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.

6 Ways Construction Jobs Lose Money to Unproductive Labor

Kenwood Town CenterTo appreciate how construction firms can make a greater profit on projects, you first need to recognize that one of the most common way to lose money is with unproductive labor. Downtime, overtime and reworking a project will kill profits – and oftentimes, morale.

However, when management and the field work together to reduce costs, you can beat the labor budget and complete the project on time or ahead of schedule. Not only does this make the project more profitable, it also makes everyone proud to be a part of such a successful project.

Here are the six most common ways construction projects get hit by unproductive labor:

1. Sloppy documentation – If a job isn’t well documented and organized, things get missed. Schedules get jammed, materials and equipment aren’t delivered when they are needed, and crews are standing around. All of this results in lost production, unproductive labor – and lost profits.

2. No job schedule – Job schedules change, but you still need a plan to manage the job. The easiest way to lose money on a job is to fly by the seat of your pants and be in reaction mode. Map out the job from start to finish, and then fine-tune the plan in small increments (about once every 2 weeks). This strategy is fluid enough to adjust, yet solid enough to keep the project on schedule.

Construction Site in the Snow3. Weather – You can’t control Mother Nature, but you should be documenting weather-related issues and delays in your daily log. You also need to communicate these hold-ups with others who need to know so the schedule is adjusted accordingly.

4. Miscommunication – In the construction industry, it is important to have good external communications with architects, owners, general contractors and subs, but good communication skills always start internally. If your staff isn’t communicating with each other, mistakes happen. Everyone should understand the common goal of making the projects as profitable as possible and appreciate how their role benefits the overall health of the company.

5. Inaccurate job cost history – A crucial element of developing a solid estimate is knowing production rates and the cost of labor. How much is your fully-burdened labor rate? How many feet of pipe can you run per hour? Don’t guess. You should have access to past history from your job costing report. When you don’t use historical data to estimate, the bid you won can quickly turn into a company loss.

6. Resources not available – The quickest route to unproductive labor is to have guys standing around because equipment or materials aren’t available. To make sure you have the right resources at the job when they’re needed, you need to manage the project with organizational skills, good communication and an accurate job schedule.

So how do construction jobs make money?

By addressing all these common mistakes – which all revolve around having an accurate job costing report. When you have an accurate picture of the job, you know:

  • Work in progress and where your resources are being used compared to where you allocated them.
  • Project costs to calculate if your project is on target with the estimate.
  • Labor analysis to determine if your labor hours are on target with the estimate.
  • Unit productivity so you can see if you are completing the work at the pace you estimated.

When you have solid construction accounting software in place, the ways in which construction jobs lose money become more visible – which means you can adjust and fix any issues quicker. You are more organized, which makes you better equipped to schedule jobs. This leads to better communication and more productive labor. The only thing that job costing still can’t control is the weather.

Find more job costing tips in our webinar, “How to Optimize Your Profits through Job Costing.”

7 Tips for Successful Software Implementation

Many contractors delay purchasing new construction accounting software because of the resulting growing pains, but successful software implementation is similar to a successful project: thoughtful planning coupled with skilled execution results in greater profitability for your company. Since you already know how to build profitable projects, applying basic construction logic to your software implementation lessens the pain so you can move forward with anticipation instead of dread. Keeping the construction process in mind, here are seven tips for a successful software implementation.

1. Define Success Up Front

The project estimate defines success by establishing a budget with an anticipated profit margin before the job contract is even won. Although defining success as it relates to your software implementation isn’t so straightforward, it’s still important to establish guidelines for measuring success. If you don’t define the meaning of success, how will you know if you’ve achieved it?

The easiest way to define a successful software implementation is to identify existing procedures that aren’t working and outline how you will improve them. For example, if you have a labor-intense, spreadsheet-based work-in-progress (WIP) reporting system, one of your definitions of success could be to replace it with an automated process that eliminates duplicate effort and takes only a few seconds to complete. In this case, success is easily measurable.

Invoice approval is another example. If you’re replacing manual invoice routing with an electronic invoice approval system, success might be defined as achieving approval 50 percent faster while eliminating lost or misplaced invoices. This same concept can be applied to all of your procedures, whether they are related to jobs, employees or equipment.

2. Spend Time Up Front Planning Your Coding Structure

Pre-planning is an important part of both a construction project and a software conversion. A new software implementation is the perfect time to establish a more logical and standardized coding structure for your jobs, general ledger, vendors and customers, especially if you are migrating from a legacy system with limited flexibility or a generic accounting program that offers little to no structure.

A standardized coding structure allows you to gain greater business insight through your software’s reporting system. For example, with a departmentalized general ledger structure, you can quickly access specific information on a single department, such as your service department. Standardized codes also let you compare data across all jobs, because account #100 will always signify the same thing, regardless of the project.

3. Clean Up Your Data

You wouldn’t start a new project with old information, so why would you start using new accounting software with old data? Before migrating existing data to your new system, take some time to clean it up by eliminating duplicate vendors, purging old information, evaluating outstanding payables and receivables and getting accurate inventory counts.

This step helps you start with a fresh and timely dataset in your new system. If you have receivables that are outstanding by 120 days or more, ask yourself why they’re present and what you can do to collect the money? If you have outstanding credits with little-used vendors, consider requesting refunds instead of carrying those credits forward. Perhaps it’s time to archive data for employees that haven’t worked for the company in years. For current employees, this allows you to identify whether you have current W-4 forms on file and if any critical licenses or certifications have expired.

4. Create a Schedule with Milestones

Treat your software implementation like a construction project by creating a schedule with specific milestones. Assign a project manager on your end and ask for a designated PM on your software vendor’s side.

To achieve software implementation success, you’re going to need some accountability for the things that must be done. Make the two PMs ultimately responsible for driving the project toward completion on time and within budget.

Let your company’s size and the complexity of your software system dictate the schedule, but try to set a firm go-live date. Like many construction projects, unforeseeable delays happen during software conversions. It’s okay to make adjustments to your schedule. But be aware that, if you keep pushing your deadline further into the future, you risk losing momentum and creating costly delays.

5. Implement Your New Software in Phases

Every construction project is completed in phases. Why should your software implementation be any different?

A phased implementation eases the adoption of new software by allowing your staff to become comfortable with the basics before you add more complex functionality.

Phase 1 builds the foundation. Implement basic functionality that replaces and improves upon the procedures you were doing before. The focus during Phase 1 should be on core accounting, including job cost and payroll.

Phase 2 adds the framework. Implement functionality that your company wasn’t utilizing before, but is vital for improving operations. Processes like inventory management, purchasing, equipment management and custom reporting fall into Phase 2.

Phase 3 adds custom finishes. This is your technology “wish list” that will revolutionize your operations. Electronic document management, remote timesheet entry and a field service system fit into this phase.

6. Establish New and Improved Procedures

Just like you implement new procedures for improving things like job site safety, you should use your software implementation as a way to establish new procedures that improve accounting processes.

Better processes make your accounting staff more efficient and keep important details from slipping through the cracks. Some examples include creating collection policies for past due invoices, scheduling payables to take advantage of vendor discounts and using triggers or alerts for insurance expiration dates or to flag missing employee information.

7. Set a Profitable Training Mindset

It takes time and money for an apprentice to become a journeyman. Likewise, it takes time and money to become proficient in your new software. Instead of viewing training as an expense, look at it as an investment and budget accordingly.

If you neglect training, your new software becomes a disposable tool. With proper training, however, your software becomes an investment that delivers a positive return over time. Achieving a successful accounting software implementation can take up to two full years. The first year is spent rolling out the system and the second year is spent fine-tuning your processes. It’s generally a good idea to allocate a portion of your budget for training at three, six, nine and 12-month intervals. Free resources offered by your vendor can help as well, including newsletters, e-mail updates, a knowledge base, online help, Webinars and conferences.

Mandating Change from the Top Down

Change is vital, but for most people, change isn’t easy. Because of this, the motivation to implement new software needs to come from the top of your organization. Set the expectation that your new tool will not only make your company more profitable, but will also increase efficiency and make your employees’ jobs easier. By being one part dictator and one part motivator – and by following the seven tips outlined above – your software implementation will be a successful endeavor that delivers a high ROI.

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!

How to Evaluate Field-to-Office Software

Field-to-Office Communication

More and more contractors are recognizing the need for a fully integrated business management suite that allows for strong collaboration with owners, subs, suppliers, and field personnel. Without a constant link between your job sites and your office, data can get delayed or even lost in the shuffle. With that in mind, project management and accounting software companies are focusing heavily on providing cloud solutions for contractors. But with so many options, how do you determine what solution is best for your company? There are many factors to consider, but one feature is becoming increasingly important.

So far, most remote applications have relied on the “push-pull” method of synchronizing data. For example, a project manager will enter a change order in the field and the data will be sent back to the home office, where it needs to be manually entered or imported into the accounting system. This method has certainly been more convenient than a lengthy phone call or a trip back to the office, but new technology is beginning to make it obsolete. The future of field-to-office communication is real-time, live interaction.

This is one of the key factors you should look for. Your software provider should have plans to implement this technology in the near future if they haven’t already. If not, you may be using a package that has no motivation to improve in the future. If you want to stay competitive, your goal should be to find software that will evolve based on your needs. Be sure to ask your software provider about real-time collaboration.