hourly wage rate that project managers and superintendents focus on. The cost of payroll taxes, worker’s compensation and health insurance, retirement plan contributions, and state unemployment taxes all add to the base-rate cost of the employee. Such costs can add anywhere from 20% to as much as 35% at larger contractors who provide training and safety programs as well as company vehicles. So that $25 per hour employee is actually costing the company in excess of $30 per hour. That includes down time when work is halted or when such workers are between jobs.

Equipment Equipment costs are one of the more overlooked in the industry. Rented equipment is charged to a job on an hourly or daily basis, and the cost is obvious to the project manager. However, company-owned equipment carries a cost often overlooked by field personnel. Since they are not getting billed by the hour, they are less likely to be efficient with the equipment. This may result in the company having to buy or rent additional equipment for perceived shortages. The >> carrying costs of company-owned equipment include insurance expenses, repairs and maintenance, depreciation expenses and interest if the equipment is financed. Other miscellaneous costs include license fees and property taxes. On an hourly basis, company-owned equipment may have an hourly carrying cost approaching many rental rates. To make project managers and superintendents aware of the cost of owning equipment, many contractors will assign a dollar value per hour to each piece of equipment and charge jobs for its use, just as if it were being rented.

Cost of theft or lossContinued loss of small tools and equipment can adversely affect bottom-line profitability of a job. Individuals responsible should be held accountable for their use, including any loss or theft that occurs. On a job with a 5% gross profit margin, the loss of $1,000 worth of small tools and equipment would require $20,000 of ongoing job revenue to cover those losses.

Rework expenses The cost of rework or warranty charges should be accumulated and accounted for. For every $15,000 of rework on a job, the company needs $300,000 of revenue on ongoing jobs to generate enough profit to cover the cost of rework. By putting such costs in terms of gross revenue needed to cover costs, field personnel will become more aware of the effect of rework on the company’s bottom line.

Billing practices Inaccurate or late billings cost each job anywhere from 3% (value of lost interest income on non-invested funds) to 8% (cost of borrowings on the company’s line of credit). Good billing practices have a direct impact on cash flow and the related cost of funds for the company. Laborers and material providers require payment weekly or monthly, so cash outflow is predictable and somewhat fixed. Failure to bill on a timely basis, or billing for less than the actual costs incurred for the month, will cause a negative cash flow on that job. Successful contractors use positive cash flow to earn additional return on single-digit gross profit margins, effectively adding percentage points to the effective profit on the job. Negative cash flow can take a 5% job down to an effective 2% or 3% margin, once the cost of borrowing (or loss of investment income) is allocated.

Company owners don’t have to reveal private financial information to educate – they can use generalizations. But they need to take the time to teach their project managers about company operations. The managers will appreciate the effort. Moreover, the strengthening of business knowledge strengthens the firm’s financial future.