What would it mean to your business if you had a tool that identified the root cause of why you are not realising your builder’s margin? How valuable would this tool be if it could show, with just the click of a button, where you are making or losing money on each and every one of your jobs? And if it could show you, in detail, how much profit you are going to make on your jobs even before you go to contract?
How much would this tool be worth to you? We know the answer to this. A lot!
Builders with this information can sign a project contract from a position of confidence. They know what their true costs will be and are sure of their profit. And yes, this helps them sleep soundly at night.
What is Profit leakage?
What would it mean to your business if you had a tool that identified the root cause of why you are not realising your builder’s margin?
How valuable would this tool be if it could show you, with just the click of a button, where you are making or losing money on each and every one of your jobs?
And if it could show you, in detail, how much profit you are going to make on your jobs, even before you go to contract?
How much would this tool be worth to you? From our building experience, we know the answer to this and it’s A LOT!
Builders with this information can sign a project contract from a position of confidence. They know what their true costs will be and are sure of their profit. And yes, this helps them sleep soundly at night.
What about the impact of profit leakage on margin?
Profit leakage is a gradual reduction of the expected profit on jobs through various means. This usually occurs through cost overruns and unexpected additional expenses. Or, even worse, a simple failure to take all business expenses into account when estimating the costs of each job. At a fundamental level, this means the business has underestimated the actual costs for which they will be liable, compared to the income they expect to receive.
Building contracts typically lose 3% to 5% from margin
Did you know that statistics show that every 1% cost overrun on a project is due to old, or inaccurate costings? Historically, most building contracts lose between 3% to 5% off the builder’s margin. On a $500,000 project with an average of 4% profit leakage, it means a loss of $20,000 profit off the builder’s margin. Which in effect is the business and that is just on one project? Imagine how many projects you’re running and they’re all losing that sort of percentage off their margins.
5 things you can do to maximise your builder’s margin
- Ensure you are using a fully integrated and building industry specific software package to run your business. Generic accounting packages may be cheaper to buy but they will cost you dearly in terms of profitability and manageability. Good software designed specifically for the building industry will save you lots of time in data entry and you will be able to see every cost against a project realised in “real” time. You will see exactly what is happening to your business each and every day.
- Make sure you know your current costs on the materials and labour you will be purchasing. Invest some time every month to review your pricing structures and make sure they are up to date.
- Make sure you include all of your overheads. Invest the time to ensure estimates are correctly set up, and that each estimate includes your true business overheads over the life of the job. When your estimate is costed correctly you can have confidence in your contract price!
- Save data entry time by ensuring the accounts department correctly set up debtors, creditors and the general ledger. Nominate creditors to be a supplier and /or subcontractors. Use purchase orders. When using integrated construction management software creditor and debtor invoices can easily be created at the click of a button and in most cases do not require any additional changes to the data contained within them.
- During the setup phase for building industry specific software makes the time to set up the staff in the payroll this can eliminate profit leakage caused by unnecessary data entry and manual changes. Time sheets mean payroll is quick and easy and allows you to set up the “exact costs” of each staff member which means that the true costs of labour are being assigned to a project estimate.
Investing in integrated construction project management software pays off
Investing in a fully integrated estimating, job costing, payroll and accounting (including builder retentions) package really does pay off. Yes, it does require time to set up and maintain. But the rewards are huge! Your estimates can be produced in a matter of hours.
One of our customers does fully detailed estimates on previously unseen building plans in a single hour!
Then when the job has been won, accurate job costing and tracking give you real-time reporting on each and every job you are doing. In addition, the project manager can easily see in “real” time exactly where the contract is at and exactly how each stage of the job is unfolding.
And then there are the labour component savings
Using assumptions based on average hours provided by builder’s feedback we can calculate savings based on a 48-week year (allowing for holidays).
Help for the estimator
Assume the estimator does one estimate per day. And is costing the business $50 /hour. Using integrated software saves him conservatively 1.5 hours per estimate. This equates to $75.00 /week or an additional profit leakage of $36,000 per year
And then…
Let’s conservatively assume we reduce data entry by 3 hours per day. At a cost to the business of $40/ hour. This equates to $600/ week or extra profit leakage of $28,800 per year.
Help for project supervisors
Project supervisors often need to check invoices are correct before signing off on invoices. They also assign job numbers to the invoice items. Their complaint is they are losing between two and three hours per week. Assuming they are costing the business $50 / hour would equate to an additional profit leakage of approximately $7,200 per year.
Then there is the cost of manipulating data to provide their project forecasts each month. That can be anywhere from 4 to 8 hours per month.
When we combine just these areas of profit leakage we get $71,200.00
To this, we add an average loss of 4% profit leakage of project costs (as per industry statistics). A further $20,000, times 5 projects per annum. The total now comes to almost $180,000.00 before we add other areas of the business where profit leakage occurs.
A construction industry business can be run profitably
Running a building business isn’t a game of chance. It’s a business like any other. Do it properly and you can retire very happily. Do it badly and you won’t.
The banks carefully track every transaction because they know and understand the benefits of doing so. So does BHP, Microsoft, Apple, in fact, all successful businesses do the same. If you want to be successful you must do it too. Start doing it properly today.
