Doing More With Less
by Josh Weiss, Partner, Lutz & Co
The past several years have been called “the Great Recession.” The economy has been on an extended downturn and very few businesses have been immune to the effects of the slowdown. It is possible that no industry experienced a more difficult period than the construction industry. From coast to coast, firms were struggling, going out of business or fighting for what little work there was available. The stimulus packages came and went, but unemployment in the industry remained high as the work did not return as fast as some had hoped.
Fortunately, things seem to be looking up. That is not to say that things are back and the economy is booming again, but there are signs of activity. There are reports that housing is on the upturn and that developers and engineers are looking to get projects moving. In our practice alone, I have had more conversations with clients in the past few months in which they say they are incredibly busy than I did for about four years. This is encouraging. It is exciting to hear people talk about being busy and thinking about profits instead of worrying about losses.
If in fact we are at the start of a recovery and work continues to expand, there are some things to consider as you move forward. During the slower times, many contractors had to get by and do more with less. This meant less of a workforce in many cases. Or less in the way of certain expenses that did little to add to revenue or to bottom line net income. A strict adherence to cost management was a strategy that many of the best operators employed. Owners and managers worked to scrutinize expenses and costs to make sure that bids were as tight as possible and that overhead was not getting out of line. The tough times gave contractors a chance to understand what it really takes to run their business.
Armed with this new knowledge of the company’s true cost structure, contractors can carry the knowledge forward to more profitable times as well. That is how the good operators stay on top. Set targeted gross margins and strive to meet those. Also, consider net income goals and work to surpass those goals based on the new cost structure.
One way to do this is from the bottom up. Start with the bottom line net income and decide how much work is necessary to achieve that goal. If revenues of $5,000,000 generates $400,000 of net income and $8,000,000 generates $450,000 of net income, is it worth chasing $3,000,000 of work for the additional $50,000 of income? To make sure you accept profitable work consider the project mix, the geography of the projects, and the size of the projects that would provide the best profit margins and allow for the highest net income. This can be done less regard for how big the top line revenue needs to be if you set goals from the bottom up.
Most owners and management teams have spent a significant amount of time analyzing the expenses with the biggest expense being labor and personnel. You have probably reduced your workforce and retained your best crews. Therefore you should be able to fully deploy your best people to ensure that you continue to provide high quality work. Using the same diligence and planning that you did during the downturn will allow you to schedule your jobs more effectively and utilize your star players to improve profit margins.
Using lessons learned in the toughest of times should hopefully provide insight as to what your company can do on a tighter cost structure. If it worked when the jobs were scarce and the resources were tight, imagine if that same diligence is employed when more profitable work becomes available.