Construction Accounting Article -
Are You Giving Away Your Money?
Why it May Be Time to Rethink Year End Bonuses.

Target Audience: Construction Industry Professionals, Accounting Consulting Interest, Contractors, Payroll Issues Interest, Performance Driven Companies, Rewards-based System Operators, Rapid Improvement Planners

Holiday bonuses are so much a part of the American business culture that the Department of Labor doesn’t require you to consider them in calculating your workers’ regular rates of pay. Small wonder, then, that employees are unlikely to consider them in determining how hard they should work every day.

Year end bonuses are nice gestures, but they may do little to boost productivity or build loyalty. In fact, many holiday bonuses are nothing more than gifts. They’re unrelated to production or performance, and employees often just expect them — which is why it may be time for you to rethink your year end bonus plan.

Doing so is especially critical for contractors. Today’s economy makes it more important than ever to distribute bonuses wisely, given that construction companies are often harder (or sooner) hit than many other types of businesses.

One Size Shouldn’t Fit All

Traditional one-size-fits-all bonuses are predictable, readily understandable and easy to administer. Everyone gets the same amount, from the staffer who always goes the extra mile to the one who coasts through every day. Because such bonuses really are nothing more than gifts, they’re likely to do little to boost productivity or build loyalty.

And, let’s face it, without a financial incentive, most of your employees aren’t terribly interested in helping to ensure that, for example, the company posts 15% growth next year. So if you want to motivate your employees and align their efforts more closely with company goals, consider changing your year end bonus plan to a performance-based bonus plan. After all, most employees will be extremely interested in acquiring bonuses for themselves if the company posts that aforementioned 15% growth.

Developing a performance-based plan that works can be a challenge for construction companies, but your accounting consulting firm can help. You should tie bonuses to specific activities that will lead to company success. The areas you target for improvement will depend on your situation, but they could include time to completion, overtime, customer satisfaction, expenses or labor hours.

Just be sure to communicate with your employees about their eligibility for the bonus pool and perhaps indicate that the bonuses are discretionary. You don’t want to commit yourself to bonuses on a couple of jobs if you have multiple problem projects or a lack of backlog.

The Money is Out There

While you’re selecting your goals, you’ll also need to decide how you’ll pay for the program. Some rewards pay for themselves. If a crew brings a job in with 10% fewer hours than you bid, for instance, that savings goes straight to your bottom line, and you can give some of it back in the form of bonuses.

Unfortunately, the results aren’t always so obvious. Improvements such as a reduction in return-to-work percentage or heightened customer satisfaction don’t show up on the balance sheet immediately or directly. Therefore, you’ll need to set threshold profit levels for the company to meet before bonuses are paid.

Knowing your break-even margin will make it easier to establish thresholds. You reach the break-even margin when your projects generate the revenue required to cover fixed expenses. Armed with that information, you can determine how much extra margin is available for incentive pay.

Timing is Key

Two other important considerations in developing performance-based reward systems are timing and quality. Construction accountants can help create a plan to ensure a smooth transition.

If you wait until the end of the year to give bonuses earned in March, the connection between the improvement and the reward could be lost. Instead, consider making your bonus plan pay out quarterly — as long as you make it clear that no bonuses will be awarded unless goals are met each quarter. Alternately, you might consider a job-based system that awards bonuses on criteria specific to each project or bigger ones.

Emphasize, too, that you won’t sacrifice quality or safety. It’s all well and good to reward people for doing a job quickly, but if they’re cutting hours by cutting corners they’re actually hurting your bottom line. Be sure your bonus plan doesn’t encourage savings at the cost of quality or safety. Perhaps the bonus calculation could include some elements tied to safety goals.

Great Payoffs Available

Establishing a performance-based bonus plan for your construction company’s employees can be a challenge. But, carried out properly with the help of an accounting consulting firm, it can produce some great payoffs.

Sidebar: RIP Your Way to a Successful Performance-based Bonus Plan

One way to improve your operations and help fund a performance-related bonus plan at the same time is with a rapid improvement plan (RIP). Implementing a RIP can also speed acceptance of a new bonus plan by showing employees how individual actions translate directly to company profits.

A successful RIP begins with a clearly identified area of opportunity that will have substantial financial results and a definite deadline. You may decide on something such as “reduce overtime by 15% in 90 days.”

Next, designate an implementation task force and RIP champion, being sure to include a representative from every department that is affected. Their first job is to decide who will do what when and quantify the savings that success will generate. They should also develop some sort of celebration for success, such as a company wide announcement of a goal fulfilled and a party in honor of the event. The champion and task force should then implement the action plan they create, and track and communicate progress throughout the period.

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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