Not many remodelers will admit they get into the business for their love of analyzing profit and loss statements, calculating gross margins, and tracking numbers. However, few business owners can deny that the numbers are a huge part of their business’ success. There are several ways the numbers can show a company is running inefficiently or failing, sometimes unbeknownst to the company itself. Judith Miller, a business consultant and frequent contributor to Remodeling, discussed the numbers side of the business on “The Numbers Than Matter Most,” one of the most downloaded episodes of the Tim Faller Show.
“I love the numbers because they tell me – and they can tell you – how you’re doing sales, how efficient production is, whether or not you have overhead control, and whether or not you want to protect your and your family’s future by protecting your asset in the company,” Miller said on the Tim Faller Show, a Remodelers Advantage podcast dedicated to the production side of remodelers. “I believe that strategy is proven by the numbers.”
Slippage in the Business
One of the topics Miller discussed with Faller and co-host Steve Wheeler was slippage, which she defines as the difference between what a company estimated for a job and how it finally produced it. If budget is exceeded, slippage is present. Conversely, if the company beats the budget, grippage is present. Both can be problematic, according to Miller.
“I think the detail of your job cost information is more important in determining which line items you’re making money on, which line items you’re not estimating correctly, and which line items you’re losing money on [than the bottom line estimated vs. actual job cost],” Miller said.
To help identify where slippage may be present in the company, Miller suggests employing the 80/20 rule. The rule says that 20% of the input gives 80% of the value. If a construction company is simplified into five primary cost types–labor and burden, materials, equipment, trade contract expenses, and other expenses–one of those cost areas is providing the greatest amount of risk, Miller said. For companies that rely heavily on field labor, the greatest risk for slippage is labor plus labor burden. For companies that rely on outside trade contractors, change order control represents the greatest risk for slippage.
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Importance of Indirect Costs
Another tricky area for businesses to monitor is indirect costs. While some job costs, including materials and subcontracts, are easy to identify and quantify, others, such as indirect costs, exist in a “fuzzy area,” according to Miller.
“Indirect costs are those costs that relate to work being done on the job but are difficult to apply to an individual job,” Miller said. “When you think about the indirect expense range, the highest amount of those costs is typically non-billable field time.”
Miller said correctly determining field labor efficiency is of “critical importance.” While it’s a fallacy to say workers are 100% efficient on the job all the time, it becomes difficult to assign non-billable time on the job. For example, if a laborer is efficient for seven of their eight hours on the job site, they produce an efficiency of 87.5%.
“But where does that extra 12.5% when it’s not billable to the job?” Miller said. “It goes to indirect [costs] and we spread it through all the jobs that [the laborer] is working on. Labor efficiency is one of the greatest components of the indirect expense range.”
On the topic of sharing numbers with employees, Miller said she was in favor of sharing estimated and actual labor hours numbers for a job rather than estimated and actual labor dollars. Because of the numerous components that go into the dollar estimate—workers compensation, benefits, apparel tax, and the like—it is often easier for workers to understand hours.
“When you show [workers] the estimated hours compared to the actual hours, they start to realize how they’re coding their hours from the field, how it impacts the reporting, and the importance of that,” Miller said.
Avoiding the Blame Game
Businesses often take a deeper look at their numbers during a post-job autopsy or debrief, analyzing what went well and what didn’t go well for a particular job. However, oftentimes the meeting devolves into finger-pointing and unhappiness among employees. Miller said such finger-pointing arises because of a disconnect between the person estimating numbers prior to the job—often the owner—and the field staff performing the work, with both sides feeling as though they have to protect their work. The most important factor in the bottom line isn’t a number, but instead is customer satisfaction, Miller said. Customer satisfaction is closely tied to employee satisfaction. As a company works through its numbers, it should avoid finger pointing and involve the entire team in an effort to figure out how to make the company more profitable.
“[During the debrief] Pull out three or four jobs that went significantly over or under what you anticipated and highlight, using the 80/20 rule, the line items or the scope of work that were 80% over, for example,” Miller said. “Get everybody around the table and dig into it and have them solve the problem.”
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