In “From Jobsite to Office: Why Financial Metrics Matter,” the first article in this series, I wrote about gross profit per day (GP/day) and tied pricing back to the company budget and project duration. But how do we define project duration, and what are the financial consequences if we get it wrong?
I’ve struggled with the question of “how long will this take?” throughout most of my career. Usually, I’ve underestimated project duration, and that always cost me. This changed when I met Tony Carver, director of operations for Schloegel Design Remodel in Kansas City, Mo. Tony introduced me to a metric called “volume per week” (VPW), which is the average amount of project revenue a company produces per week based on similar historical jobs.
The power of VPW is twofold. It is a scheduling metric and a throughput metric. In addition to using VPW to set the overall project duration, my team has applied it to the different phases of the build to better understand how each production phase needs to overlap to achieve an accurate overall project schedule.
Tony takes VPW one step further: “If you calculate your total VPW for the year,” he says, “you can use that number to build your long-term schedule to give you a forecast of what you can produce over the year.” As a throughput metric, VPW is used in financial forecast models to estimate revenue volume as far out into the future as your backlog will allow. My forecast model currently contains VPW for two years out based on projects that are delayed or on hold.
Figuring VPW
To define your company’s VPW, all you need is the total revenue for your individual build projects and the total duration in weeks each project took to produce. You might be thinking, “I know the revenue number, but I don’t know exactly how long it took.” I thought the same thing when I started tracking VPW. Tracking VPW is about constant refinement, so starting out with rough estimates of project duration is acceptable as long as you are committed to refining your VPW as your data improves.
As my team and I developed our understanding of VPW and GP/day, we realized we needed a clear, company-wide definition of project duration. We now define project duration as the start of field work through the client’s sign-off on the punch list, colloquially known as “hammer swinging time.”
I built my VPW spreadsheet by grouping 60 or so projects from the three previous years by revenue. For projects up to $300,000, I used $50,000 as the increment. From $300,000 to $700,000, I upped the increment to $100,000. From there, the groups $700,000 to $1 million and $1 million to $1.5 million round out my VPW data sheet.
Once I grouped the projects, I divided each one’s revenue by its duration in weeks to find its VPW. I then used the project VPWs to find the average VPW for each revenue group. For example, a $225,000 project produced in 15 weeks yields $15,000 VPW. This $15,000 VPW can then be applied to estimated projects in the matching range to develop a baseline duration. I often adjust this range up or down based on the specifics of the project. An addition project with overlapping interior and exterior scopes, for instance, can be produced at a higher VPW than a whole-house interior of the same price due to the linear nature of the whole-house interior’s scope.
VPW is not just for number crunchers, however. When Tony first explained it, he emphasized that VPW is a metric he has integrated with his entire team. By understanding VPW, carpenters and managers alike share expectations for project durations, which is critical to defining accurate project schedules and accurate job pricing.
Combining GP/D and VPW
I previously made the case that gross profit per day (GP/day) should be the guiding star for what to charge. But GP/day works only if you can accurately define the duration of your project. That’s where VPW comes in. Strong VPW data also lets you tie project management and admin costs directly to duration, as these costs scale with weeks on site.
GP/day tells you how much gross profit per day your company needs. VPW tells you how many weeks a project of a certain size is likely to consume. Together, GP/day and VPW create a closed loop. GP/day defines what you need to earn daily; VPW grounds your estimate in how long the project will realistically take.
By combining GP/day and VPW, you stop guessing about both sides of the profitability equation. GP/day keeps your pricing tied to your budget, while VPW keeps your schedules tied to reality. Used together, they give you a clear, data-driven picture of what it takes to run profitable projects.
