Guarantee Profit in the New Year

With 2007 quickly approaching, we thought it would be a good time to address your profit goals. How much profit do you think you should you make? Your answer is probably one of the following: “5%,” “10%,” or “15%.” Or it’s possible that your reply is “More,” or “As much as possible.” None of these goals is a clear target.

A recent survey of over 2,500 construction company owners showed that:

• 66% of companies have NO specific profit goals
• 70% of companies have NO overhead goals
• 50% of companies have NO sales volume goals
• 92% of all company employees have NO written goals

Shoot for nothing, hit it every time!
Most companies shoot for moving targets by attempting to make ‘as much money as possible’ or ‘more’ than they are currently making. ‘As much as possible’ is not a target. ‘More!’ More than what? These are not clear targets or goals. 5%, 10%, or 15% are not clear targets either. As your sales and job costs vary each month, your total markup earned changes, while your fixed cost of doing business remains the same. This causes your net profit to move up and down like a roller coaster.

A specific annual sales target of $3,000,000, an overhead target of $400,000 and a net profit goal of $120,000 are specific fixed targets you can shoot for and hit. Not, “More!” And not, “As much as possible!” As 2006 draws to a close, it is time to ask yourself:

What is your annual sales target?
What is your annual overhead budget?
What is your annual net profit goal?

Always make a profit!
The goal in business is not to stay in business or keep your crews busy. The goal of business is to always make a profit. According to a recent study, companies who have specific strategic plans with clear targets and goals make 33% more profit than companies without targets. And only 33% of all contractors actually make a profit every year. Additionally, 92% of all business owners reach age 65 with $0 net worth! It’s not how much you make that matters, it’s how much you keep (after overhead, job costs, staff, and a fair salary for the owner).

Run your company like a business
Very few small and medium size general contractors actually run their companies like businesses. A “business” has a business plan, sales goals, job cost goals, an overhead budget, and profit goals. A “business” pays its president or owner a fixed and reasonable salary every month (plus year-end bonuses from the net profit). A “business” prepares monthly financial statements, profit and loss statements, income statements and balance sheets. Most importantly, a “business” makes a profit. A “business” without ALL of the above is not a business. It is a place to go to work; a place to try to make some money; a place to try and cover expenses; and a place to try to have some leftovers to pay for the owner’s lifestyle.

Get a return on your investment!
If asked to invest $100,000 in a friend’s new start up contracting business, what annual return would you want? 10%, 15%, 25%, 50%, or more? Considering the risks, one should never invest in a new construction business that doesn’t offer at least a minimum guarantee of 15% to 20% annual return on investment. Your fixed cost of doing business (overhead) is an investment in your future ability to make a profit as well. Every year you decide what overhead costs you will need to run your business. Your staff accordingly, rent an office, seek jobs to bid, and hope enough business comes in to make a profit. Likewise, you must also make a minimum 15 to 20% annual return on your fixed overhead investment you commit to in advance every year.

Aim at a fixed target
Construction companies should make a minimum 20% return on overhead every year. This is the minimum target to shoot for. If your annual overhead is $400,000, you should expect a minimum net profit pre-tax of $80,000. Remember this is the minimum and in most cases, too low to shoot for. Aim at a target of 40% to 50% return on overhead as a higher target to hit. For example, if your overhead is $400,000, your pre-tax net profit goal would be $160,000 to $200,000. Now you have a minimum target and a higher target to shoot for. These are specific goals you can aim at and then track your progress.

What is your fixed cost of doing business?
First determine your fixed cost of doing business or annual overhead costs. Overhead costs include everything you need to run your business without any jobs under construction. Overhead costs include:

• Company management
• Administration and accounting
• Estimating
• Marketing and sales
• Your office and utilities
• Computers and supplies
• All non-job charges business costs

Job costs are not a part of your overhead and include everything that occurs out in the filed or on the jobsite and must be job charged. Your job costs should include:

• Project management
• Supervision
• Pro-rata share of owner for project management or supervision time
• All field labor
• Field labor burden and fringe benefits
• Field workers compensation insurance
• Liability insurance for jobs and labor
• Field trucks and equipment

A typical $3,000,000 construction company’s overhead is shown in the example below. Your task is to calculate your accurate fixed annual cost of doing business. This is the ‘nut’ you have to crack before you can break even every year. Always include a fair and reasonable salary for the owner or president of your company6. If your owner runs some jobs, split his or her time between overhead and job costs such as project management or supervision. Also, field labor job costs must include workers’ compensation insurance and liability insurance. These are now overhead charges as they don’t occur unless your field crews are working on jobs. Be sure to put those costs into your job costs and not into overhead. Another mistake is putting all of your company vehicles into your overhead. Most vehicles are used out in the field and should be job charged including the insurance, gas, and maintenance.