The main goal of using business systems for a remodeling company is to ensure that the company is making money on projects instead of funding them. This month, Paul Winans, CR, of RemodelersAdvantage.com and former owner of Winans Construction, offers the final piece of the three-part NARI recertification series on using business systems to control costs and grow profits.
“I think the riskiest thing that a remodeling company does is prepare estimates because that’s where you either make money or lose money,” says Winans. “People think most money is lost while a remodeling project is being completed, but I think it’s before the proposal is presented.”
Winans feels if that’s true, then job-costing is incredibly valuable because it shows how well the company did, how accurate the estimate was and where opportunities for improvement lie. So many companies don’t even do job-costing, but how will they improve their company without job-costing? At Winans Construction, accounting would be done weekly with the time sheets coming in at the end of Wednesday. On Thursdays the sheets would get entered into the accounting system and the company would have job-costing figures by the middle of the day. By the end of the day, people would look at that information and make adjustments like rebidding other aspects of the job to try and make up the money. The real win is making the net profit that was planned on rather than making sure that every component comes in on budget.
“If you’re not looking at job-costing or run it only after the job is done, you might find out that the last couple of weeks of the job you were actually just funding getting the work done,” adds Winans. “You’re not running a company; you’re just providing materials and labor and maybe you’ll make money. That’s why job-costing throughout the project is hugely important.”
Most construction accounting systems will let a company run actuals to budget on a weekly basis. The software Winans Construction used let it break down each of the construction specification institute components into materials, subcontractor and other, and then see actual-to-budget for each of those.
“You have to make adjustments mentally,” explains Winans. “If you can’t go back to the client for more money, then you need to write an in-house change order to adjust the actual budget. If you’re going to go over budget, then you have to manage to that new budget now.”
Winans then suggests that if it is clear why a budget shortage happened, a company can make sure it doesn’t make the same mistake again and can adjust estimating for future projects. Another thing that companies can do is manage costs proactively by using a purchase order system. If a company uses a purchase order system to write out all purchase orders before the job started, then there’s nothing that gets paid if it doesn’t have a purchase order.
An important component of it is that a company would write and execute agreements with all of the trade contractors before they did their work so that the company would have a really clear idea of what the cost is for the work. The company can then manage payment of invoices against that contractual obligation. Purchase orders are a way of doing that.
Just as important to running reports are regular weekly or bi-weekly interactions regarding the information that is being generated. It is important to discuss what is going well and what needs some attention because it isn’t successful. Those meetings in the very least would want to include the lead carpenter/project manager and the production manager. It is also a good idea to include the estimator in those meetings on a semi-regular basis so that the company can take advantage of any insights gained sooner than later and not just when the job is over and doing a job completion review.
“Schedule is also really important,” says Winans. “I don’t think a realistic estimate can be prepared unless a schedule is prepared along with it. For instance, if you engage a plumber, there are questions that need to be asked while a proposal is being prepared: What’s the amount of time needed to do rough work, how much lead time do you need to get you into our project and what would be the schedule for the finishing work?”
If a company marks down when a particular part of the job began and ended, it begins to give a good idea of how the contractors are doing based on what they said they could do. This allows a company to have better informed conversations when writing future proposals or preparing another schedule.
“If you look at the job-costing weekly and make a judgment on how complete each thing is on a percentage basis, it allows you to stay on budget better,” explains Winans. “You don’t want to pay out 100 percent of the money if the job is not complete because then you’ll have to find more money somehow.”
It’s important to look at the estimating backup along with job-costing to make sure they complement each other to ensure a profitable job. Winans also warns to pay attention to the amount of hours in-house staff are using on a job because it can be a problem in the end.
“Everyone thinks they’re working hard, but there’s no way the company can succeed without job-costing during a project,” adds Winans. “That’s where training and education are key as a basis of having a clear understanding of what success looks like for a company.”