The Silent Killer of Construction Profit – Profit Coach in Edmonton

Here is a question most construction supervisors cannot answer. How does the decision you made on site today affect the company’s profit margin on this project?

If your foreman does not understand the financial impact of their field decisions, you are flying blind. In this module Bruce Baker of The Business Builders by Workplaces connects the job site to the balance sheet: scope creep, the project scoreboard, and why cash flow is the oxygen a business breathes.

Why field decisions and financial literacy belong together

For every action there is a financial impact in the profit and loss

Bruce: On construction sites you have foremen and site supers doing their thing, and the actions they take are directly tied to the financial side. Project scope is a financial connection. Scope changing is a financial component. Scope creep is a financial component.

These are people who are exceptional at what they do. The problem is that because it all connects to the financial part, a lot of them do not have the financial literacy to pull the two together. For every action there is a financial impact in the profit and loss statement, so the two pieces have to come together.

The master project dashboard

If you cannot measure it you cannot manage it

Trevor: What is the master project dashboard?

Bruce: You have been to a hockey game. How do you know your team is winning? The scoreboard.

On a project, in construction or any other project management setting, you need to see what is happening when you are winning and when you are losing. If I have to lose twenty pounds I get on a scale and it tells me what I am doing. If you cannot measure something you are certainly not going to manage it.

So the dashboard, or scoreboard, shows every action taken and whether you are tracking the right way against the plan. If you are not, you see it almost immediately.

Take it further and you get into lag and lead indicators. A lag indicator is looking at the end of the month and seeing you had a terrible month. A lead indicator says that if you continue this way you are likely not going to succeed, and if you do it that way consistently you will. The dashboard becomes a powerful instrument for keeping focus and moving in the direction you need to move.

Scope creep

The silent killer of profitability

Bruce: Your scope is initially understood to be one thing, and as time passes things start to change. In construction, if you think it is going to stay consistent, if you think that is the plan and that is what you are going to get, forget about it. It does not work that way. There will be changes, and that is the creep. It builds until you lose direction and lose focus.

A subcontractor does not do something, or is late, or is sitting around waiting for the next thing. Or the site supervisor says yes to a client asking for something different. Sometimes there is not even a process for a change order, but the supervisor goes ahead and makes the change.

Pure project management assumes something close to a perfect system. Stage one, stage two, stage three. In reality it does not work that way. So whenever there is a change, and change is inevitable, document it. Surprisingly, a lot of construction companies have no change order system, no change management system at all. They forget about it and they underestimate the creep, because every small change creates a ripple effect. Whatever the size or intensity of that ripple, it changes something further along.

If you are not documenting it you are not seeing how it lands. So when something changes, stop, document it, and check whether it has changed the scope dramatically. If it has, that is fine too. Re-engineer it. Make sure the things that depend on what is happening now are not damaged, and if they are, change the scope and change the direction.

Cash flow is the oxygen

Every decision on site has a cash flow implication

Trevor: Financial literacy for construction supervisors. Where do you start?

Bruce: Cash flow. Just as you and I breathe in and breathe out, a business breathes in cash and breathes out cash, and we want to breathe in more than we breathe out. Oxygen always needs to be in the body. When it is not, we are in trouble. A business needs continuous cash flow.

Translate that into construction and every decision a supervisor, site super, foreman or even a team lead makes on site has cash flow implications. From the point progress payments start happening, every action that prevents that payment occurring affects cash flow.

Through the life of the project, bills need paying, employees need paying, payroll has to happen. If cash is not flowing and we are not productively managing the project and the cash tied to it, either we have no cash, which kills a company, or we rob Peter to pay Paul. We take cash out of other projects, and we hurt the business inadvertently.

So the project plan is not just actions and tasks and phases. It also assigns cash availability to each phase. And when scope changes, it is not only about how the actions are affected. It is about the financial impact and the cash flow tied to that project. If the project were one small business on its own, you would make sure cash was available.

That is the gap between a supervisor’s actions and financial literacy. Understanding the financial consequences of action, and of inaction.

Run it like it is your own

Treat every project as a business in miniature

Bruce: We were training supervisors in a construction company this week and the one thing we said was, if there is anything to remember, run this like it is your own. Take ownership of it, because there are so many implications.

It also requires senior leaders and owners to remember something when they are deciding who the next leader will be. This training exists so that people are not only becoming outstanding construction professionals in terms of what they can plan and build. Financial literacy. Do not let it intimidate you. Let it work for you and for your employees. You will not go wrong if they learn how to balance action and financial management.

Field application

Turning days into dollars

Bruce: Here is the classic one. Boss, we are behind. The client is unhappy and they still have to be out of their home another three or four days. So we make up the lost time. We bring in more labour, we add a shift or two.

Say it costs $15,000 extra. Overtime, additional equipment, maybe additional resources. The delay can also cause rework, because people rush. Say they speed up and save $5,000 of that $15,000. You still have a $10,000 loss. And when we look at profitability we are looking at gross profitability on the job. The markup you were hoping for, the profit you were looking for, is no longer the markup you have.

The key is teaching your site leaders that connection. It is not only about time saved or finishing on time. It is about changing the number of days into the number of dollars.

Imagine saying to somebody, you are delayed by two days. Ah, the customer will be unhappy. Now imagine saying, that cost the business twenty thousand dollars. That is a completely different conversation, and it is what connects a supervisor’s actions to the money.