Firing a client might sound sacrilegious to many who feel that there is no way any sane construction executive would consider turning away business (let alone firing clients) in a recession. But recessions are not usually about acquiring new business. When the economy tanks, it’s all about survival, and survival is a math problem to be solved with numbers. These numbers will dictate when specific business opportunities should be declined and when clients should be fired. Here’s what to consider when making that decision and why it is so important.
Determine What It Costs to Do Business
Determining costs is elementary in business. Even a child running a lemonade stand needs to have some idea of the cost of the materials used to make and sell the product. The first step in job costing is to calculate what it costs to build a project. Add up the direct and indirect expenses (e.g., materials, labor and share of overhead) for any project to obtain its total cost. This number represents the risk of the job to the company and should be used to set the price.
If the expenses of a certain service cost $60,000 and the company seeks a 40% margin, the price should be $100,000. It should be noted that using automated management reporting (detailed earlier in this series) will make these numbers easy to obtain and very precise.
Exploit Automated Management Reporting to Identify Issues
Internal reporting will not only spit out the cost of every product and service—it will also go deeper and make it possible to identify issues and patterns essential to making smart “to build or not to build” decisions. For example, are some employees more efficiently executing particular jobs, such as surveys? Do some clients pay early, or are they habitually late and require reminders? Is there any seasonality to the profitability of utility work? Most important to this discussion: Which clients are profitable and which are not?
Profitable Clients Assure Survival
If all jobs are not priced to earn the desired margins, there are several steps to be taken. Fixed costs can be reduced (which also boost the margin on other jobs). Perhaps some employees need training on certain tasks to get their skills up to date. Maybe some suppliers are less expensive at certain times of the year.
All of this information and more can be easily obtained from management reporting. Once any expense or staff adjustments have been addressed, run a profitability report to see how much profit each job generates and each client contributes, then rank each list from best to worst.
Ask the Tough Questions
Obviously, any company wants to spend its time doing the most profitable work possible. This is why ranking jobs and clients by their contribution to the bottom line is so critical. When all of the components of different jobs are available for scrutiny, it is simple to see which can be streamlined, which may have extra steps, which are priced either too low or too high, which are too small to make money on and more.
The best jobs will also be revealed—those yielding the most profit at the least risk to the company. For example, two jobs can each make $50,000, but if one requires $50,000 in expenses and the other requires $200,000, the second is much more risky. The same information is available for clients—maybe two clients have the same services provided, but one costs more to complete. Or a client may constantly ask for out-of-scope work that doesn’t always get billed for, resulting in employee time leakage. Or there may be a single job or client that generates 80% of company profit or 80% in of expenses. Clients or services that produce this much risk should be replaced with lower-risk clients unless steps can be taken to improve the results.
Do What Works
Simply put, construction companies need to discover what works and do more of it while determining what is hurting results and doing less of that. Management reporting will provide this information. This data also provides a black and white rationale for the action a company decides to take, which helps to soothe hurt feelings, limit speculation and improve staff morale. Do what works best, do it well, and growth will follow in any environment.
