Cut the Fat

February 18, 2008

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“Two rules:  #1 Preserve the principal and #2 When in doubt, see Rule #1.”

–Warren Buffet

QUESTION: What possible good could come out of the construction slow down?

ANSWER: Too many to cover in just one short article!

Here are just a few. Of course some action may be required on your part. This first series is on cutting the fat and turning a financial downturn into a win for your construction company.

Forced Ranking

Look around your company for those employees that just don’t shine quite as brightly as others.  Now trim the fat. Use this time to get rid of “Okay” performers. Think very carefully before cutting key employees.  Ranking on detailed lists will help. Many of the costs for replacement are hidden. Long term employees know and understand your business. It’s essential during vast change to keep together a cohesive core.

Salaries & Wages

Where did salaries go through this last building craze? Through the roof.  Guess what? The slope just changed. Take command of your company.  Trim just five or ten percent across the board while it’s here.  Will it go over well? Probably not. However, having a job is much better than standing in the unemployment line. Employees will recover nicely, especially when the realization that over fifty percent of the positions in home building and other sectors don’t exist any longer. Let them go look. It’s not out there.

Equal Opportunity

One last thought on employment: age, race, weight, and sex all seem to have come to the aid of some in the way of job security.  Any cuts made with a broad enough knife can include all those politically correct classes. Tough love.

Insurance & Taxes

Be sure you’ve scrutinized your insurance policies. Be sure to adjust estimated payrolls for projected premiums. Look at your estimated tax payments. Be sure they are re-aligned. The impact on cash flow from adjusted tax deposits and premiums can only be of help.

Overhead

Look up.  Why?  Because I want you to see what’s overhead.  That’s right; no doubt things became a little cushy.  Trim it all.  Many costs as you downsize naturally fall.  Look at your floor space.  It’s not going to shrink.  If, like many contractors you own the building, cost compare renting a smaller space, leasing your space to another business.  If you’ve recently built, the change may pencil.

Profitable Details

Keep the knife sharpener handy. Cuts don’t have to be deep nor drastic by any means.  From toilet paper quantities, to pencils, to cell phone plans, to benefits, cinch it in. Lock it up if you must and designate a gatekeeper.

Harness Brainpower

Hold brainstorming sessions on how savings can be achieved with key employees and their subordinates. Create departmental teams and offer incentives for finding ways to save or increase efficiencies.  

Tighten Controls

Take a very close look at your material handling or lack thereof.  Take your field guys to the conference room.  Audit material handling and develop strict material handling training and processes. No nail shall go unclaimed. No board shall be cut too short. Use them as your tool for coming up with best practices. Most of it should stick when the heat dials up again. You’ll be operating as the new trimmer you.

Renegotiate Everything:

Renegotiate with vendors. How low can they go? Negotiate a long term relationship to stabilize your costs.

D. Brown Management has successfully helped a variety of different contractors manage business processes, systems and training. We consistently perform by improving cash flow and profitability for our clients through innovative tools producing great results. A third party can make it much easier to make the necessary hard changes in times of cutting back. We can push you past the emotions by illustrating the harsh reality of not taking action. This validation relieves stress at critical junctures. We offer onsite coaching and sessions that can be done remotely to minimize the impact on your team. Our team is from construction working exclusively for contractors.

One area where we find a lot of efficiencies and profit is in the tighter integration between operations and accounting. Learn more at:
www.dbrownmanagement.com/solutions_ops_acctg.htm

Direct Contact (Financial Solutions)
LeAnn Evoniuk
leann@dbrownmanagement.com
(916) 719-6866 PH | (916) 244-0413 FAX

Great Insights

January 28, 2008

Flying out to Florida on Sunday I was reading the lastest copy of Fortune magazine and came across a couple fantastic tid-bits of insight that everyone could benefit from. 

 The first comes from Melinda Gates -

"If you are successful, it is because somewhere, sometime, someone gave you a life or an idea that started you in the right direction.  Remember also that you are indebted to life until you help some less fortunate person, just as you were helped"

We could all benefit from feeling a little more indebted and seeking to help out others. 

The second great piece came from Robert Polet who is now the CEO of Gucci and discussing a time when he was first put in charge of all Malaysian operations for Unilever when he was just 35 years old. 

One day when faced with a particularly tricky issue, Polet put in a call to Unilever's head office to ask for help.  The advice that came back was simple:  Take a piece of paper, write down all the options available, and pick the best one.  "The next morning I said to my wife, 'They're right,'" Polet recalls.  "It's only by going through tough experiences that you can grow."

I think that a lot of times we all forget this.  People often forget that most of their most difficult times were also those that taught them the most.  Don't think that you are being a good boss by "helping" people past those difficult experiences.  You are really doing them a dis-service.  The best thing you can do is to actually make sure that your high-potential people get as many chances to go through difficult situations as possible. 

Sprint Wireless Cards / Dell Laptop / Field Connectivity

December 11, 2007

Recently we tried out the internal EVDO cards from Sprint in Dell Laptop computers. I have used many of these wireless cards in the past and the service has always been shakey. We have really been trying to test these out in the field to see if they would be a good product for ourselves and our clients who need to connect to their IT networks remotely.

Today I was driving from San Jose to Atascadero in CA. I took Highway 101 which has poor cell phone reception.

Leaving San Jose I sat the laptop on the seat and connected to the internet through the Sprint card. From there I established a VPN connection and started a log of the connection.

Throughout the 150+ mile drive it only missed a total of (4) pings to the server via the VPN tunnel and NEVER dropped the VPN connection!

This is just plain amazing - I couldn't even get the GPS on my AT&T powered Blackberry to work for part of the trip due to no signal.

I'm sure that this has partly to do with the internal antenna built into the Dell laptops but the end result was fantastic. I would recommend this solution to any company that needs to connect from the field.

Estimating Cost Data

December 01, 2007

Having some good standard references when it comes to cost data will help you develop and evaluate estimates, conceptual budgets and change orders. Every construction professional should have a set of these books that are relevant to their discipline.

RS Means just released their 2008 cost data books:

Cutting The Fat - Slow Down Survival Tips

November 25, 2007

Action is the key to success. Here are just a few tips on leaning out during a slow down. This is a first of an upcoming series on surviving the market slow down.

Look around your company for those employees that just don’t shine quite as brightly as others. OK, now trim the fat. It’s that easy. Use this time to get rid of non performers. Think very carefully before cutting key employees. Replacement many of the costs for replacement are hidden. Long term employees know and understand your business. It’s essential during vast change to keep together a cohesive core.

Where did salaries go through this last building craze? Through the roof. Guess what, the slope just changed. Take command of your company. Trim just five or ten percent across the board while it’s here. Will it go over well? Probably not. However, having a job is much better than standing in the unemployment line.

Be sure you’ve scrutinized your insurance policies. Be sure to adjust estimated payrolls for projected premiums. Look at your estimated tax payments. Be sure they are re-aligned. The impact on cash flow from adjusted tax deposits and premiums can only be of help.

Many costs as you downsize naturally fall. Look at your floor space. It’s not going to shrink. If like many contractors you own the building, cost compare renting a smaller space, leasing your space to a more another business. If you’ve recently built, the change may pencil.

Keep the knife sharpener handy. Cuts don’t have to be deep nor drastic by any means. From toilet paper quantities, to pencils, to the cell phone plans to benefits synch it in. Lock it up if you must and designate a gatekeeper.

Hold brain storming sessions on how savings can be achieved with key employees and their subordinates. Create departmental teams and offer incentives for finding ways to save or increase efficiencies.

Take a very close look at your material handling or lack thereof it. Take your field guys to the conference room. Audit material handling and develop strict material handling training and processes. No nail shall go unclaimed. No board shall be cut too short. Use them as your tool for coming up with best practices. Most of it should stick when the heat dials up again. You’ll be operating as the new trimmer you.

Renegotiate with vendors. How low can they go? Negotiate a long term relationship to stabilize your costs if at all possible. Be sure to leave market adjustment allowances built into the agreements.

Stay tuned for more. Coming soon are moves that generate cash plus tips on running a successful construction company.

Good Marketing - Good Company

October 05, 2007

This morning on the way to the office I got a phone call from Allied Decals in Florida. They call on a regular basis - about once every 9-12 months to follow-up on an order that I placed several years ago just to make sure I'm still happy and the decals are doing what we wanted.

What they had printed for us (when I was at Royal Electric) were a bunch of "24 Hour Service" labels for equipment that had a reflective background. These looked great and make it easy for maintenance personnel to find the company's phone number if they were looking for an equipment problem in the dark.

Anyway, the company did a great job, the labels looked and worked great. I would recommend Allied Decals for any label job.

But the biggest thing to note is the power of making regular phone calls to existing, potential and old clients. If you are just waiting for the phone to ring you are probably leaving about 50% of your business results behind!

A couple hours a week of phone time will yield HUGE results.

Summit Technology Group - Client PR

September 17, 2007

One of our clients (Summit Technology Group) just had a great article come out about their business in a trade publication:

Summit Technology Group: Divide and Conquer

The business strategy of diversification is huge for a contractor. The other thing we love about Summit Technology Group is their relentless focus on customers and employees. These are the two drivers that produce long-term profits. Any other strategy will fail in the long-term.

Work in Progress Class - Coming Soon!

September 06, 2007

If you would like to learn more about the Work-In-Progress Schedule stay posted. Class dates will be posted on our Web Site soon. No matter your level of involvement in project management, whether it's creating job reports for accounting or relying on information to better manage your projects, this class contains valuable information you don't want to miss. You will take with you a better understanding and appreciation for this highly under- utilized reporting tool. Learn a fast and efficient way to view jobs and gauge profits, billing and backlog.
This is an interactive module of Profit Happens Here... This module breaks down the Work-In-Progress into five basic segments giving insight to the practical affect each process within a projects life cycle has on the report.

This is an interactive module of Profit Happens Here... This module down breaks the Work-In-Progress down into five basic segments giving insight to the practical affect each process within a projects life cycle has on the report.

Workforce Quality or Management Quality?

August 24, 2007

I'm in Florida this week and was reading an interview with Stuart Graham, the CEO of Skanska, a construction company listed as 125 on the Fortune 500. They have construction projects worldwide so a natural interview question was:

QUESTION: Where in the world do you find the most productive workers with the best work ethic?

ANSWER: We have 12,000 projects, so I see vast differences in productivity. But I can't attribute it to a country or a culture. I attribute it to the management on a project. Productivity is not the willingness of the workers but how good and demanding the supervision is.

I haven't been on 12,000 projects but have been involved in a significant amount of project turnarounds and have NEVER had to replace the workforce in order to turn a bad project around. This is the fault of the industry, not the individual foreman, superintendent or project manager. There is a significant amount of craft training but very little management training.

Companies who are looking to succeed will be the ones who are building strong construction management and leadership training programs.

"Master Plan" or Rapid Experimentation?

August 05, 2007

Tom Peters posted some very interesting thoughts "The Right Plan Is to Have No Plan" which touches both on why a lot of foreign aid programs fail and how that applies to business execution as well.

At the heart of the matter is a difference in execution styles - some companies and people want to try to plan out every single detail having meeting after meeting working on a grand "master plan." Over time these companies build cultures that are afraid to experiment and believe they need every detail planned out in order to get anything done.

The other execution style focuses on getting the major pieces of the plan worked out and then gets to work rapidly implementing. They rapidly try things out - often trying several small things at once. As soon as they find something that works they build on it. When they find something that does not work they ask "how could it work?" and "what did we learn?"

While the "Master Plan" approach may seem great from an acedemic perspective it rarely works in reality because there is no way for anyone to be able to see all the details in a complex system (like a company with more than 1 employee!) to be able to create that "Master Plan" no matter how many meetings are held.

The rapid experimentation, if built into the company culture properly will always perform the best. While this method may seem like chaos - it can be very effective is the chaos can be controlled just a little. Managing the chaos is very challenging and you will always be working in the gray area between total chaos and restrictive bureaucracy.

Managing the chaos should come in a few stages:

1. Set clear goals for “RESULTS” – not “PROCESS”

2. Encourage the team to “EXPERIMENT” with different “PROCESSES” to attain the “RESULTS” – if at all possible have more than one team working on the problem separately

3. Push for experimentation and thinking outside the box – ask “WHY” (5) times at each step of the process – including “Why even do this step?”

4. Reward even failures – the constant “EXPERIMENTATION” is the key to long-term organizational success

5. “MEASURE” the differences between the different “PROCESSES” and the actual “RESULTS” achieved. Discuss the various experiments rigorously with the team(s) and determine what the best “PROCESS” really is

6. “DOCUMENT” the process thoroughly including descriptions of why and anticipated results

7. Setup “VERIFICATION” systems to ensure the new “PROCESS” is being followed including reports and visual indicators

8. “TRAIN” everyone across the company in the new “PROCESS”

9. “VERIFY” that everyone is using the new “PROCESS” consistently – in the long-term any “system” will beat any “non-system” in performance

10. Once everyone is using the system consistently encourage people to start “EXPERIMENTING” again on refinement. There is no “PROCESS” that will last forever so constant reinvention of the systems is crucial. Go back to step 1.

New Accounting Standards

July 30, 2007

The Wall Street Journal published an interesting article detailing some potential upcoming changes to the financial accounting standards:

Profit as We Know It Could Be Lost With New Accounting Statements

See the draft layout of how the new rules could affect financial statements

While this may seem trivial the effective design of financial reporting can create more rapid and thorough insight into a company. You should spend as much time designing your financial reports as you would designing your estimating take-off / recap format. Using the standard, "canned" reports that come with your accounting system is unlikely to produce optimal results for your unique business.

Company Integration

Currently we have several clients who are involved in acquiring, merging or otherwise integrating the operations of their company with another. This is a very exciting way to grow because of the upside of almost immediate revenue dollars but behind the scenes there are thousands of details that need to be managed.

If these details are not managed correctly then the chances of those additional revenue dollars turning into profits are slim to none - losses are more likely.

There is a great short article called "The Right Way - and Some Wrong Ways - to Make an Acquisition" written by Wharton / GE Capital that outlines some best practices. The dynamics of integration do not change whether it is a $10M company integrating a $1M company or a $100M company buying a $10M company or simply trying to tie together a strategic partnership.

The Work In Progress (WIP) Series

July 19, 2007

For a construction financial manager, mastering the understanding of how a work in progress calculates and compiling the report successfully are only the first steps in really working with this important tool. The work in progress is much more than in income reconciling tool. Taking the time to gain understanding on what affects the numbers really do have on the health of a project will lead you to a greater understanding of construction processes.

Let's take the a look at change orders and extra work for instance. What affect does extra costs hitting a project have on the calculations of earned revenue? What if the contract is not adjusted to meet the value of what is actually to be expected? The affect is that the project looks as though more work has been completed. Because the schedule is driven off of the original estimate, as actual costs rise the mathematical calculation against the projected earnings essentially rises causing an increase in the under billed. That is why it is so important for changes to be updated on both sides of the system. Costs are naturally captured. Estimate adjustments/documentation of change orders are driven only by how well processes are set in place. Discovering whether or not extra costs are going to lead to increased revenue in the way of billable change orders or if the case is that the project is running over early on in the project is crucial. Examining line item budget items if over billing occurs will lead you right into whether or not a project is running over budget or is just not invoiced up to date. Identifying cost overruns makes a huge difference in the steps that will be taken from that point on. If it's discovered that a project truly is running over early enough, perhaps you as the CFM can be the star in assisting the turn around on a project.

In summary, a CFM should always question the under billed. Assuming the cause is a lack of billing that will catch up in the next cycle is if nothing else is dangerous. Apply business sense to the numbers that appear in front of you and it's surprising as to what might be uncovered. Especially in an under-billed situation. There are many factors in the life of a project that can affect the numbers on the work in progress. Learn what they are. Don't just produce the work in progress and balance out the income on the financial statement.

Building Information Management

July 17, 2007

California Construction magazine provided a great overview of BIM - It's a BIM New World

Personal or Company Responsibility?

July 01, 2007

Just reading the latest edition of IEC Insights and there was an article by Christopher E. Hoyme, a partner at Berens & Tate. The article described a case setting some precedence regarding an employers liability for an employee's mobile phone use.

Recently a Smith Barney broker was using his mobile phone on his personal time but making a call to a client. The broker got into an accident and Smith Barney was sued because it was "understood" that brokers made business calls on their personal time. The case was settled out of court for $500K.

This is amazing and just goes to show how there continues to be a degrading line between an employee's personal responsibility versus a company being responsible for almost everything an employee does on or off the clock.

For more information about employment law sign up for Laborwatch newsletter from Berens & Tate or contact them directly:

Berens & Tate, PC, LLO
10050 Regency Circle
Suite 400
Omaha, NE 68114
(402) 391-1991 PH
(402) 391-7363 FAX
www.berenstate.com