The average pre-tax net profit for subcontractors is between 2.2 to 3.5 percent, according to the Construction Financial Management Association. Because there is so much competition in today’s economy, contractors have to bid work aggressively, which results in these low profit margins. However, this can be a risky strategy, as even small problems on a project can quickly wipe out the small amount of profit. Since material costs are high for everyone, contractors rely on productivity in the office and the field to make their money.
The reality is that contractors need to take back control of common factors that diminish returns, like poor cost management, evidenced by over/under-utilized or idle resources and the mismanagement of field data. Understanding the impact of these problems and regularly working to mitigate them will improve overall profitability. Technology can help contractors improve their productivity and profitability by addressing some of the most common ways contractors leave money on the table.
What is cost management?
Cost management has the most obvious impact on profitability, and it’s anything but linear. Effective cost management includes resource planning, estimating, budgeting, and cost control. Each of these areas can be complex, and together, they define the parameters for project profitability and have a major impact on the overall health of your business.
- Resource planning – identifying the inputs needed to complete a job, including labor and equipment by task
- Estimating – forecasting the costs a job will incur based on these inputs at different stages of development
- Budgeting – allocating the projected costs into different aspects of a job, such as specific tasks or modules
- Cost Control – the continuous process of measuring cost variances against the budget
Impacts of poor cost management
Lack of visibility
Without the right tools and processes in place, contractors cannot understand their business as a whole. This means there are likely gaps in understanding the business’s capabilities to do more work, where they run into issues on the job, and what combination of work is optimal for the organization. For example, contractors that don’t spend time analyzing their cost data or only look at it from a high level (e.g., was this project profitable?) overlook the gold mine of insights indicating why a job was profitable or lost money. These insights are critical when estimating future work that is similar in scope.
Ultimately, contractors that fail to analyze and review data regularly are losing out on opportunities to learn from successes and failures that can drive more profitability in the business.
Exceeding Budgets & Waning Margins
Unplanned costs on a project can quickly add up and reduce margins. It might sound like the solution is to avoid unplanned costs, but the reality is that cost management is more involved than simply controlling the costs of any given project.
Contractors need to be sure they are establishing realistic budgets and reviewing cost data regularly. Failing to guide yourself with data and course-correct can lead to unexpected budget overages and be detrimental to profitability. By regularly reviewing costs and projecting into the future, managers will see potential budget problems sooner and can make the necessary changes to preserve profitability.
What it Means for Business Health & Performance
Over time, these issues can cause major inefficiencies and impose considerable adverse effects throughout the business. The impacts of a struggling bottom line trickle down from management and manifest themselves as further-reaching issues, like poor employee morale due to stress. Contractors might even cut costs elsewhere to make up for poor cost management, like reducing employee benefits or limiting the budget for critical tools like software to help them do their work more efficiently.
The point is that having a healthy construction business requires proper cost management, from resource planning to cost control. It’s an iterative process, upon which contractors should always endeavor to improve. Cost management doesn’t have to be time-consuming, but it does have to be continuous. Assignar’s construction software for management can help improve your business’s profit margins. In Part 2, we’ll look into the impacts of resource utilization and how optimizing is the answer to greater productivity, and, ultimately, profitability.
“With Assignar we have saved $10,000 a year by no longer printing job sheets, timesheets, and PO books as it’s now all easily accessible on the app”.Lisa Langlands, Fluren