Construction Accounting Article -
Comprehensive Management Leads to Greater Profitability

Abstract: Many contractors define management as "getting jobs done quickly and completely." But production alone doesn’t create profits. This article presents eight criteria and two case studies to champion comprehensive management — a leadership style that maximizes construction companies’ human resources.

Management. What comes to mind when you read this word? Many contractors would probably say: "Leadership, getting jobs done quickly and completely." For them, management drives production, not their companies’ financial or administrative functions. They probably rely on staff members to oversee these other processes.

But here’s the rub: production alone doesn’t create profits. Rather, comprehensive management -- overseeing everything from bidding to marketing to accounting -- begets profitability. If you spend every workday focused solely on making some amount of progress on a particular job, your company may never grow beyond the modest success each finished project represents.

8 Successful Business Characteristics
So how does comprehensive management manifest itself in a construction company? According to Thomas Peters and Robert Waterman, authors of the bestseller In Search of Excellence, successful businesses share eight characteristics. These companies:

Act decisively to solve problems and implement new ideas,

Concentrate on direct, purposeful and friendly contact with customers, suppliers and other associates,

Allow managers to run their respective departments (or, in the construction business, projects) as though they’re business owners,

Simplify their organizations and avoid stifling layers of middle management,

Nurture each manager’s unique skill set -- nobody can do everything well,

Exercise consistent decision-making with sufficient flexibility to meet changing customer needs and stay ahead of competitors,

Employ managers who possess firsthand operational knowledge, and

Focus on employees -- providing proper training, good working conditions and substantial incentives.

Consistently meeting these criteria is no easy task, especially with that ornery owner breathing down your neck and the weatherman predicting another "perfect storm" to touch down on your job site tomorrow. But a good place to start is the meeting room. Conduct regular management meetings, not just to discuss your latest projects, but also to solicit ideas about how your company can work better, faster and cheaper.

Improve Productivity With Incentive Plans
For example, let’s drop in on Big Finish Construction Co. Its owner, Marty Finish, has led his business through years of "successful" projects, but he still struggles to increase his profits. During a recent management meeting, one of his foremen pointed out the great productivity disparities among Big Finish’s work crews.

Using points 1 and 8 at left, Marty established a productivity monitoring and incentive program. He tracked each crew’s hours and progress. He then analyzed the data and determined which crews functioned best. These crews received company-wide recognition and first dibs at the cash-bonus incentive program, which requires that crews meet a specific productivity standard in order to qualify.

Marty knows that cash bonuses top many employees’ favorite incentive lists. They even tend to outweigh employee stock ownership plans, deferred compensation programs, and qualified pension and profit-sharing arrangements. So he integrated the cash bonuses into his payroll system. If you also choose to implement cash bonuses, clearly establish how and when you’ll compensate those who achieve their incentive-plan goals. Many companies remit partial quarterly, semiannual or annual bonuses and provide retroactive adjustments at year end. These remittance plans can help maintain employee interest and control cash flow.

Maximize Supplier Discounts
Several states away, Marty Finish’s sister-in-law, Samantha, owns Finish Line Contracting. Long a progressive company, Finish Line already has an incentive plan (not to mention a day-care center). But ever the go-getter, Samantha always strives to improve profitability.

Following points 3 and 7 on page 2, Samantha hired a purchasing agent, Jeffrey, with firsthand experience dealing with materials suppliers. She allowed Jeffrey free reign in revising her company’s purchasing policies. He pointed out that, like many contractors, Finish Line typically buys large quantities of materials from suppliers that offer early-payment discounts. But it rarely takes advantage of these offers, preferring instead to retain the money until the bills are due. Jeffrey revised this policy, and he presented Samantha with a formula justifying his decision:

Benefit = (discount/1 – discount) x (360/days paid early)

To delay payment, Jeffrey explained, the benefit must exceed the discount amount lost. For example, Finish Line buys $100 of goods from Ye Olde General Supplies Inc., which offers a 2% discount to pay within 10 days. If Finish Line pays $98, it gives up the money 20 days early for a return of $2. But if it puts the money in the bank for 20 days at, say, 3% interest, the company would earn only 16 cents. Of course, doing nothing creates no gain whatsoever.

Manage Freely and Thrive

These examples are but two of many business solutions that comprehensive management can bring about in your construction company. By recognizing all aspects of your business, you can not only complete successful projects but also ensure long-term profitability and success. This means leading effectively, but also freeing your managers to do their jobs the best they can.

A prudent first step in improving your construction company’s management style is acquiring an outside assessment. Please contact us -- we can examine your policies, procedures and financial statements and offer some useful suggestions.

Do You Make Good Music?
"A real leader faces the music, even when he doesn’t like the tune," reads an anonymous quote. When’s the last time you composed a song about yourself? Every leader needs to periodically step back and assess his or her performance. For a quick test to see whether you comprehensively manage your construction company, ask yourself:

Do I review my company’s financial statements, budgets and profitability reports?

Do I play a positive leadership role in my company?

Do I regularly monitor the progress of all my jobs?

Do I develop and promote strategic marketing plans to stay competitive in my region?

Do I encourage my employees’ personal and professional development?

Do I inspire my managers to assume owner-ship roles and regularly suggest business-improvement solutions?

If you answered no to any of these questions, you need to change your tune. Think about ways you can implement these ideas in your construction company.

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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