Seven profit enhancing strategies for contractors

By Randy Bonnecaze

Having a competitive edge over your rivals is essential to being top dog in any industry - construction being no exception.

And one way to measure whether you're a champion or an also-ran is a simple look at your bottom line. Are you the most profitable contractor on the block? If not, here are seven profit-enhancing strategies that can help you move to the head of the pack.

1. Re-evaluate your marketing plan. Most contractors know they should create a marketing plan to sell their services. But few actually use these plans to their fullest potential. Do you know what your marketing strategy is? If you can't answer this question in great detail, re-evaluate and, if necessary, overhaul your plan.

Take into account your customer base, primary services, competition, strengths and weaknesses. What strategic advantages do you have that your competition lacks? Does your marketing plan maximize these advantages? If not, bring them to the forefront and don't hesitate to brag about your recent successes.

2. Improve your estimating. If that marketing plan pays off, you'll find opportunities to bid on some jobs. And when that happens, you must have an accurate estimating process. Establish procedures to ensure this. For example, compare job estimates to actual costs on completed jobs and investigate substantial differences. Provide the results of these variances to your estimators so they can improve their accuracy.

3. Boost cash flow when negotiating. So let's say you win that bid and now it's time to negotiate the contract. Among the many things you need to keep in mind is boosting your cash flow. Think about contract details that might bring money to your hands a little more quickly. For instance, structure the billing terms so you collect contract revenue before your projected job-progress schedule dates. That way, your revenue stream will cover your current job costs and allow for the collection delay of receivables.

Also, be creative in collecting retention. Add a contract provision to reduce retention when the project is 50 percent complete. And negotiate beneficial interest payments by requiring the owner to remit retention dollars to an interest-bearing escrow account. Although you can't access the retention until full project acceptance, at least it'll be earning you money.

4. Communicate throughout the job. Before a project begins, meet with your project team. Doing so will convey that you value their opinions and enable you to pass on important information (such as timelines and profitability targets). Better yet, you may identify potential problem areas before they arise, saving you precious time and money.

As the job progresses, hold periodic review meetings to evaluate progress and correct any mistakes before they become costly. Follow up on deadlines and make sure team members stick to them. Include not only project managers in these meetings, but also members of your accounting group. By collectively addressing job challenges, you'll minimize waste and maximize profits.

After completion, gather your team one last time and discuss the project's successes and failures to identify good and bad practices for future jobs. This is also a good time to evaluate the project's profitability and recognize team members' contributions. Most important, ask the owner for feedback and talk about what he or she tells you. Satisfied customers are critical to obtaining repeat business and job referrals.

5. Keep things safe. Don't forget to address safety - accidents can devastate any construction company's profitability. In addition to decreased productivity and increased workers' compensation costs, direct and indirect costs often spring from job-site mishaps. Be sure that your managers are committed to safety as a top priority.

Moreover, carefully review your company's investment in training and consider increasing this effort. With a more knowledgeable work force, you may reap potential savings from a decrease in job injuries. Also look into establishing incentive plans that reward safety-enhancing ideas and injury-free jobs.

6. Create credible documents. Whether on the jobsite or at the home office, proper documentation can keep you out of trouble. One example is job claims. Because these burn up substantial time and money, track every on-the-job move you make to avoid them. For each project, keep daily job reports, communication logs and progress reports.

7. Maintain your financial planning strategies. Last but not least, always keep an eye on the big picture. Case in point: Your year end financial statement. This document allows sureties and bankers to analyze and come to important conclusions about your construction company. Thus, your bonding capacity, working capital, lines of credit and interest rates all depend on its strength and accuracy.

Also use your year end financial statement to plan for events that may affect your tax liability. For instance, you may foresee opportunities to defer tax payments, keeping more of your dollars at work today. Simply put, don't miss any chance to present your construction company in the best light.

Conclusion. Whether you implement one or all seven of these profit-enhancing strategies, your bottom line will likely grow bigger and your competitive edge sharper.

Additionally, carry over the attention you pay on the job site to your office work. For example, verify that your financial statements accurately reflect the job costs you identified in the estimating process. Doing so facilitates budget-to-actual comparisons and overhead rate calculations, as well as enhances your job cost system's accuracy.

And don't keep this information to yourself - give your accounting personnel and project managers access to it, so they'll be able to do their jobs better.

Editor's Note: Randy J. Bonnecaze is a Certified Public Accountant (CPA) with Hannis T. Bourgeois LLP, Baton Rouge.