This newsletter series will give you insights and techniques to help you build a better business no matter how large or small yours is. I always say that success comes from working on your business as opposed to in your business. I want to share with you the systems and philosophies that have been successful for me over the years.

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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 managerial action.

Poor estimating. Without having the historical data of previous jobs available, 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.

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. That’s a pretty tall order, isn’t it? Don’t worry; we all know that we work in an imperfect world so no one should expect perfection from you. Nevertheless, continue to strive to raise those expectations.

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 or other unpredictability, may hold you up unexpectedly.

Consider whether you may have picked the wrong customer or picked a job that exceeded your capabilities. The latter takes too much time and increases labor-units on a job. Be mindful of individual skillsets and 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 and necessary equipment on the job.

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

Maintaining a close working relationship with your suppliers is essential. Order materials in with enough lead-time so they arrive in accordance with 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 if delivery cannot be moved up or pushed back when necessary.

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.

The quality of your work as well as the quality of your equipment and materials is another consideration. If you order and use poor quality materials or equipment not specified in the contract, you might be required to replace them with better quality materials. And when you’re using poor quality or in-experienced personnel in the job, you might be required to re-do the work. This could be a significant cause for cost overruns. The costs related to callbacks to a completed job only serve to reduce the profit from that job.

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 almost any task, but not responsibility!

The above content is extracted from Mike Holt's Business Management Skills Program.