3 Easy Ways To Maximize Profit In Construction

The volatility of the construction world demands effective management. Slow decision making or relaxed margins can spell doom for businesses both large and small in a market that rises and falls so easily.

The basics of keeping a healthy business can feel obvious, especially to those in charge. Author and motivational speaker Ron Black spoke at CONEXPO/CON-AGG 2017 on the many missed tools and opportunities of business, highlighting three keys paths to financial success.

CPM (Critical Path Methodology) plays a central role in Black’s process, as he explains how it jumpstarted his own business. Seeing the need to grow himself and his company, Black crafted his own CPM system that he still hands down to his employees: work right, work with pride and work fast. To Ron Black, CPM is “…the mentality of being able to plan better, to estimate better, to connect the real world with the foresight.”

Invented in the 1950s by Morgan R. Walker and James E. Kelley Jr., CPM has long since become the industry standard for planning construction and is even used to measure jobs in courts of law. At its core, CPM uses network diagrams to seek the ‘critical path’, the fastest method by which a job and all its adjacent tasks can be completed. CPM has the advantage of outlining potential slack and warning contractors of what the future might hold; but it also has the disadvantage of needing constant attention to stay accurate, and it is occasionally being seen as more of a formality.

Step 1: Understanding Your Value

Value is the first key component of success, and everything possible must be done to maintain it. When dealing in margins, lowering bids to acquire jobs can feel effective and even look good on paper. But after COGS (cost of goods sold) and overhead, a 5-percent decrease on a bid can cut profit down by as much as 50 percent. But lowering COGS, though much more difficult, can actually boost profits by up to 37 percent on a given project.

In a market so saturated with cutthroat competition, it’s important for managers to remember the worth of their team and their time and to sell themselves accordingly. “That is a mistake that so often happens on your estimator’s desk,” says Black. “I want you to check and double check the numbers before they go out. That is the death knell in a tight market.”

Step 2: Knowing Your Appropriate Volume

When looking at volume, more work ironically doesn’t mean more profits. Instead, it is the break-even analysis, the point at which sales over take costs and a company starts becoming profitable, that determines everything. Meaning that instead of focusing on the biggest jobs, owners and managers should focus on the right jobs for their gear and their crews.

When buying new equipment or altering margins, it’s important to determine how it will affect future profitability; what might seem like an investment now can turn into dead weight if it brings increasing fixed costs. Knowing that construction can go from profitable to disastrous overnight is the key to knowing how to handle volume.

Step 3: Prioritizing Your Velocity

Velocity ties the previous two paths together; the faster projects finish, the less overhead is paid and the more room is freed up to earn additional income. By focusing on optimizing a team’s productivity (an area where managers and leaders have more influence than with subcontractors, for example), profit can be increased with no input other than encouragement, analyzation and maybe a little discipline. This is the first place to look for success; it depends on nothing but a leader’s ability to motivate and lead their workers.

The Importance of Planning

But all these paths are useless without organization: a well-written plan. Black’s ideal planner has an additional, personal plan for how they’ll plan, with knowledge of the trade, CPM skills and team communication. Part of those CPM skills involves a systematic process, where Black outlines the many steps that he recommends to construction companies bidding on jobs.

Several key factors included:

  • A pre-bid checklist: ensures that smaller but important items aren’t forgotten before bidding, such as city-specific parking or safety regulations.
  • A cash-flow chart: a way of tracking all income and output to help illustrate a company’s financial standing
  • A look ahead schedule: understanding what a project will look like several days or several weeks from any given point, being able to visualize and prepare for that future
  • Project journal: keeping track of all costs, prices, bids and negotiations for future references, potentially in legal matters or tax audits

Once again, it’s the heavy fluctuation seen in this industry that reinforces this point; with so many processes and people working together at once, an impossibly long list of things can go wrong. Black uses the analogy of a sled progressing down a hill to illustrate the need for effective planning:

 

“You get a start point, you choose a direction and away you go. And rapidly, that project accelerates. One of three things happen: things that you thought wouldn’t happen did, things that you didn’t even think about happen or things that are completely impossible happen. Large rocks, big trees or maybe even a cliff. Everybody starts screaming. And everybody will have a different idea about how to avoid this cliff. That, to me, is not the time to make a project decision. I want you to get to the top of the hill and make every decision you possibly can, as early as you can.”

 

This means picking the right projects, bidding transparently and drawing up plans before even setting foot on the worksite. Essentially, plan harder and more in-depth to scale with the size and intensity of the project.

67 percent of failed projects don’t succeed due to failure of omission, claims Black. By planning out a project (complete with tasks and estimates), if work slows down in the beginning, corrections can be made to ensure that it doesn’t 

construction project management chart

trickle down into dragging out the end of the job. Bringing together the leaders of different areas (for example, plumbing and drywall) can also optimize communication by merging all the different construction paths. Black mentions how this can also change the respect dynamic of the project, saying,

“I’m allowing people to be engaged and to start planning their parts. This is not a plan handed to them, it’s a plan they helped create. Get people involved: be a leader, get them around that whiteboard, make them think, respect their opinions.”

But it is the Gantt Chart that truly captures the essence of Black’s CPM mantra. By listing tasks, their durations and their predecessors, the critical path (most effective path) through all task can be found (see example chart). This chart allows workers and estimators to understand how many tasks can be started immediately, what tasks can be started as a result of finishing all the initial tasks, and how much available slack can be found between tasks. A good leader can better place their resources if they know which tasks will be completed in tandem.

Though it might seem obvious, CPM helps to take miniscule, tedious business decisions to a higher level of significance by illustrating their impact. And Black frames this beautifully through his examples, showing how easy it is to take these steps positively impact profits with small choices.

Craving More Information?

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