The reality is insolvencies in the construction sector have doubled in the last 12 months. Marco, Director - Head of FTS ...
4 Steps in Reviewing Profitability
18 May 2021
We support a number of companies within the Built Environment Sector including Construction companies, their subcontractors and Designers of all disciplines. One of the areas clients often find challenging relates to project profitability and how to achieve this consistently.
So, we’ve highlighted four key areas where we can support in introducing effective processes so you can review your business’ profitability and see where adjustments may need to be made.
1. TENDERING FOR WORK
From the outset, do you have a marketing team who completes the Selection Questionnaire and Invitation to Tender? Do you have a robust Bid/No Bid process based on set criteria? This is an important decision for any business to take as money can be wasted bidding and therefore money lost on projects that don’t fit your team’s capability and experience. Do you carefully scrutinise the contract terms at the outset? Once the opportunity to tender’s been secured, the final profitability outcome’s determined by how robust the processes and systems you have for project costing, tendering and monitoring.
Do you have a consistent approach to preparing tenders? This is important for any size of business and particularly where more than one team are formulating bids simultaneously. Do you have an accurate way of establishing the duration of a project as this affects many aspects of the price submitted including ensuring the percentage additions for overheads is adequate?
If you’re a Contractor, how do you establish the net construction costs? How do you establish your margins? How do you settle and agree the final tender price, is this something only Directors are allowed to do?
The process will vary with whether you’re a Main Contractor or a Designer, but the principles are similar. Designers fees are based on people costs and duration. Do you have a simple, but robust system in place for calculating and monitoring costs during the various project stages? Sometimes fees are front or back loaded. If they are, a good understanding of the contract you have with a client is crucial.
2. CAPTURING DATA
No matter where you might sit within the Construction supply chain, how you capture and use data will significantly impact on your ultimate success as a business. It can help you secure more profitable opportunities and win more successful projects.
This is extremely important for smaller start-up businesses.
Do you have a robust system for analysing the sectors you work in, the clients, the market rate for different building types? Do you have a good CRM system commensurate with your business size and resources? These are all important when considering Bid/No Bid decisions in the future.
Are you aware of how much it costs to tender on particular projects so this can be factored in on future opportunities? Do you keep accurate records of the costs and profit levels achieved on previous projects?
For unsuccessful bids, do you know why you failed to win them? Did the client have favoured contractors or consultants? Capturing such data can allow a review of what to do in future and take the learning when considering future opportunities. If particular sectors or geographies are more successful, then can you learn from those successes?
It’s worth remembering that the quality of your project data feeds into your accounting system.
3. COST/VALUE RECONCILIATION
A common painpoint for business owners is the slowness and accuracy of month end reconciliation of projects. This materially affects how the financial performance of a company can appear.
Do you have the right systems and expertise in place to enable a robust Cost/Value reconciliation to take place every month? As a Contractor, have you considered the benefits of a ‘Day One’ final accounting procedure? When such procedures are adopted to keep both internal and external customers appraised of the final account figure, there are no surprises that could damage the credibility of the company.
Work in progress, retentions and variations require robust systems because often the valuations and billing don’t always coincide with month end. Can you currently calculate these aspects with a reasonable degree of accuracy?
How good are your invoicing and cash collection processes ? As ‘cash is king’, this is an aspect that requires particular focus.
4. REPORTING AND REVIEW
An important stage in the process of monitoring costs and profitability is having a regular and meaningful review process.
We’re often asked to help our clients make sense of the data they capture. Sadly, many businesses aren’t able to act quickly enough when things start to go wrong financially. When project costs start to run over what was originally predicted at the bidding stage, it’s crucial that action’s taken as early as possible.
We often find a dash board type system can help, with Red, Amber and Green status. Do you have such a system in place?
Having a fully integrated system or process, starting at tender enquiry, through the bidding and project monitoring stages can pay huge premiums in ensuring your company remains profitable and efficient. This whole project life cycle approach ensures that mistakes at the outset aren’t repeated subsequent projects.