CONSTRUCTION Accounting ARTICLE -
Staying Focused In the Fight Against Profit Fade

Target Audience: Construction Industry Professionals, General Contractors, Construction Accountants

Just about every contractor has been there — a project starts out strong but, as it moves forward, delays and incidental added work and changes knock dollars and cents off of the bottom line. There’s a name for these situations: “profit fade.” There are also a variety of ways to stay focused in the fight against this continuing problem.

Know the contract and budget

Before work begins, understand fully what you’ve contracted to do by carefully reviewing the contract at hand. Legal language is often unclear, resulting in differences in interpretations that can disrupt and delay projects, increasing costs.

Also make sure your project managers understand the contract language fully. Meet with them before every project to discuss not only the contractual provisions for scope of work and change orders, but also what you bid and why. If your managers don’t know how much you allocated for materials, and how you arrived at that number, they can’t reasonably be expected to meet your budget.

Stay on top of changes

The profit you calculate when bidding a job can fluctuate dramatically as work progresses. For every phase you finish under budget, there may be an unexpected problem waiting to wipe out any savings that you’ve planned and budgeted for.

So as work progresses, meet with your project managers regularly to make sure they’re comparing their actual costs to the bid cost amounts. If a problem arises, they can address it immediately.

Remember that your leverage is strongest before the project is finished. Owners need your help to meet their goals, and they may be more amenable to approving change orders while you’re still on the job. If you wait until the project is done, the owner will have use of the facility and may not release your retainage.

Every significant cost increase should be accompanied by a signed change order that increases the value of the contract. If costs are going up faster than contract value, determine why. Was your initial estimate off? Or have you done extra work that wasn’t covered by a change order?

Make valid assumptions

In addition to monitoring your work in progress, study your estimating and profit histories. Review some of your profitable jobs and some that didn’t work out so well to determine where the jobs didn’t meet budgets and whether expenses were allocated properly.

Discuss with your job supervisors whether the assumptions you used in estimating the projects were valid. Did you, for example, realistically calculate the number of bricks your crews could lay in a day? Were your average labor costs accurate?

Also consider direct and indirect costs, and compare your estimates on jobs that lost money to those you used on profitable projects. Then use the results to improve your estimating procedures on future projects. For example:

• If projects were delayed because you expected your project manager to obtain final foundation design approvals and shop drawings while also getting the job under way, you may need to revisit your staffing estimates.
• If you’re typically plagued by weather delays during a certain time of year, you may need to build a little more time into your bids.
• If a supplier or subcontractor is always late, you may need to find other sources for those materials or services.

Look, too, at whether certain owners cost you money. If one owner consistently has moved walls or added doors, you may want to be sure any future contracts with that owner include very specific language regarding scope and specification changes, change orders and schedule revisions.

Pay close attention

When it comes to the battle against profit fade, remember that old saying: Hope for the best, but expect the worst. Only by paying close attention to detail can you stay on your feet in this fight.

Find out how our expertise in construction accounting can add value to your business. Email us or call us at 1 (888) 875-9770.

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