Three Factors That Can Determine Whether Your Equipment is Helping You Profit

Equipment Should ContributeDo you question whether the equipment in your construction fleet is profitable or if you should be renting equipment as needed instead? Do you have a piece of equipment that often sits idle for months and don’t know whether to sell it or hold onto it – just in case?

You aren’t alone. Many contractors ask the same questions. To find the answer for your construction company, you need to know the three factors that determine profitability of construction equipment.

 

1. Equipment Costs

Two categories make up your equipment costs – cost to own and cost to operate. Cost to own is composed of fixed costs – whether you operate the equipment or it sits idle in your warehouse. These expenses are insurance and depreciation.

Cost to operate are variable costs associated with actual operation, such as maintenance, repairs and fuel.

 

2. Equipment Revenue

Revenue from your equipment is generated when you charge an internal rental rate to your jobs. To establish this rate, you need to know the costs to own and operate the equipment (as mentioned above) and the going rate within current market conditions.

Setting an internal equipment rental rate is similar to bidding a construction job. For example, if your costs indicate that your backhoe rental rate is $200 per day, you don’t want to set a higher internal rental rate just to show a profit on the backhoe.

Conversely, if your equipment costs exceed the going market rate, you’ll need to figure out why and decide if continuing to own the equipment is good for your bottom line.

 

3. Equipment Utilization

Equipment Not in UseAnother factor in determining your equipment profitability is how often you use the equipment. To evaluate this properly, have a clear understanding of both annual usage and lifetime usage for each piece of equipment. For example, say you’ve determined that your backhoe needs to be in use 50 hours annually to break even. In the first year, it is used 120 hours, which makes it profitable. In the second year, it is only used 20 hours. Does that mean it’s not worth holding onto it? Maybe, but you need to look deeper than that.

When you only analyze one year at a time, your conclusion will keep changing. But when you look at the equipment over many years, the law of averages provides a more realistic picture. Historical data is vital to making important decisions regarding the profitability of your fleet.

 

Now that you know the determining factors, let’s look at three options for tracking equipment usage and gauging profitability.

A spreadsheet is one way to track your equipment usage. Many CFMs are experts in designing complex formulas to compute data and to help them analyze the results. While using a spreadsheet isn’t a bad option, it does require you to manually input data, and there are man-hours associated with keeping the spreadsheet up to date. Often, construction firms do this on a weekly or even monthly basis, which means real-time data are never available.

Another option for tracking your equipment is using your accounting program’s job cost functionality. Every accounting program on the market has a different level of complexity, so the process of setting it up to track and manage your equipment can vary (detailed set-up instructions can be found here). While this option does allow you to collect equipment utilization data in a central location, manual input is still necessary.

Paper ClutterThe best option is to use equipment management software that is a component of your construction accounting program. With this approach, you have a variety of built-in tools for managing all aspects of your equipment as soon as a piece of equipment is set up within the system. These tools include preventative maintenance alerts and work orders for maintenance and repairs.

An integrated equipment module also automates a number of tasks to greatly reduce the number of man-hours and human-error factor. Tasks such as assigning equipment to jobs and generating recurrent billings can all be automated. Not only does this improve efficiency, but it also give you a more accurate snapshot of your job costs to-date.

Once you begin to track equipment costs in this fashion, you can easily identify which pieces of your fleet are profitable and which ones aren’t. Discover how the ComputerEase Equipment Management module can provide you with the historical data you need to make your construction equipment profitable.

Common Errors in Converting to New Construction Accounting Software

Napkin Floor PlanA great writer once said, “Beginnings are always messy,” and this is often true in the construction industry. Some of our most trying events happen at the beginning of a new project, which can make the whole project messy from day one. However, with the proper plan, potential pitfalls can usually be avoided.

The same can be said for implementing new construction accounting software. Contractors often hesitate investing in a more efficient system – not because of the cost, but because of the anticipated pain associated with a conversion.

However, many of the errors can be avoided when you apply what you know about running a successful and profitable construction project to converting to a new accounting system. Here are some of the most common errors and how to avoid them:

Error #1: Beginning Without a Plan

Make a PlanApproach this conversion the same way you would approach a construction job – with a solid plan – and tap into the resources of your software provider to develop a logical implementation strategy. They’ve helped hundreds of other clients before you, so allow them to be your trusted partner throughout this process.

Error #2: Not Defining Success

Success is more than simply having the system up and running. Look deeper. What procedures aren’t working with your current accounting software and how can those be improved? Is there too much time wasted in duplicate efforts? Do you want work-in-progress (WIP) reports at the ready? Identify those tangible measurements of success at the onset of this conversion.

Error #3: No Project Manager Assigned

You wouldn’t begin a new job without a project manager (PM) so don’t start a software transition without one. Dedicate a person from your firm as the PM and request a point-person from the accounting software provider, too. Ultimately, those two will be the ones to champion this changeover from start to finish.

Error #4: Doing It the Way It’s Always Been Done

The reason for converting to new accounting software is to increase productivity and profitability, so it is important to review old procedures and make adjustments. Spend the time up front to establish a more standardized and logical coding structure for your jobs, chart of accounts, customers and so forth. Setting up a master job cost code structure, for instance, will allow you to compare data across jobs.

Error #5: Migrating Outdated Information

Before migrating your existing data to the new system, review all your records. Eliminate duplicate vendors, evaluate outstanding items, and archive old employee information. Once your data is clean, develop a procedure for how and when to approach this moving forward – so you avoid this scenario in the future.

Error #6: Not Approaching The Transition in Phases

Converting to a new construction accounting system should be approached in phases, just as you would a job. Map out each phase and timeframe. Using this tactic will keep your staff from feeling overwhelmed as you move forward because you are giving them time to learn the basics before adding more complex functionality.

Error #7: Overlooking Ongoing Training

TrainingYour staff will get the best understanding of how to use the new accounting software from experience, and there will probably be some frustration along the way. Don’t stop after the initial training. Instead, allocate funds for ongoing training – say every three months – for that initial year. Not only will this trouble-shoot any issues, but as your team’s familiarity of the system increases, ongoing training will increase their knowledge base and overall efficiency. Over time, this will enable them to utilize the software to its maximum ability.

The beginning of anything new is always a bit messy, but change is necessary for growth. When you set expectations early on and approach implementation with a solid strategy, you’ll avoid common errors, decrease frustration and be on the path to greater profitability and efficiency for your business.

To learn more about ComputerEase construction accounting software, take a tour to see our full-range of capabilities.

Is your CPA doing everything they can for you? 7 Questions to Ask

HelpThe construction industry is a difficult one – full of strategic planning, tight deadlines, demanding customers and lean margins. In some projects, just 2-3 percent can be the difference between profit and loss.

However, construction companies that navigate this industry expertly have learned to surround themselves with others who understand the business – especially their CPA firm. You look for subcontractors who have experience in a particular type of work; your CPA firm shouldn’t be any different. Don’t settle for just any old number-cruncher. To be on target in this business, you need a CPA that understands construction.

Certainly, no matter what business you are in, your relationship with your CPA firm should be active year-round, not just during tax season. But there are other factors that are unique to the construction industry that can help make you more efficient and more profitable.

How do you determine whether or not your CPA firm is meeting all of your needs? Here are 7 questions to ask:

  1. Does your CPA simply prepare your information? Your CPA firm should be doing much more than the bare minimum quarterly tax paperwork. They should be analyzing the data and providing you with information that your team can use to make educated decisions moving forward.
  2. Does your CPA add value to your internal accounting department? Your accounting department is your eyes and ears on your jobs and the overall financial well-being of your company. Those job costing numbers need to be accurate, which is something that our construction accounting software specializes in. Your CPA firm should be willing to share valuable insight with your accounting staff to help them see the bigger picture. This, too, will go a long way to providing you with the information you need to make higher-level decisions with confidence.
  3. acctdeskcomputerDoes your CPA firm conduct or have access to benchmarking? Here in the Cincinnati area, the CPA firm VonLehman conducts an annual construction survey, analyzes the data and then shares the information with others. This report helps construction firms benchmark how they are doing in comparison to the rest of the regional construction industry. If you are located in a large metro area like Cincinnati and your CPA firm specializes in assisting construction clients, they probably have access to information to help you benchmark where you stand.
  4. Does your CPA have a proactive approach to bonding? As a construction firm, you need specific information to present to your surety company to secure the bonding capacity you need. Your CPA can proactively help you through this process by reworking your financial statements and restructuring your debt to give the surety the specific information they need. Being proactive allows you the opportunity to bid on a large project when the right one comes along.
  5. Has your CPA firm talked to you about your succession plan? Developing a succession plan is a long process, and your CPA should be helping you through it. Furthermore, a succession plan is more than your legacy. The surety and financial lenders will want to know your succession plan, too. This gives them the assurance that if anything happens to you, your company’s projects will be completed.
  6. Does your CPA help you understand your financial statements? When you work with the right CPA firm, not only will the numbers be accurate, but you will understand where they come from. Intelligent overviews of your financial statements are crucial when meeting with surety or banking representatives.
  7. Does your CPA understand work-in-progress reports? Job costing isn’t an after-the-fact item; it is an ongoing task. When you review your work-in-progress report on a monthly basis, you see what happened in the last 30 days and can make any needed adjustments immediately. The right CPA firm will also hone in on over- and under-billings and work with you to get the project back on track.

The right CPA firm will proactively analyze pertinent information and provide you with the data you need to make business decisions with confidence. Any CPA can crunch numbers, but wouldn’t you prefer a firm that can be an active participant in your business? To discover more ways your CPA firm can be helping you, view our “What Your CPA Should be Doing for You” webinar.

If you want your CPA firm to work with ComputerEase to provide the best possible accounting services to your company – or if you are a CPA with the same goal in mind – find out how our CPA Partnership Program can help!

 

Prevent Major Construction Losses with a Solid Job Costing Structure

Have a PlanIn the construction industry, cash flow is essential to staying viable in a competitive market. Even some of the most profitable construction firms have gone out of business because of poor cash flow management.

Perhaps the reason cash flow is so difficult in construction is that by the time a job is awarded, significant resources have already been invested into it – from the time spent on the lengthy bidding process, to manpower on the job site, to purchasing materials and renting equipment. Often, these expense are incurred months before ever seeing a payment.

How well your company is doing financially may not be an accurate reflection of what money you have in your bank account. You may be over-billed on a project, so it is important to understand how to manage the project properly – so you have money to pay expenses when the time comes.

Contractors with the best understanding of cost and schedule will be the most successful. Having an accurate picture of your labor and material costs allows you to bid competitively and stay profitable.

Successful contractors manage their cash flow on a daily basis. They have a system in place that allows them to access job information in an organized fashion. They have access to accurate work-in-progress and percent-complete reports. They know, with confidence, where each job stands.

That success begins with a solid job costing structure.

Job costing can manage jobs more thoroughly.
As the CEO, you may know the overall financial health of your construction company, but you also want to make sure that each job is holding its own to support the cash flow of the business. Jobs should be broken down into activities (labor, materials, subs) and/or phases so that you can compare real costs against the budget. A solid job costing structure allows you to manage each job more thoroughly because you are able to see where gains (and losses) are happening and plan accordingly.

Job costing allows you to spot potential issues early on.
Spot Issues EarlyIt is important to know where each job stands, and to do this we need to have accurate “Work in Progress” and “Percent Complete” reports. If you’ve only done 25 percent of the work but you have spent half the budget, you need a red flag alert that will make you aware of the problem. Jobs go off-course for a variety of reasons, but diagnosing and correcting them early minimizes the loss and goes a long way toward making the job as profitable as possible.

Job costing generates accurate estimates.
One of the easiest ways a construction firm can lose money is through the estimating process. When you start with a poor estimate, you are immediately beginning a project with a deficit, and you might spend the entire job trying to dig your way out of it. You can generate accurate estimates by using historical data for calculating labor rates.

Imagine your estimator is bidding a job using $45 per hour as your fully-burdened labor rate, but historically over the last 12 months, that rate has actually been $46 per hour. With a solid job costing system in place, this information is available to help you create solid estimates.

Job costing creates better work schedules.
Unproductive labor is one of the top reasons jobs lose money, and inaccurate job schedules can cause work stoppages. As a project manager, you want to allocate your labor properly so you can meet or conserve your labor budget. Say you were planning to have five workers on the job site for the next five weeks, but then you realize that you are ahead of schedule and only need four. Job costing allows you to see whether you are ahead of or behind schedule and plan your labor intelligently.

Job costing gives you the “fade and gain” comparison.
Every job has a natural flow to it. A job that is a little bit behind in the beginning can catch up midway, but contractors need to know where they stand at all times. When a solid job cost structure is implemented, you can see the flow come into focus and be better equipped to track the “fade and gain.”

In construction, managing cash flow begins with a solid job cost structure that can detect and help prevent huge cash flow mishaps. Get more job costing tips by viewing our webinar, “How to Optimize Your Profits through Job Costing.”

Why You’re Running Out of Time to Save Big on Taxes through New Software

Uncle SamSection 179 Deductions and Bonus Depreciation have been used extensively in the construction industry. Both grant your company big savings on taxes as a result of any major equipment purchases you’ve made in the tax year. Accounting and project management software is included in the equipment that qualifies, and it’s been one of the most popular routes that contractors have taken to seize this opportunity.

That opportunity, however, may be coming to an end. With tax law changes looming, this may be your last year to take advantage of historically high savings under Section 179 and Bonus Depreciation laws. That means that if you’ve been putting off purchasing new equipment or upgrading your software system, you’ll want to stop putting it off now! Starting January 1st, some of the major tax advantages of implementing those changes may disappear entirely.

If you want to learn more about Section 179 and Bonus Depreciation, or if you want more tips on what you should be doing to prepare for Year End, you may want to check out our recent construction accounting webinar on the topic, featuring Steve Hausfield, CPA who specializes in construction accounting.

New Webinar: “7 Tips to Keep Your Premiums from Skyrocketing”

Last year, we had the privilege of hosting a webinar alongside Matt Mauller, Vice President of Neace Lukens Insurance Agency. At the time, we were in what he called a “soft market” for insurance. Premiums were low, and he told us how to take advantage of the market by either renegotiating with our brokers our kicking them to the curb and finding a new one. You can recap that information by viewing our previous webinars. Since that time, the insurance market has taken a hard turn. Premiums are going up, and it’s making life tougher for contractors. Luckily, Matt Mauller is coming back this year to co-host another webinar, “7 Tips to Keep Your Premiums from Skyrocketing.” Matt will tell us about the current market, how we got there, and what you can do to prevent your premiums from following the upward trend.

This webinar is a must-see for contractors, and it’s absolutely FREE. Space is limited, so be sure to register today!

Are You Getting Your Money’s Worth Out of ComputerEase Construction Software?

Some of our customers take ComputerEase Construction Software to a basic level and then stop. They only use 50% of the software’s potential. We want to fix this by offering two full days of training on ComputerEase in Cincinnati, Ohio on September 20th and 21st.

You have completed the hard work – the hours setting up the software are behind you. Now, with a little more education, you can take full advantage of the software’s potential. This advanced training course is a compilation of the best ideas from over 6,000 contractors using ComputerEase over the past 30 years.

It’s time for you to become an expert on ComputerEase. Did you know that over the past 2 years ComputerEase has added over 300 new features to the software? How many of these features are you using? Attend this class and we will make sure you are using all of them.

To learn more or register for the class, visit the Event Signup Page.

3 of the Most Deadly Job Cost Mistakes You Can Make

Most contractors start out having the owner act as the project manager on jobs, which makes it easy to oversee a job and make sure nothing is going terribly wrong. With success and growth, the “owner as PM” model starts to become unrealistic, and deadly mistakes start to crop up. Some problems are minor, but some are deadly to your bottom line. Here are the deadliest mistakes, and how to avoid them:

3. Using a Cost-to-Cost Method for Work-in-Progress Reports

If you’ve incurred $50,000 in costs on a $100,000 bid item, does that mean the item is 50% complete? Not necessarily. Yet many contractors make this mistaken assumption, leading bonding companies and bankers to be on the lookout for it. The amount of cost incurred often has nothing to do with how far along a job is. Sharp contractors know that unexpected costs arise, so measuring their percent complete by cost is probably the worst method.

Avoid this mistake by using units in place or an estimate of hours needed to complete, or anything other than cost when you’re drafting a work-in-progress report. Once you know the estimated percentage of completion, you can recalculated the estimate by adding actual costs to date to the projected cost derived by your informed estimate. With projected costs, you can know what your profit is likely to be when the job is complete.

2. Not Knowing Where You Stand on a Job

If you’re a project manager and you don’t know where you stand on a job, you may be under the false assumption that all is well, your job is on track, and you’re making money. Your estimator has a responsibility to give you a break down of the hours and units used in his estimate so that you can project the hours to complete. For example, if the estimate is to complete 1000 square feet in 500 hours and you’ve completed 500 square feet in 300 hours, you could be running 20% behind schedule and not even know it. If you use projected job cost calculations, you will know the status of your jobs before the end, when it would be too late to do anything about it.

1. Not Using Projected Job Cost Estimates

Job Cost eBook

9 Deadly Job Cost Mistakes

You’ve probably realized at this point that there’s a common thread in these deadly mistakes – job cost estimates. The importance of job cost estimates cannot be overstated. If you’re calculating your profit and loss without an accurate job cost estimate, your profit projection is just plain wrong. If you’re going to know anything about what your profits will be by the end of a job, you need to use projected job cost estimates.

To learn more about projected job costs and what other deadly mistakes you should avoid, check out 9 Deadly Job Cost Mistakes by Bob Mattlin, CPA, founder and owner of ComputerEase. You can request a free copy of the ebook on the ComputerEase website!