Category: Cost Control

Meet or Email

I have noticed over time, that the number of people who phone me on my office line during the working day is decreasing, whilst email has become almost unmanageable. Note I don’t use the phone at work for chit-chat only business. This suits my misanthropic view on life but does not pander to my narcissistic traits.

I was discussing this with one of our up and coming future project managers the other day and broached the subject of “business life before email and mobile phones” Of course to a twenty-three year old it must seem like the dark ages. But there was a world in construction management where we built things without spreadsheets, pdfs, ipads etc.

The conversation went back further to the time before telephones. No I am not that old but it brought to mind one of my favorite authors, who credited himself with being the author of a book in which the telephone was first used extensively between the characters. The author being Evelyn Waugh 1903 to 1966, famous for Brideshead Revisited, Decline and Fall, Handful of Dust and Scoop.

Vile Bodies was published in 1930 and is Evelyn Waugh’s second book and. Similarly to his first novel Decline and Fall, Vile Bodies is set in 1920’s high society London. It is about the “me generation” who are rich and privileged. They go to all night parties and love being in the papers. They were part of the cult of celebrity. Nowadays it seems the dream for the great unwashed as they wander around the supermarket checking their smartphones for some oh so important message, tweet or update, is to be famous. They attach self-worth to having a mobile phone as if it sets them up as being important. When in fact Waugh’s book title describes them perfectly.

We take the telephone for granted but email is easier yet more pervasive for some people, although my preference is a bit old-fashioned – it is called face to face. This is something I constantly bang on about to young PMs especially in solving issues with subcontractors. A face to face meeting works so much better than a curt email.

Which brings me to this great short article from Keir Thomas-Bryant of Sage

Five crucial advantages of face-to-face client meetings

Large or Small Contractors

smb-quality-managementI have had the good fortune to work for many varied construction companies. Ranging from very large international conglomerates to small “mum and dad” businesses. Both types have advantages and disadvantages but which offers the best environment for employees. I started considering this after spending two days interviewing for staff. Not senior people but a mixture of junior quantity surveyors, graduates and others embarking on their careers in our industry. They all had a similar goal to be project managers on large projects within a large construction organisation. They all believed best practice, the most experienced staff and the best career could be achieved within those types of company. The idea of working for a small or medium sized business wan an anathema to them.

When I interview potential staff I look for potential, energy and commitment. I may not necessarily like the candidate, in fact I prefer the candidates who I do not take an instant like to rather the opposite. I look for people who can, in time, do my job better than I can do it. I also have issues with strict selection criteria and believe in sometimes adjusting the role to suit the person.

So, which is better, a small/medium business or the big corporate behemoth. The main attraction to the small/ medium company is employees know what is going on within the business whereas in the large company with it multitudinous layers of management, employees get isolated on projects or restricted within the silos of estimating, finance, HR, IT, or other head office cells. In a smaller company, there are no hiding places and talent and commitment is more easily recognised.

Having worked in both camps it is interesting to look at gross profit, overheads and EBIT. The big end of town with their $100 million plus projects tend to be union dominated, with a small pool of approved” subcontractors which means tendering is extremely tight, with the same major contractor trying to cut their own throats to win jobs with a two to three percent margin. These projects are usually design and construct which means they need to understand that process and have the people on board to manage it. They often do not understand the process and do not have enough experienced people to manage value engineering, control novated consultants, and manage the projects commercially. Added to this is the millstone of head office overheads which the projects must support, including hanging on to staff between projects completing and commencing.  This is compounded by the simple fact large contractors pay their staff too much. At the end of the financial year many large contractors are struggling to make a positive EBIT.

The smaller contractor is not weighed down with union pressure, high salaries and overheads are kept to an absolute minimum. Which means their tender margins are higher and their net profit (we don’t here the acronym EBIT in this environment) is higher. Because their projects are of a lesser value, they turn them around quicker so one bad job is not the end of the world.

My personal preference is the small/medium size business which has several income streams: new construction; small developments, refurbishments and fit outs. These businesses can change direction quickly and the owners are usually heavily involved not just in the business management, but they know their employees, subcontractors and clients inside out.

Into the Unknown

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Well I finally bit the bullet and decided to go solo. I have always relished the idea of working for myself and now I am on my own away from the corporate comfort blanket and all the other nonsense that entails.

Setting up your own business is very straightforward and I have one simple goal, that is to enjoy what I do day to day. It is not about making enormous amounts of money, it is about being happy.

To date I have not canvassed anyone, cold called companies or called upon colleagues and friends in the construction sector. Simply because I have been too busy dealing with clients who have sought me out. There are a lot of distressed projects and many builders and subcontractors who simply need some assistance.

In Australian capital cities there has been a boom in high rise apartment developments. With any boom there are casualties. Developers unable to make final payments to builders because apartment sales contracts have fallen through, subcontractors being strung out by builders, everyone blaming each other for their losses on projects. When you roll your sleeves up and get into the nitty gritty of the problems it usual is caused by companies taking work on without understanding risk and then they employ staff who do not know how to manage risk.

So I get approached to “fix” a project and very quickly identify it is not the project but the way the company is organised to handle projects in the first place.  The project may never achieve its tender margin but sometimes the damage can be reduced. Fixing the business is the key and usually it all relates to the contract that was signed and the way the procurement is managed.

I was hoping to get away from the sixty hour working week in the corporate world but the potential workload may keep me even busier – if I am not careful!

Premdale Consulting 2017

The Bottom Line

TC 1 and 2I was asked recently by a subcontractor how they could increase their bottom line. They had fallen into the trap of believing increasing revenue would increase profit. In fact by increasing revenue they were going broke quicker.

Whether it is the overall business or an individual project the principle is the same. Revenue is usually determined on a fixed price contract and costs are controlled by the business and on projects, the on-site team.

The table below set out the difference in increasing revenue or reducing cost:

Current Required Difference %
Increase Revenue
Revenue 10,000,000 13,636,364 3,636,364 36.4%
Costs 9,500,000 12,886,364 3,386,364 35.6%
Gross profit 500,000 750,000 250,000 50.0%
Margin % 5.0% 5.5% 0.5%
Reduce Costs
Revenue 10,000,000 10,000,000 0 0.0%
Costs 9,500,000 9,250,000 (250,000) (2.6%)
Gross profit 500,000 750,000 250,000 50.0%
Margin % 5.0% 5.5% 0.5%

My subcontractor friend is not an accountant. COGS, EBIT, work in progress, accruals etc are a foreign language to him. He simply wants to make more money.

In this example I demonstrated how to increase his annual gross profit by $250K. So I explained based on the above if he reduces his costs by 2.6% he will increase his gross profit by $250K. To achieve the same by increasing his revenue he needs a 36.4% increase ie another $3.636M, along with more risks on variations not being approved, more clients who may pay slowly and this does not allow for maybe more overheads to handle the increased turnover.

This sounds simplistic because it is. Costs are variable and under our control, but we have to fight for every cent of revenue not included in the contract.

Cost Reporting

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As each month ends the project prepare the dreaded cost report. This report is reviewed by management and information extracted to be consolidated into the overall business reporting regime. But what value are these reports and what benefit do they provide?

The responsibility for the report lies with the project manager but it is usually prepared by the contracts manager/administrator and due to time constraints often the project manager has little input into the report even though he is responsible for it. The report can be quite long and detailed and all too often the only number the project manager looks at is any movement to the project margin.

The following points are all to often encountered in the preparation of the cost report:

The reports may include forecast revenue for head contract variations which have been submitted but not approved. The forecast cost of these must be include but not any margin uptake. However, in the world of design and construct how accurate are the forecast cost when design has not been finalized and the revenue/cost is not based on subcontract pricing but on elements of the cost plan.

The reports may not include all of the true project costs. Such as head office charges, late submission of subcontractor’s variations, late suppliers invoices, costs incorrectly costed to another project and incorrect cost coding.

Revenue may also be overstated by including the most recent client progress claim which is yet to be certified and is over claimed..

The cash flow report may show a large cash positive position. This may be due to subcontractors not submitting accurate claims

If there is over claiming it simply means the costs have not been incurred and the cost to complete are disproportionate to the physical progress on site. If this is not considered the margin position of the project is spurious.

They take too much time to prepare because:

  • The information is outdated often by a minimum of one month.
  • The report has simply too much information and detail.
  • Several people have input including Health and safety, programming, procurement, pictures and the person preparing it ends up chasing individuals who submit their “section” at the last minute not giving enough time for analysis prior to the report being tabled.

How to tighten up cost reporting (and control costs before they are incurred)

  • On a design and construct project It is essential that all decisions taken regarding design changes or trade lettings are based on a forecast of the cost implications of the alternatives being considered, and that no decisions are taken whose cost implications would cause the total budget to be exceeded.
  • The project leader must be involved in the preparation of the cost report, not simply reviewing what a junior contract administrator has prepared.
  • Accurate cash flow reporting is a function of accurate programming and an analysis of the programme status at the month end of the cost report period. Cash flow is not independent of the programme.
  • Only project members who have the authority to spend, commit expenditure or approve variations should do so. And should be carried out in accordance withe the head contract and the subcontract..
  • Most projects include a contingency for risk for items not included in the cost plan. However, before the contingency is accessed involvement by the cost planner is essential

Zero Overheads

v-30-PreviewSimple premise – reduce overheads, become more competitive, then win more work. So what overheads does a construction company essentially need. Perhaps if the projects were set up with the right resources we would not be as reliant upon a head office. The project becomes, in effect a stand alone business and if it needs anything from head office it has to pay for it. Simple. But in reality , if the project runs this way it will incur costs never envisaged in the cost plan and instead of wearing head office overheads, it just bleeds dollars and drags the business down anyway. It is all down to how the budget is managed, reported and controlled.

So we need to be competitive in the tender process, run the project pretty lean and not rely on additional resources from head office. The answer is smart people, good communication and the best IT we can buy.

Let’s start with IT. We  love to blame it, cannot function without it, do not embrace it and do not use it to its full potential. The IT department is an overhead that needs to charge the project for providing services and hardware.  First thing we can do is to stop buying hardware. Bring your own phone, ipad, tablet, monitor and simply connect to the company’s access points. Companies don’t provide cars any more so why provide computer hardware. All IT provide is the core software and managing internal communication. Everyone has a mobile phone so why is it most staff have two, one for work and one for personal.

Site office space is always a problem as we never seem to have enough. We need to understand space should be determined by function not status. Give everyone access to an open plan area and meeting rooms for meetings, not for egos. Site offices are expensive. We do not need a dedicated office for a project director who visits once a month, whilst others are working on top of each other.

But this is just simple good housekeeping. We need to look at all the functions that the project could manage themselves and ensure those they cannot are paid for. We all think very seriously before calling in external legal advise, yet pick up the phone at the drop of a hat if we have in-house counsel. Internal lawyers (if the company has them) are our best friends and having access to them is a true luxury. But we need to be aware not only do they have a cost, the resource is limited and whilst we are tying them up they are not available to our colleagues on other projects.

It is interesting to consider say fifty years ago we employed all the major trades for us to construct buildings and did not have internal support such as legal, marketing, green advisers, real estate novelists etc. Now we have various none core support divisions and we subcontract the construction.

Of course our support teams are vital and we need to make full use of their expertise, we simply need to remember we have to pay for them.

 https://gkeating.com/

picture courtesy of http://graphicriver.net/

Bleeding Dollars

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So how does a project start hemorrhaging dollars? I aspire to the old fashioned school of thought which states very simply “you make your money before you start on site, once you start construction you have to prevent losing money”.

Managing the risk with the client should be resolved in the tender process, what are we prepared to sign up to? Can we accept the draconian terms and condition the client wants? Have we allowed the gung ho business development manager too many long lunches, convincing himself in a haze of narcissism and red wine, that we can deliver a project on time, on budget but beat the rest of the tender pack by a country mile. Hopefully a company’s internal checks and balances and counteract this over-enthusiasm, stand up to the client and if need be, simply walk away. Often the client manages to wrap the contractor tightly within the contract, but the contractor is too loose with their subcontractors.

OK, we have won the job. The business development manager accepts the accolades and moves on to their next conquest. The cost planners have covered themselves with a multitude of caveats. The accountants are expecting the profit at tender to increase. All we as a construction team have to do is deliver. The first task is to sign up the subcontractors. So often we get a relatively inexperienced administrator to put “packages” together, to add to those issued at tender. These packages contain a scope of works, drawings, specifications, etc. The administrator fields the queries from the subcontractors. Eventually a short list of subcontractors per trade is prepared. How many times have we heard the cries of joy as a substantially lower price from a subcontractor is paraded around the office, until someone with the word ”commercial” on their business card slows it all down by actually reading what the subcontractor has offered. Often, the enthusiasm of the team is tempered by the Grinch aka: “The Commercial Manager”.

Next step – the deal with the subcontractor. There is no point in screwing someone in to the ground only for them to go broke mid-way through the project. Their price has to be based on a fully detailed scope of works with no “gaps” between their trade package and others. But all too often this is where many increased costs originate. The reason is that all too often, the wrong person has issued the package. Issuing tender packages requires construction knowledge, commercial acumen and rigorous internal review. Inexperienced administrators do not have the requisite experience or negotiating skills.

We are now underway on site. Every subcontractor has a signed subcontract so why do we not implement it. We have time requirements for claims, procedures for variations and extensions of time, so why do we not apply them. The reason we do not is often this task is left to an inexperienced administrator. We have a subcontract document, no doubt prepared by internal or external legal eagles, and often the people managing it do not understand it.

The hemorrhaging has commenced. Poorly written scopes of works, lack of contractual and commercial knowledge, now compounded by a third factor. That being the team’s self-denying something is going wrong. Somehow they believe by not reporting bad news, it will make it all go away. It does not.

The way to manage risk is through focusing and identifying, analysing, prioritizing, and managing risks to eliminate or minimize their impact on a projects objectives, profit target and success. We need the same rigor applied throughout procurement and construction that should is be applied at tender stage. This requires experienced construction professionals, and this usually means they have been burnt previously.

 

Picture courtesy of betanew.com

http://www.gkeating.com

 

 

 

 

Censorship in the workplace

CensorIt is fair to say that almost all bloggers have a day job, but carry out their blogging activities in their own as opposed to the company’s time. But that does not allow employees to blog about certain aspects of the business in which they are employed. But how far can companies go in restricting what bloggers put out on their sites.

Most companies have policies regarding computer usage and confidentiality. But some companies are raising the levels of what an employee can say or blog to a point where they want to vet everything an employee has to say. Often it is an individual manager that wants to control their staff above and beyond what the company guidelines provide for.

So what does an employee do if they are faced with a controlling manager. Simple. If the blog does not refer to, imply, make reference to or in ay way breach the company guidelines, tell the manager where to go. If that results in a stoush and if it is allowed to continue, then it is not the kind of company you want to be employed by. Time to “Ramble On”

Risk

riskBack in the sixties I received Waddington’s game of Risk as a Christmas present from my beloved, long departed parents. My favorite place on the board was Kamchatka. That was certainly a long way from home in Liverpool. I had never heard of Kamchatka and even today it is a place name not often mentioned in the media. The tactics were not complicated: build up your armies; protect your borders; and own as much as the board you can. Of course to own the board you had to roll the dice.

Okay enough of reminiscences from days long ago. We work in an industry full of risk. We take on projects that have been won my optimists, reported upon by pessimists and delivered by pragmatists. We do it because we have a passion for construction, but all too often that passion is tested in the extreme by the sudden realization that the risk we discussed at the start of the project, has increased exponentially.

As the economy gets tight, with a shortage of development cash, clients/developers want hard dollar, fixed price contracts with us builders. Then they want to push the responsibility of design onto the builder. Simply the project is a design and construct, fixed price contract. We then screw down the design consultants and the subcontractors in an effort to shift our risk on to them. But it does not work. Subcontractors are signed up on incomplete scopes of works, based on minimalist consultant documentation, and at the end of the project we are fighting with the client, consultants and subcontractors. The project team becomes tired of the battles and we limp towards practical completion watching the dollars hemorrhage from the budget. Add to this we have reduced the programme and contract sum in give backs to the client simply to win the job. So we are fighting time and money from day one on site.

But we as an industry keep doing it. Is it some masochistic trait within builders, are we deluded in believing we can achieve the impossible, that is making money on a hard dollar design and construct job.

We have to learn the lessons from previous forays into this model and simply not accept risk that we know will hurt us. We try to minimize the risk in draconian subcontract documents, but then we run a further risk in ending up in court with security of payment issues to subcontractors.

We all prefer the alternatives such as construction management contracts etc. and we can also reduce the risk by simply saying to clients, who want to screw us – thanks but no thanks.

http://gkeating.com

Consultants are Subcontractors

24462534There is a common factor that leads to some projects being less successful than others. It is not the team, the budget or the client, it is the design. It amazes me that often let the design cause us problems even when we control it. The classic design and Construct contract.

In a D and C contract it is usual for the client to kick of the concept design  and as the design progresses the design team are novated to us, the builder. At what point this takes place and can vary from almost the whole design being locked in before we get a chance to influence it, to a full in-house design control set up. Whichever end of the spectrum we find ourselves, we still have to manage the design process.

So why do builders all too often mis-manage consultants? The reasons are quite simple if you compare how we award subcontracts to how we engage consultants. With subcontractors we issue scopes of works, drawings, specifications, program, maybe an ungauranteed B of Qs, together with the subcontract they will have to sign, plus anything else that encompasses the package of work they are pricing. We receive their prices, compare them, carry out financial checks, then have a post tender interview to ensure they have included everything and understand what they are providing and what we expect.

On the other hand, the consultant’s brief is often nebulous, deliverables ill-defined, time lines not cast in stone, the list goes on.

Right away there is a difference in language in between the two processes. it should not be. Consultants need to be issued a scope, a program, expected deliverables, exactly the same principles we apply to subcontractors.

Every trade subcontractor understands what a monthly progress claim should be. Some consultants I have had the misfortune to work with cannot grasp this simple idea. I have forgotten how many times i have argued with consultants about the quality of their monthly report. It is usually a requirement for them to provide one, so when we get upset at either the lack of or quality of the report, the consultant often tries to shrug it off.

Then there is the issue of set off, or in the vernacular “Back Charges” If a subcontractor cause us to incur cost we set off dollars or back charge him. When we even dare to suggest back charging say the architect for an incomplete design that costs us plenty, we seem reluctant to take him to task.

We need to hire consultants with the same rigour and diligence that we do when hiring subcontractors. If consultants cause us pain we should  seek our recompense in the same manner we deduct dollars from the trades when they fail to clean up or damage finishes.

http://gkeating.com