Lost Profit

Blog333

It is often said “we learn from our mistakes”. But why, in the construction industry, do we keep making the same mistakes? When will we have truly learnt our lessons? How many times does a project not deliver the profit that was envisaged when we signed the contract?

There are many reasons for not achieving the target profit but there is a common thread. That is poor commercial management. For some reason builders focus so much on delivery of product without putting as much emphasis on the delivery of profit.

It sounds simple but there are three key issues

  1.  If the project team did what it set out to do
  2.  Got paid for everything it was entitled to
  3.  Only paid out what it was obliged to pay

1         If the project team did what it set out to do

We build to the drawings, specification and scope of works. Therefore, we purchase subcontracts, consultant services, and materials in the same manner. But we do not. We allow consultants to over design and under deliver. Subcontracts have gaps between trades. Materials such as concrete and reinforcing always exceed what was in the cost plan. The reasons for this is inexperienced staff, who simply do not fully know how to build and manage subcontractors and/or consultants.

2         Got paid for everything it was entitled to

We sign a contract so why don’t we understand it, use it, and extract every cent out of it. Often the member of the project team responsible for the day-to-day management of the finances is a relatively junior, young and less experienced individual. The big guns from head office only get involved when the project is starting to haemorrhage substantial dollars. The inexperienced site based contract administrator often does not want to “take on” the client or has not been given the authority to do so. They are reluctant to highlight potential/actual losses and can be overruled or intimidated by an over bearing wily project manager.

3         Only paid out what it was obliged to pay

If we start with the premise that the project team does not grasp these three key issues we need to have in place some method of monitoring them and being able to take corrective action before it is too late. That means setting projects up with robust reporting protocols. That does not mean head office go through the monthly report and try to act like the Spanish Inquisition with the project team. It means identifying before we start on site the areas where we know there will be issues. We need to ask the simple question: is this project team really up for this job to maximise our profit or is it a simple case of this team will deliver a good project but yes they are commercially weak.

I have lost count of the amount of times I have had to explain to people responsible for project profit what the terms committed cost, certified cost, margin on revenue, margin on cost, work in progress, accruals, discounted cash flow, aged trial balance. I have even had to explain the difference between a certificate and an invoice; revenue and profit; forecast cost to complete and forecast final cost.

So we need to train these young “Harry Potters” who peer at their computer screens all day, send off curt circulatory emails to all and sundry, but they hardly walk the job, engage with subcontractors and generally live their lives in a bubble. If you want to manage costs you have to be able to manage people.

by Gerry Keating

http://gkeating.com

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