It is no secret that the construction industry is one of the riskiest industries in which to operate. Competition is intense, margins are thin, and there are so many variables which can turn a profitable project into a loser overnight.
While there are high risks, there can also be high rewards. One of the common threads that runs through many successful construction companies is that they all have procedures in place throughout a project life cycle, designed to minimize risk and maximize profitability. This article touches on some of these best practices.
One of the most important factors to consider before bidding on a project is the reputation of the owner (or in the case of a subcontractor, the general contractor (GC)). Consider researching the financial history and strength of the owner/GC by utilizing one of the many financial tracking and reporting agencies. However, one of the most effective methods of researching a company is by utilizing your contacts in the business community. Your surety agent is well connected to the players in the local market. In addition, trade associations are valuable sources of information, as many of the members may have worked for the respective owner/GC. Lastly, your attorneys or accounting firm may be able to provide valuable information based upon the experience of their other construction clients.
During this phase it is important to understand the key terms of the contract. A contract that has unreasonable contract terms, poor definitions of the scope of work, unreasonable indemnity obligations, or unfavorable payment terms can turn a potentially profitable project into a loser before it even starts. In addition, management should attempt to eliminate or reduce retainage withheld in order to improve cash flow. It is highly recommended that an attorney who specializes in the construction industry review all contracts before they are signed.
Meetings with the project management team should be held weekly to discuss the progress of each job. Management should be monitoring budgets for each line item of the contract, to actual costs incurred on a regular basis. Potential cost overruns can be identified and addressed quickly. This allows management to be proactive, as opposed to being reactive and dealing with issues after the fact. In order for this process to work, direct costs and billings need to be processed as soon as possible in order have an accurate picture of income and expenses. The Company should also have a general ledger software package specifically designed for the construction industry.
An internal close-out meeting should be held after the project is complete with the entire project team, including the estimators. This is a great opportunity to get everyone together to share information and discuss the job while things are still fresh in their heads. The team should ask themselves: When comparing the budget vs. actual for each line item of the contract, where did we do well? Where did we go over budget and why? What can we do to anticipate problems or issues better? What can we do on the next project to improve? How accurate was our estimating when compared to the final results?
The results of this meeting should be used as a tool to continuously improve the project management and estimating processes, as well as profitability, with each future project.