6. Ignoring Your Employees

Use recruiting and retention methods that work regardless of the kind of person you can afford. There are just as many mistakes made by hiring an expensive person who can’t perform, as hiring someone without the experience or qualifications because recruiting them is too expensive. It is easier and less costly to develop internal management and key personnel then to go outside your company. In order to do that successfully, you must develop an effective process that is defined, tested, routine, and communicated to the targeted employees. Beyond defining training processes to the candidates, you must also define your expectations of them, what they should expect for themselves and what’s in it for them. That will allow you to develop the personnel who might otherwise choose to leave for a better opportunity with another company. However, do not promote someone who is great at a current job to a position for which they are not fully prepared because they will fail, and you will lose money and your valued employee. Typically, a truly performing employee should not have to be promoted to receive more pay. As described under “pay for performance”, a great producing employee could make more money than the manager who manages them. Remember, a manager is there to support those they manage and to nudge them back when their actions take them “out of bounds” of the company policies, job or business plan. If you have control processes in place, use your employees to “sell” the company; promote these policies on your website under employment opportunities inclusive of testimonials of current and past employees who benefited from these policies. Develop a rational business culture of communications that confront and coach coupled with a working pay for performance plan, and you’ll become a leader in recruitment and retention of valued employees.

Use Pay for Performance plans that work and sell others on your company. If your company is under control as defined by the previous 5 noted steps, you should introduce a pay for performance plan. I do not mean the plans that are Christmas bonuses, or subjective bonuses that become entitlements. You do not want your employee questioning what they got, why they received it, if it was enough, or if it is what they deserve. A true PFP plan establishes measurable standards attributable to the job the person performs with at least one of the measurements dealing with the link between what the person does and profit. If what they do is not measurable directly to profit, such as the accounting department, the timeliness and accuracy of what they do weekly and monthly is, as are evaluations monthly or quarterly by their internal customers in other departments. Ultimately the combination of values that comprise the bonus score is taken as a % of the pool created by the % of the company profit as defined as to what profit means, the pool available to the department or profit center, and the pool available to the individual by job classification. The PFP plan is a scorecard that shows the employee how they are doing periodically in measurable terms and money. Each company plan should be unique. Each company plan should incorporate standards that support the company goals of revenue, profit, customer branding, and internal culture. Each plan should be implemented when the company has successfully implemented the first 5 steps above. Do not begin unless the 5 controls are in place or the plan will fail and harm the company.

Include middle managers in senior management meetings. A development process for performing key staff is important. Regardless of the process, it is always useful to include non-management staff in appropriate business meetings to introduce them to the real process of managing the company. It gives them a sense of inclusion, an opportunity to learn, contribute and makes them feel valued. Of course, it is critical to hold a meeting that begins on time, has an agenda, involves participation by attendees and is followed up.

Listen to and respond to suggestions from the field and staff. Employees sometimes will state a concern or idea but there is no structured response to them. There is no response such as “great idea, good insight, won’t work and why”. The opportunity to coach the employee as to how the business needs to make decisions is lost. I recognize the issue of response is often about money…can’t afford it, not in the budget…or the like. However, the opportunity is to put the response into a “coaching/learning” moment, by explaining the need for a return on investment that is accountable to someone to do anything in business. In effect, if someone has an idea that can be measured as to ROI to an amount and timeline, and if the business is willing to take the risk, and the person managing the process or key to it (typically the one making the suggestion) is willing to “take the hit” within their pay for performance plan if it doesn’t work, then the company has the basis for making a decision to go forward with the idea. Conversely, if an employee suggests something that is beneficial to the company and has a measurable effect on the profit of the company or sales of the company, then the employee should be rewarded within the PFP plan or in addition to it based on the measurable gain to the company. In the end, it is ok to say “No” when the “No” is explained. It is important to let someone know that you listened by following up with the employee. It is the essence of good management, and it keeps the employee from “going to the well too many times and finding it dry” and “losing the emotional investment of trying anymore”. This of course is measured in lost productivity and profit/revenue loss.

5. Failing to Work for a Profit

Complete job reviews monthly and include the estimated cost to complete. Whether you are a remodeling company, residential builder, or commercial builder, and if the job takes two weeks or two years, a job review process inclusive of an estimated cost to complete process assists you in rapidly identifying job issues. It creates a feedback required for estimating and managing field issues, and ensures better accuracy of your monthly financial statements. Working for a profit is all about management, knowing potential issues, mitigating them, and building knowledge. Those four elements control profit along with your time investment and the quality of the buildings you build.

Compare sales results and billing results to planned results. All too often, companies “take what they get” as a sales result. Just as you manage a job, estimating processes and quote processes, the lead generation process must be set with standards that are linked to your revenue and profit plan. Those standards must be measured and responded to. One of the primary duties of the manager is to respond to the results of the measurement of standards. It is expensive when you do not target your estimating process. It is equally costly to have poor lead generation and follow up of leads. Determine the results of sales, billing and lead generation every month and compare those results to the cost of inaction versus the benefit of action. You will find poor results that can be improved.

Respond to and mitigate problems urgently. It doesn’t do anyone any good if you have access to information or knowledge and there is no urgent response to it because you didn’t understand it or address it. A manager must be able to clearly understand the accuracy and meaning information in front of him and respond to it immediately. The manager must determine when and how the problem will be solved. All too often in business, the issue is not that problems occur, but that they are not recognized, resolved, or mitigated quickly. There is no perfect business. The most successful companies are the ones that respond to problems and opportunities, maximize opportunities, mitigate current problems, and stop making the same mistakes over and over again. They look…they understand…they respond…they learn…they change.

Not Knowing Your True Cost

Control a sale/job from pricing to completion. Whether you are a contractor with a pre-construction process, a service manger with a dispatch process, or you are planning profitability via a service contract sales process, integrate all the involved parties up-front before commencing the sale output. Know the costs on the job, hours on the job, material requirements, buy-out gain, parts requirements, and know that the labor scheduling needs are relative to your actual cost versus the revenue you will realize. Simply put, measure what the true profit on this job or service is supposed to be, so the job or service can be measured against what it should be. Get everyone on the same page. Start with a clear understanding of what the profit is after direct costs of the job or service. If you use overhead or general conditions in your estimating/pricing process, have your accounting department measure your profit or loss based on the “absorption” rate of those costs. Measure the effectiveness of estimating. Determine what your true cost of time and expenses is on sold jobs, which will determine an effective sales strategy. If you attribute a labor overhead rate to the hourly cost of labor, measure those costs inclusive of overtime against hours estimated (not used) on jobs. You may find this to either be a profit center, and therefore also a tool to price tighter, or you may find that this is a loss that can be better controlled, or simply that you are “leaving money on the table” with your rates that you can increase without jeopardizing sales.

Learn to maximize profit. Review the categories of sales or “profit centers” routinely. Almost every company does something really well. Identify the job or service you can use to be more predatory in your sales process to increase your bottom line by maximizing your less risky type of work. Correct or avoid the jobs or services that are hit and miss and never seem to work as envisioned. If you have job controls, accurate and timely reporting, a strong pre-sales or pre-construction process, and an engineering/design process linked to the budgeted estimate of costs that supports the actual ability to build within the budget, you can target your sales efforts and increase revenue and bottom line. This will also allow you to take a “tight” job that you want for branding, overhead absorption, or competitive reasons, and drop whatever you make after direct costs to the bottom line.

Make sure the cost of sales on your financials mimics your management reports. All too often information is “lumped together” on the financial statements. Often the categories of direct costs, overhead, or general conditions are not depicted on the financial statements in the same manner that they are used in the estimate or in pricing. For example, for a residential developer, the base home revenue and cost should be segregated from the post sale “selections” revenues and cost, and the home should be segregated from the land revenue and cost. The commercial contractor should segregate direct costs within the estimate from general conditions costs within the estimate on the Income Statement. If there is a separate pricing process for change orders, segregate the revenue, and if possible within your current systems, segregate the cost of the change orders billed or not billed. The service company should segregate revenue and costs of service contracts from time and material work, and segregate the materials/parts that are billable from supplies. Labor and labor overhead should be listed as defined in the pricing, often inclusive of payroll added costs, uniforms, licenses, vehicles costs, radios, pagers, or cell phones. This basic process avoids surprises when viewing financials versus internal job cost or management reports, allows for a “sanity check” as to accuracy, and avails itself to analysis that is meaningful. In the end, construction is a business of risk management. The better the information and its use, the better the “intelligence”, and the better the intelligence used, the better the profit results.

Know what gross profit should be. In keeping with the previous section on “mirroring the estimate on your financials”, the next step is utilizing percentages. Know your gross profit percentage on revenue after direct costs of labor, materials, subcontractors, equipment rentals, permits, etc. If you own a service company, your gross profit is based on your real profit on labor after payroll added costs and costs of non-productive time planned, and your gross profit on parts and materials based on your mark-up is the combination of the relationship between labor and materials planned gross profit percentage compared to your actual gross profit percentage. Variances for all industries are non-billed labor hours from overruns and excessive non-productive time or overtime, missed change orders, missed parts/material billing and estimating mistakes are mitigated by material buy-out gains.

3. Bad Business Decisions

A business decision made by any person working in your company must be an informed decision based on the experience and savvy of the person, and the decision needs to include the following four points before acting upon. The absence of any of these four points will undermine the probability of a positive result and ultimately create “anarchy” in the business decision making process, because each person will incorporate their own standards of what “good” is to them. The four points are:

Support the company’s stated goals of profit and sales growth. Whether at the level of the job estimate, service contract, engineering budget, design budget or service call, all employees who make decisions must consider whether or not this intended action will move the company closer to achieving their stated revenue and profit goals as understood at the level of the person making the decision. The absence of this step creates a separate little business within your company, run by each person who doesn’t follow this step. You do not want your financial life created by the uninformed decisions of others!

Be consistent with the “customer promise” of the business. At each level of “customer touch” within your company, each person must know the specific commitments made to the customer. The promise should be written and presented to the customer so that “pictures” or “expectations” are commonly agreed upon and communicated throughout the organization that interacts with the customer. Time/schedule, change orders, follow-up, written communications processes, payment terms, warranty, and intended results should be known and reinforced at each level, with the practical input of each level of employee customer interaction. The promise is simply the agreed upon standard you set with the customer. If the customer perceives it to be different, depending with whom they interact, you can be assured of a problem impacting your revenue, profit, and reputation.
Be consistent with concepts of teamwork and inter-departmental “customer”. Be sure that the decisions you intend to make include the resulting impact upon the other departments affected by the decision. Get their input. The decision may be good for one area and not for another. The ‘bottom line” on this one is, don’t “kill” someone critical to your business by not letting them know what you are about to do.

Ensure that the decision or action meet “compliance” or regulatory requirements of your industry, federal tax code, and state and local standards. This may seem like common sense, however, the issue is to prevent not knowing a potential problem with some regulatory body. Simply get a sanity check where appropriate, within the company. Whether it has to do with taxes, or the hiring of a fake-documented (for workman’s compensation insurance) subcontractor, or illegal aliens, or local/state regulations, simply ask the question to someone who should know the answer. Do not accept “I don’t know” for an answer.

2. Ignoring Your Cash Position

Knowing your cash needs beyond today is another way of saying “Cash is King”. If you have a basic plan of how you make money with accountability links, then cash planning will become your guide to success. For every client we engage, we establish a business plan that represents the “translation” of the revenue and profit plan into cash flow planning to make it “real”. The plan answers many questions such as: When are large expenditures due? Does the bank line have to be cleared for 30 days each year? Is principle reduction on debt larger than depreciation, or visa versa? What are the expected and manageable terms of our revenue billings? What can be done to increase cash now and each week? Many of our new clients are “profitable” but cash poor. Beyond the clear changes they need to make to increase their profit, cash must be addressed up front for each, or it is all just paper money.

Knowing how to manage to the needed cash flow is essential. Just as each of you manage a job, service contract, or service call to ensure labor and material control and accuracy in billing, so too must cash be managed. You must resolve disputes rapidly, contact companies owing you money a week before it’s due to address any needs and confirm the payment date, let them know you care, are on top of your billing/collection process, and that you DO manage cash at your company. Be the “squeaky wheel”, or you will not be paid first. GET IN LINE NOW AND STAY THERE. Watch how quickly your “days in receivables” drops, simply by having a proactive process which involves a clerical position and a team that works for and services the customer.

Don’t hide inefficiencies in your equity strength. Many “old line” companies have large equities and strong cash flow. That position was often described as “idle cash”. Most companies like that are profitable each year, but when analyzing the components of profit, they are often dramatically under performing. When you add up interest, dividend income, purchase discounts from early pay, cash discounts on quantity purchases (because the company has “the cash” to negotiate), and negligible interest expense (because the company doesn’t have to borrow), you reduce the actual profit by that total. Add to that total an “S” company that pays dividends to the active stockholders even though their salaries are below market, the total artificially increases profit. I’m not suggesting changing the strategy of Dividends versus Salary, but don’t be fooled by the Profit and Loss results.

1. Not Holding Your People Accountable

Know what accountability means. In very basic terms, accountability means that every critical employee knows specifically, the minimum that is expected of them each day; that their job performance is relative to the profit and sales of the company, is measurable and therefore objective to results; that the measurement is communicated to them regularly; and that their ability to exceed the company standards will impact how much they earn each year or, if performance is a standard, that they may lose their job. Standards and measurements can be developed when revenue is planned and controlled, when a plan of sales, gross profit, labor productivity, schedule, material controls, general conditions, overhead and profit is linked to what employees actually do every day, week, month and year.

Know what accountability means to sales and profit. The process of lead generation, selling, estimating, pre-construction, buy-out of materials, labor scheduling, labor productivity, project management, dispatching, parts, tools, vehicle, materials usage, job costing, punch list, post job completion reviews and marketing is linked to the selling and profit making process. It does not matter whether the standard of performance is specific to a sold job directly or to an office support function. If employees are clear about their job expectations and the measurement of their performance, and they accept that they can do the job defined for them at the standard of performance required, then accountability can and will exist when routinely managed.

Learn to manage accountability to attain it. Managers are accountable to the results of their managed processes and to those who report to them. Managers must communicate with their employees, support their achievement of planned results and get out of their way of doing their jobs. Also, the employee standards linked to the profit and sales plan of the company must be clear to the reporting employee. Managers become a resource to their employer and to the people they manage, as long as they have critical measurements available in a timely and accurate process with proactive communications of great work, problems, or potential problems provided to the company. Standards and results make the company work. Attaining “accountability” does not mean there are no problems. In construction, there are potential problems every day. Accountability mitigates problems and their effect on profit and sales. Accountability creates an open process of preventing the same mistake being made over and over again. Accountability saves the cost of those problems due to someone not knowing, not being sure sure, or not wanting to say that the problem was a problem.

Your reports and schedules, when understood and responded to, are precious to keeping your profit. They represent the financial control of your business. You need to use your balance sheet, income statement, working capital schedule and your schedule of estimated cost to complete jobs in progress as a sanity check against your field review, office feedback, job cost reports, project notes and other weekly and monthly schedules.

By understanding how to effectively manage from our financial and job cost information, we permanently increased our gross profits by 20 points and increased our sales by another 20%.

David Newton, President, XYLEM Builders, Weymouth, MA

The problem for many smaller and mid-market companies in the construction industry is that they are often misunderstood or ignored because their reports and schedules are not trusted to be accurate. They are often not accurate because the reports are used primarily as a tool for the accountant to prepare a tax return or to fulfill a bank-reporting obligation, so they do not contain complete enough information for you to control your business.

Let’s go backwards. Let me explain the purpose and value of a “Balance Sheet” and an “Income Statement”.

Read the rest of this entry »

We are happy to announce that several of my articles have been published by nationally know publications. “How to Read Your Financials”, was published in the September issue of Construction Business Owners Magazine and “Don’t Be Fooled By Your Job Cost Reports”, was published in the Sept/Oct issue of Florida HomeBuilder magazine, the official publication of the Florida Home Builders Association. Also this month, I am a guest columnist in the Florida Homebuilders Association website where my “Management” column article is posted and entitled “How To Make Your Employees Accountable”.

It was a pleasure to present two workshops on August 15th and 16th, 2007, in Long Island, NY, to two separate groups from Vistage International, the world’s largest CEO Membership Organization that specializes in executive leadership development, CEO coaching and business coaching. One presentation was entitled “Succession Planning” and the other, “Seven Deadly Mistakes Businesses Make…How to Recognize, Quantify and Avoid Them”, both of which were successfully received and well-noted by all attendees, who were prominent executives, businessmen and speakers in their own right. I am available to offer workshops or presentations at seminars, trade shows, special meetings and events. If you know of a speaking opportunity that might be a good fit, or would like to know more about my presentations and availability, please contact me.

Just a heads up for our Florida relationships. Keep in mind for your pricing, costing, profit planning for next year.  Everything helps!  Tony

Proposed Workers’ Compensation Rate Reduction!

The National Council on Compensation Insurance (NCII) has delivered its annual rate filing recommendation to the Florida Office of Insurance Regulation (OIR).

Based upon its review of the most recent data available, NCCI has proposed an overall rate level decrease of 16.5%, effective January 1, 2008.  If approved, it will be the fifth consecutive drop – a cumulative overall statewide average rate decrease of 50.4 percent.

The previous rate reductions approved by the OIR are as follows:

• 10/1/03 (-14.0%)
• 1/1/05 (-5.1%)
• 1/1/06 (-13.5%)
• 1/1/07 (-15.7%)

Assuming the filing is approved as proposed, the overall average rate impact at an industry level would be as follows:

The OIR is expected to schedule a public rate hearing in October,