11 Steps to Triple Coating Contractor Profits -step 1
Step 1: Planning
For 20 years I owned what was likely the most profitable (on a percentage basis) contracting business in the Energy sector. We worked in 47 states and many countries. I wasn’t the reason the company was so successful – the people were. But I had a front row seat and can share with you why it worked and more importantly how the systems developed at TGM can work for you.
To make the point here are the some numbers from 2000 to 2005:
Industry average TGM (us)
Average bottom line profit 2-3% 16%
Average gross margin 15% 35%
Gross margin before employee bonuses 15% 60%
Customer Satisfaction scores (avg) 70/125 119/125
Direct Labor cost as a % of revenue 43% 12%
Our top five competitors while I had the company were GE, Westinghouse, Siemens, The Wood Group and ABB. These are good companies with smart people, but they can be beaten. In competitve bidding we won 2 out of 3 in competition with this group.
In this blog I’m going to tell you how we did it, and more importantly exactly how you can achieve similar results. If you are looking for easy go somewhere else. There is plenty of work to do here, but I will guarantee the results if you follow the plan I’ll lay out.
Perhaps the best part of the story is how little I did personally. The people who worked at the company were the ones who made it happen. How I got them to want to make it happen will be discussed when we get to step 9.
First let’s talk about the things that impact job profit and make customers love you. I’ll give you the list and then we will talk in detail about each one.
The seven most important things to making money on the job site are:
- Project Management
- First Line supervision
- Access to emergency supplies/services
- Communication with the customer
Let’s talk about Planning first. It takes the most work, is the hardest to do well, the least understood and usually the most impactful.
Hourly paid people, including painters and despite the opinion of many, generally want to spend their day working. If you have laid out what the people need to do, explained it clearly, given them the tools, materials, and consumables they need along with a proper environment to work in they will generally work productively all day long.
Management’s role is to insure that every time a guy looks up from his work and says “I need a ________” the Foreman is there putting it in his hand. To be able to do this the Foreman needs to be working off a rolling “Three Day Work Plan”. We use three days because that is enough time for the Foreman to check out the work that has to be done, analyze what tools, materials and supplies are needed, and get them sourced and positioned on the job site. The foreman should gather whatever materials, including paperwork, are needed for each task well ahead of assigning the work to the crew. We once studied crew behavior before we implemented these programs and learned that the average crew member spends about an hour and five minutes out of his day “looking for stuff”. Almost every time a crew member stops work to “look for stuff” there is the inevitable smoke break or other work stoppage. These things ultimately cost you 30% or more of the man-hours you pay for.
Parts of your plan will have to change because of unforeseen circumstances that happen on every job. Your plan must take into consideration what can possibly go wrong with EACH task and prepare an alternate solution that the crew can roll right into as soon as an obstacle is encountered without standing around thinking about it. If you have friends who served in Special Forces ask them about PACE. Our Special Forces PACE every mission. That means that every facet of every mission has a PRIMARY objective, an ALTERNATE, a CONTINGENCY and an EMERGENCY. Members of the team learn each of the alternatives for every phase of the mission and it only takes a hand signal for every team member to switch to the alternative plan if the leader sees that the Primary plan is not attainable. This is how things are done by the best in the game when achieving goals is Life and Death. I’m not suggesting that painting a commercial building needs this level of planning, but being somewhere in the shadow of this level of excellence is where you need to be if the life of your company is important.
Planning is also about understanding which tasks must take place in some particular order and which ones can be worked on any time labor is available to do them. Tasks that have a sequential order will create what is called a “Critical Path”. The tasks that fall along this path entend the length of the project, and thus these tasks prolong the overhead burdens associated with the job. Overheads can be tool rentals, motel rooms or just the time before you can bill the work. Tasks not on a critical path only bear the cost of the labor and don’t impact project overhead. Learn which tasks affect your overheads and make sure these tasks are being worked expeditiously every minute. Foreman think they are doing a good job when “everyone is busy”. If people are busy on non critical tasks while tasks that carry the overhead burden are idle you are throwing away money. The hourly wages of our crew more than tripled over the 20 years I had the company, yet our cost of labor as a percentage of revenue dropped from over 40% to less than 12%. It was all about efficiency and making their hours count for something. Henry Ford said that “all the people have to trade is their time, and if you allow them to work inefficiently and thus lower the value of their time you are stealing from them, and you are no better than a common thief.”
I appreciate your checking out my thoughts on Contracting and invite your comments. Step 2 will be coming soon.