Profit fade is best identified and averted when the project information system is integrated into the company’s bidding, billing, costing and project management functions. It’s clear to see through the processes that require project managers to provide periodic forecasts of cost at completion. It’s important to recognize why profit fades. For example, when labor costs get ahead of project completion, the only way to get the project back on track is to know what is happening from a quantifiable standpoint. 1According to Wesley Middleton, a Tax Partner of MiddletonRaines+Zapata, authored an article, “Profit Fade: 6 Causes and What to Do About Them,” that explains how to identify potential causes of profit fade and find a constructive way to address them. 2 He proposes there are six probable sources:
- Estimators: An estimator may be the source of profit fade if he is too optimistic in his estimates or if he bids aggressively in a struggle to win contracts. Check if the estimator routinely bids too low to achieve an acceptable profit level on contracts.
- Change Orders: Change orders might be your source if they are unprofitable or simply have not been approved and recorded in your accounting system. Evaluate whether change order amounts realistically represent the costs to make the change.
- Project Managers: If your project manager isn’t effectively managing the costs and people on the job, you may be experiencing profit fade for that contract.
- Expertise Gaps: Jobs that are outside the company’s expertise can result in a learning curve that causes extra costs or job delays. Evaluate whether each contract you take on is something your company can handle profitably with the knowledge base and skill sets available.
- The Accounting Department: This department may be a source of profit fade if job costs are not being coded to the correct job. To help in this area, have a project manager and estimator review and improve final job costs.
- Cost Shifting (i.e., Fraud): This could be in the accounting department or from the project manager. The project manager could be shifting costs from one job to another to cover up the fraud; the accounting clerk could be doing the same thing. Regardless, the same review process mentioned in #5 could be implemented as a preventative measure. 3
By leveraging contemporary technology, specifically all-inclusive software, contractors are better able to reduce risk, improve profitability and compete for long-term success. For example, by using seamless estimating software with standard pricing databases and digital takeoff, estimators can accomplish material takeoffs with more speed and accuracy. Plus, with features like the Manage Sheet Revisions, contractors can focus on the revisions-only versus having to do an entire takeoff over again.
Another example where technology can help is with change orders. An integrated solution makes this process easy and accurate because COs can be taken off and estimated in the Estimating module and flow directly to the Project Management and Accounting modules seamlessly. With a centralized location for all project information, an all-inclusive solution allows access to internal and external stakeholders via web and mobile device.
Schopp Talk: Change Orders
Filled with stories and anecdotes about managing a construction business in the new technology millennium, Gregg and Tim dig deep into their own experiences and provide excellent advice for navigating this new landscape.
In conclusion, integrated enterprise resource planning (ERP) software ties critical project data with financial data, which helps contractors make faster decisions for reducing profit fade and injecting business intelligence into all operational areas of their business. Business Intelligence with dashboard views enable companies to forecast potential cost while keeping projects on time and on budget. Watch the Demo
1 Robert Sniegowski, Construction Business Owner, May 1, 2012 Wesley Middleton, “Profit Fade: 6 Causes and What to Do About Them,” http://www.middletonraines.com, December 17, 2013. 3 Ibid
