Effective Strategies

In business, there are two key strategies for generating more profit: increasing revenue levels and reducing expenditures. When owners or executives only focus on the top line, they miss out on the benefits brought about by cost reduction and performance enhancing measures. While everyone dreads workforce layoffs, there are several less drastic but more effective strategies for improving the company’s performance and enhancing business efficiency. 

When senior leaders take the time to focus in this area and communicate their goals to staff, they rally the troops in ways that can produce unexpected results. In fact, when given the chance, employees can make significant contributions to increased profitability in areas such as customer development, inventory management, maximizing productivity and new product or service development. 

The key is for owners and management to clearly state their objectives and expectations and actively solicit employee input. Then, by establishing performance standards and metrics to measure results, they hold their employees accountable for their designated areas of responsibility. In this way, companies can remain profitable even during industry-wide low growth phases. 

Construction Statistics

Recent statistics indicate that the construction industry is recovering, albeit slowly, from the recession. Residential housing construction is up between 15 to 20 percent and lenders are less reluctant to lend again. The U.S. Bureau of Labor released figures showing that in February employment in the construction industry increased by 48,000 jobs. 

Meanwhile, the U.S. Census Bureau of the Department of Commerce stated that construction spending in January was approximately 2.1 percent below December’s spending, but 7.1 percent above the spending in January 2012. Even though commercial construction has increased compared to last year, it has leveled off and is nowhere near the increase seen in residential. 

Civil construction (construction involving government funding) has declined mostly because of government imposed financial constraints. Additionally, as the federal sequester continues, the impact on the construction industry will be more widespread. Therefore, it’s time for construction companies to examine the methods they will use to uncover opportunities to increase profits and reduce costs.

Improving Company Performance

When profits are flat, one successful strategy is to reevaluate the sales and estimating processes to incorporate changes that will lead to increased effectiveness. Here are a few suggestions:

•Establish metrics. Clearly defined measures of performance assist employees in understanding their roles and set the expectation for their performance. Without them, employees often flounder and fail to achieve company goals.

•Hold employees accountable to achieve metrics. “Accountability breeds response-ability,” said Stephen Covey, businessman and author of “The Seven Habits of Highly Effective People.” Owners and managers who take personal responsibility for their own actions demonstrate proactive inspiring leadership. Insist on similar accountability from each member of the sales and estimating teams. 

•Invest in sales, estimating and production/field employees by implementing a gross profit incentive plan. Compensating (or partially compensating) employees from the profit of each job or project means the staff has a vested interest to ensure pre-determined targets are achieved. 

It’s crucial to align the employee compensation and incentive plans with the overall strategy of the company. In this way, the possibilities for increasing profit are maximized.

Efficiency in Business Operations

Companies that invest time and energy in re-examining their operational procedures, whether or not the construction industry is experiencing a recession, reap significant rewards. Here’s an example. A large Northeast U.S. firm relied on a traditional markup methodology when estimating jobs. 

The executives incorrectly believed that this formula would produce the required margin the company targeted. However, the formula included old figures that no longer completely covered the company’s overhead. 

Additionally, the sales/estimating staff did not fully understand the overhead costs, and lost money even when the projects were completed exactly as estimated. After realizing they were not using accurate overhead figures, the company then revised its prices. Even with the higher prices, the company was still able to bring in new projects. 

Another cost reduction approach is to request discounts or rebates from long-time suppliers. For example, one general contractor determined that his company purchased $6 million in materials annually and that 50 percent of its supplies came from one vendor. He contacted that supplier and asked for a discount on future purchases and a rebate on previous purchases. 

The supplier’s initial response was unenthusiastic and no discount or rebate was offered. The contractor then let the existing supplier know that he would be tendering all material typically purchased from this supplier and obtain a minimum of three prices from his competitors. The following day, the supplier offered the contractor a 3 percent discount retroactive for the year and in the future. 

The contractor had already purchased $3 million in supplies which meant a $90,000 rebate. Even if the supplier had not offered these terms, the contractor likely would have saved money by investigating the prices from other suppliers. 

Here are additional tips for increasing profitability:

1.It is not necessary to always be the lowest bidder. Low bids may win jobs but may not cover the costs.

2.Know and control your costs and do not leave money on the table. This is not a viable business strategy. If the cost ultimately does not result in a profit for the company, it’s time to make a change.

3.Don’t naively rely on one major customer. Anything adversely impacting this customer eventually will impact the company.

4.Know your value proposition and deliver it. In addition, know your core competencies and stick to those. 

5.Figure out what your customers are willing to pay extra for and price jobs accordingly.

6. Build/service with integrity. This encourages loyalty from both customers and employees.

7.Finally, plan your work and work your plan.

 

The Competitive Advantage

Sometimes, when sales are flat, owners intentionally price projects with little to no margin just to keep employees busy. Often referred to as break-even quoting, this “break-even” strategy is not a long-term, viable way to conduct business. Instead, this approach represents significant opportunity costs. 

In other words, if the company is tied up with completing lower profitable work, the business might not be able to accept other lucrative projects that may come along. It’s crucial for owners to evaluate the way they operate their businesses to avoid facing this dilemma. Several areas of the company to examine include:

•When did the company last increase prices?

•Has the company actively shopped suppliers recently?

•Is it time to reevaluate the employee compensation plan?

•Do the owners and executives know where the overhead is calculated in the pricing? Do they understand how to calculate overhead?

•How accurate is the estimating? Are field employees achieving the times estimated to complete work?

•Is there unnecessary re-work/warranty work that erodes a project’s margin? 

Finally, an important business exercise is to conduct an internal assessment to determine what aspects of the company’s products or services separate it from the competition. If this insight is not readily recognized and articulated by the owner, it won’t be viewed as anything special by the customer. 

However, when this niche is discovered, it can be promoted in such a way that the customers will be willing to pay extra for it. Differentiating the company from the competition is a long-term strategy that will increase the sales and improve profitability even during the lean economic times. 

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