Viewpoints

What Contractors Can Do To Improve Their Bottom Line Right Now

Scott Cresswell

Originally Published In:
ROCHESTER BUSINESS JOURNAL
July 2006
Author: Scott Cresswell, CPA

In this area, construction companies and contractors have historically looked to new project opportunities for growth, concentrating more on the top line than the bottom line. The halcyon days where fleets of cement trucks rumbling down highways and construction cranes dotting our local landscape have certainly slowed.

The domino effects of rising fuel costs and the inability of New York State to eliminate onerous legislation and regulations is crushing our growth and competitiveness. Today, most major construction projects in this area are backed by government dollars. It's my hope and prediction that we are only experiencing a respite, not a trend, and that within the next several years, we'll witness a renaissance in the construction/contracting industry that will go hand-in-hand with the revitalization of our upstate economy. 
 
But in the meantime, as costs skyrocket and as the competition continues to increase in light of fewer construction opportunities, contractors must still pay the bills, meet payroll, and earn a decent income.

You could of course, focus on improving your top line—generate more sales by bidding on more projects, create new partnerships or alliances, seek to become more competitive, differentiate yourself from the competition by your decreasing profit margin, switching your customers to inferior materials, or even offering guarantees, incentives, or other value-added/customer-friendly contract conditions.

While improving the top line is a necessity for all contractors, all too often it leads to disaster when contractors start bidding on projects outside of their comfort zone. Contractors are also cutting margins so low that even the slightest mistake can result in financial disaster. My first suggestion is do not panic, but rather be calm, stay in your market(s), and talk to your legal and business advisors about your ideas for top-line improvements.

In a down market, smart contractors focus on managing the bottom line. This is a lot easier said than done, but best-of-class contractors know how to make money when costs rise faster then expected and revenues shrink. Here are 10 tactics you can consider for your construction or contracting company, regardless of size, to improve the bottom line.

1. Create a Waste Reduction Employee Taskforce

Your employees have a vested interest in your firm's survival and profitability, so it makes sense to engage them to develop ideas that help manage/reduce the organization's fat.  Give them a mission of developing ideas that are frugal, not foolish. Cut things that don't make sense to the long-term success of the organization.

Then, reward the project manager that reengineers a job. Reward the purchasing agent that buys down a subcontractor and/or finds a cheaper supplier. And, reward the frugal office staff person who uses both sides of the paper.
  
2. Understand Your Contracts

Both you and your project managers must read your contracts and understand them inside and out. Profits get lost when the difference between your perception of a job's requirements and the customer's don't match. Follow the contract at all times and absolutely do not make changes without a change order.

3. Pass on Cost Increases to Your Customers
 
Build fuel and material escalation clauses into all new contracts. While this may seem harsh from a customer relations perspective, it’s smart business. You should not be expected to bear the burden of an unexpected price change. Alternatively, you might consider buying and storing materials that you know will be required for future jobs and customers. It's unlikely that that prices will decrease, and being able to bid lower material costs might provide you with a competitive edge. The downside of this approach is that you are tying cash into inventory without a known return.

4. Don't Bid at Cost

The temptation for many contactors in tough times is to bid at cost. This is a bad business practice. Understand your overhead rate and make sure it's properly budgeted into the job. 

5. Smart Bids

Have the estimate and project managers work together on bids.  This ensures that the project manager agrees with the way the job was bid. It makes him part of the team and gives the estimator a second set of eyes. 

6. Minimize Fraud, Waste, and Abuse

A recent survey revealed that one third of all construction companies were the victims of a significant amount of fraud over the last two years. The most prevalent types of fraud are asset misappropriation and corruption. For example, when everyone in the company has a company credit card, the opportunity for theft is ripe. If you suspect fraud or theft, the time may be right for a forensic accountant to do a thorough investigation. Those dollars saved are dollars that go right to the bottom line.

7. Risk Management

Nothing hurts a contractor more than a bad workmen's compensation experience modification rating. Analyze the past and put a team in place to fix the problems. This may include behavior modification training for employees. 

8. Budget Vigilance

Watch the budgets on your jobs.  Project managers need to get job cost reports weekly and need to be accountable monthly. Finances need to be discussed in a timely manner by management.  If there is a problem, work with your financial advisors and attack it now, not next month. 

9. Use Financially Strong Suppliers and Subcontractors

Regularly check the financial stability of suppliers and contractors. Do not review them at the time of signing them to a contract. Never pre-pay, and if their financial stability is in question and they are a specialty subcontractor, consider getting a bond.

10. Capitalize upon all Available Incentives, Deductions, and Credits
 
One of the quickest ways to positively impact the bottom line is to use federal, state, and local tax incentives, deductions, and credits. From state training grants, to Empire Zone programs, to the new "Construction Deduction" under the American Job Creation Act of 2004, there may be an opportunity for you to positively impact your bottom line. Again, work with your financial advisor to make sure you have maximized the available opportunities.

While there may not be any grand slams in these lists of tactics, there certainly are a number of home runs that don't require a great deal of culture or process change and can produce big results for your bottom line. Finally, consider this: when our economy picks up and those cranes dot the landscape once again, you'll be the one prepared to enjoy record-level profits.

Disclaimer: The Bonadio Group provides the information in Viewpoints for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. Tax articles in Viewpoints are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided "as is," with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.