Break-Even Is Difficult To Calculate Because Most Construction Projects Are One-Of-A-Kind Custom Jobs
(Last updated: Sep 1, 2016)
The answer is to develop a Universal Standard Of Measurement (USM) for your Construction Company and stick with it. This is one of those concepts that sound simple and it is; however, it is not fast and easy.
There is no "app" or magic formula you can buy and put in place in ten minutes. In fact it is hard and grueling work similar to slogging through a three foot deep mud pit two hundred yards long, carrying a forty pound rucksack, at night, in the rain, with no flashlight after having hiked ten miles over rough terrain wearing sandals, Bermuda shorts and a thin t-shirt with a picture of Mickey Mouse grinning from ear to ear and a distant light just over a mile away showing you the end of your journey.
The Hardest Work You Will Ever Do Is Think
The Most Profit You Will Earn Will Come From Thinking
Every contractor I have ever lead on this journey have all wanted to give up and continue using their "Guesstimate" and "Gut-Feeling" method of "I think I make money on _____ jobs and _____ type of customers. Some have persisted on, some quit, some work on it for years before finally making a breakthrough.
The contractors who keep-on-keeping-on until they get it, have it and use it are amazed at the amount of pure, ridiculously high profits their contracting company earns in the years following the implementation of something so simple as the Universal Standard Of Measurement (USM) and I am going to share some of the ways we develop it so that if you are so inclined you can pick up the ball and run with it until you make a touch-down and turn your construction company into a Cash Cow!
Developed By Bruce Henderson - For the Boston Consulting Group in 1968 to help corporations analyze business units or product lines. It helps companies allocate resources and is used as an analytical tool in brand marketing, product management, strategic management.
No Two Construction - Companies are alike. Every construction company has a unique blend of ownership and management philosophies, tools, equipment, staff, field employees, geographic location, and relationships with suppliers, vendors and professional service providers.
This Means - That if construction company "A" earns a better than average profit percentage on residential remodel it does not follow that company "B" will be able to do the same.
Get Rich In A Niche - By finding your company's sweet spot, that particular thing you are good at, that people want and will pay good money for and that best suits you. Then you spend the majority of your time and effort developing your Business Process Management (BPM) to be the best and only company to service those clients and preferably dominate that market in your target geographic area.
The BCG Matrix - Is one of the many tools in our BPM tool chest. We put together Job Profitability and Job Costing reports from a properly maintained QuickBooks file to map out a specific construction company's target markets.
Cash Cows - Are construction projects that generate the highest gross margin. These projects typically generate cash in excess of the amount of cash needed to maintain the business. They are regarded as stable and boring and every contractor would be thrilled to own as many as possible. They are to be "milked" continuously and add more of them whenever possible.
Dogs - Are construction projects that generate the least gross margin. These projects typically "break even" or lose money. Though owning a break-even unit provides the social benefit of providing jobs for your employees and possible synergies to assist other construction projects from an accounting point of view they are worthless because they reduce profits and the construction company's return on assets ratio which many investors, bankers and bonding companies use to decide how well a company is being managed.
Question Marks - Are construction projects in new markets or a different type of work than the company has been doing which shows potential because they are growing rapidly. Beware of the fact that they could consume a lot of cash while you are putting the processes in place to manage these projects. A question mark could prove itself and become a star, and eventually a cash cow. If the question mark does not prove profitable within 90 - 180 days, it may be wise to re-evaluate those projects.
Stars - Are construction projects with high gross margins in a fast-growing area like aging in place for seniors. The hope is that stars become the next cash cows. Sustaining your construction company market leadership and increasing the profit picture. When growth slows, stars become cash cows if they have been able to maintain their category leadership, or they move from being a star to a dog.
The Process To Developing And Using Your Construction Company Universal Standard Of Measurement
Step #1 - In QuickBooks generate a report called "Profit & Loss By Job" for all your jobs in the past twenty four months. The sample below may be hard to read; however, if you click the button below it will open a PDF file, which may be easier to read.
Step #2 - Study the percentages of each job and compare them with all of the other jobs until you can see which jobs and customers are your "Cash Cows" vs. "Dogs" vs. "Question Marks" vs. "Stars". Please note these are simply titles meant to convey a message not meant to be insulting or demeaning; pictures to keep you from having to read and digest a thousand words.
Step #3 - Export the report to Excel for further analysis including "What If Scenarios". Click on the following link for a great article outlining how it works http://office.microsoft.com/en-001/excel-help/introduction-to-what-if-analysis-HA010243164.aspx#_Toc275163262 In addition there are several videos demonstrating the value and use of Scenarios. One of my personal favorites is shown below:
Step #4 - From all of your analysis in the first three steps you should have a clear understanding of which projects and which customers and clients your construction company generates optimum profit. It is important you understand the difference between Optimize Vs. Maximize; one will make you wealthy the other will destroy your construction company click here to learn more.
Step #5 - Determine the one thing that is common across all your most profitable projects, customers and projects and that will become your Universal Standard Of Measurement (USM).
For Example A Concrete Contractor Does A Mix Of Projects:
And several other types of hardscape.
Now Think About The Possible Variations Of Each One:
Colors - for this example I will limit it to three: Red, Green, Yellow
Finishes - for this example I will limit it to three: Smooth, Washed Aggregate, Stamped
Now Let's Look At The Basic Combinations Available:
(7) Types of Projects X (3) Colors X (3) Finishes = (63) combinations individual projects. On most construction sites the concrete contractor will perform several different projects to complete the project.
Universal Standard Of Measurement (USM):
In this example, there are several possibilities and to keep it simple I will select three:
Labor Hours To Form, Place And Finish
Square Feet Of Finished Concrete
Cubic Yards Of Concrete Used
The best USM will depend upon which mix of projects provides the optimum profit and to get there will require some understanding and use of Linear Programing.
Linear Programming To Find The Optimum Mix Of Projects
Step #6 - Again I like Excel because it is so widely used most contractors have a copy of it on their desktop computers. I seriously recommend you invest in a large computer screen of at least 42" diagonally. There are several hi-definition televisions with HDMI ports that can connect your desktop to the screen.
Determine the optimum mix of projects that will generate the most reliable profit; the one thing that is common across all your most profitable projects, customers and projects and that will become your Universal Standard Of Measurement (USM).
There are a number of videos available to show you step-by-step how to use Linear Programming and one of my personal favorites is shown below:
Step #7 - You are now ready to develop a Break-Even system because you will have reduced the myriad of projects down to a single USM which is what you need.
For More In Depth Information About Breakeven - Please feel free to download the following e-Book Click Here to Download Break Even e-Book
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About The Author:
Randal DeHart, PMP, QPA is the co-founder of Business Consulting And Accounting in Lynnwood Washington. He is the leading expert in outsourced construction bookkeeping and accounting services for small construction companies across the USA. He is experienced as a Contractor, Project Management Professional, Construction Accountant, Intuit ProAdvisor, QuickBooks For Contractors Expert and Xero Accounting Specialist. This combination of experience and skill sets provides a unique perspective which allows him to see the world through the eyes of a contractor, Project Manager, Accountant and construction accountant. This quadruple understanding is what sets him apart from other Intuit ProAdvisors and Xero accountants to the benefit of all of the construction contractors he serves across the USA. Visit http://www.fasteasyaccounting.com/randal-dehart/ to learn more.
Our Co-Founder Randal DeHart - Is a Certified PMP (Project Management Professional) with several years of construction project management experience. His expertise is construction accounting systems engineering and process development. His exhaustive study of several leading experts including the work of Dr. W. Edward Deming, Michael Gerber, Walter A. Shewhart, James Lewis and dozens of others was the foundation upon which our Construction Bookkeeping System is based and continues to evolve and improve. Check out our Contractor Success Map Podcast on iTunes and Follow Randal on Google+