JOB MANAGEMENT - COST OVERRUN

Who is at fault? Management is inclined to blame labor, since the cost of materials can usually be estimated with a more consistent degree of accuracy than labor. Experience indicates that there are two common sources of major labor cost deviations, both of which can be corrected by management action.

One source is poor estimating. Without having the historical data available on previous jobs of a similar nature, accurate estimation of field labor cost is difficult. It follows that if this type of job is one that your company is inexperienced in doing, your risk is greater, and you should include a greater profit margin in your estimates to cover possible contingencies.

The other cause is poor scheduling - not having the right materials, the right tools, the right information, the right training, and the right people all at the right place at the right time. All of these responsibilities are those of management. Sometimes, in spite of your best efforts, causes of overruns are out of your control. Your field employees may be held up while waiting for other subcontractors to finish their work so that you can get in. Bad weather may hold you up unexpectedly.

Consider whether you may have picked the wrong customer, or picked a job you weren’t skilled to do. This type of job takes too much time and increases labor-units on a job. Place employees in a position where they can do a job without requiring additional on-the-job training. Train your unskilled labor and provide better supervision. Be sure to have the proper tools on the job. Unexpected problems may be due to a bad estimate.

Do YOU schedule work or do you allow your CUSTOMERS to schedule work? Do you attend or participate in pre-construction meetings?

Order materials in advance so that they arrive according to the construction schedule. When schedules are changed, immediately check to see if material deliveries can comply with the new project schedule. This keeps your crew from standing around waiting for material.

The end result of cost overruns is a reduction in profits and upsets in cash flow. Management can help make your contracts more profitable by providing education and licensing opportunities to employees, which makes them more organized and efficient. It’s also better practice for a contractor to advance and promote employees within the organization, rather than hire from the outside.

What else can you do to reduce cost overruns? Start with overhauling office and management procedures. Reevaluate estimating skills of your personnel and learn how to assign labor-units more accurately. Understand overhead, and why percentages don’t always work. Make sure your markup reflects the amount of risk entailed in each job.

No matter what the specific cause of cost overruns is, the responsibility always falls to management. You can delegate authority, but not responsibility!

NOTE: For other closely related topics, be sure to review the newsletters on Job-Costing (#51 & 52), Markup (#53), Estimating Procedures and Labor-Units (to be published later) in this series of articles on Financial and Job Management.

Mike Holt’s Comment: This newsletter was extracted from my Business Management and Management Skills’ Workbook. Watch for our next newsletter, and as always, we encourage your comments and feedback. Send us your real-life experiences. Please respond to Barbara@mikeholt.com.

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