What is slippage? When is it OK? Ever? Never? When does slippage become big enough to be called “sloppage”? Is slippage a legitimate cost? If it is, who should pay it? Who is accountable for slippage? Is slippage like sales tax? Should it be the same for everything? Should we assume slippage is unavoidable and add it to our estimate? Then what happens if there is slippage on slippage — do we call that “slidage”? OK. I know. Enough already.
The term slippage is widely used in construction and by some of the best in the business — it is used properly by some and as an excuse by others. For the sake of this discussion, I am going to dismiss those who use sloppy management and estimating techniques and expect good results. Permissible slippage should only come from estimates that are done properly and management that is effective and attentive. We will deal with the good estimate folks for most of our discussion.
If we define slippage in the classical sense, we would call it the efficiency with which the job is executed both from a material and labor standpoint; but that’s not entirely accurate in practice. When we estimate a job at $1,000 and it winds up costing $1,080 without a change in work scope, we would have a slippage of $80 or 8 percent and that is a lot; on a million dollar year, that would be $80,000, by anyone’s standards some serious bread. What amount of difference would you be willing to “tsk tsk” and call it the way the cookie crumbles? Two percent slippage seems to be an acceptable level. I am not trying to pick a fight over words, or a percent, but it is very, very important to know slippage for what it is.
Accurate estimates come from good plans and with accurate job scope descriptions; we prepare a take off showing quantities by size, type or character so that we can accurately get pricing. An important part of an estimate is the computation of waste. The portion of the materials that is not usable productively, is lost, damaged or misused is reasonably defined as waste; it is not waste if you can return it for full credit. Waste depends upon the amount of the material, packaging and in some cases vendor policy about returns for credit. Consider the following examples. 1) I built a two-story office building several years ago. I used approximately 80,000 modular bricks, the coursing was normal, and the brick was a uniform color and was easy to lay. I checked with the supplier and used a waste factor of 2 percent or allowed for 1,600 extra bricks without using halves. The brick cubes were a 400 count (lucky, but it’s a remodeler thing). If I had to bust into a new cube for 50 bricks to finish the job, it would increase my product waste 0.5 percent, but let’s say that my waste allowance was correct at 2 percent and my job came in on budget using most of the waste I had included — hence there was no slippage. 2) Next, I built a house and the house had 22,000 bricks and if I used a 2 percent waste factor (440 bricks), essentially one cube, I have less elbow room within the waste factor. If I run even slightly over, I have to buy another cube and that doubles my waste to 4 percent; the extra waste would be slippage. 3) If I do a normal remodel that has 8,000 bricks and if I use the same waste, 2 percent, I can only lose 160 bricks before I’m stuck, so I have much less wiggle room; all that has to happen is bad coursing and if I have to buy another cube, now my waste has turned into 5 percent or 2.5 times what I estimated for waste. Every one of these examples is a good possibility, but if we call waste slippage, we don’t have an accurate picture of why our job would have finished over budget. Furthermore, we didn’t get to mark up the waste if it turned out to be slippage.
If we saved the cost of waste we had allowed for, do we have a negative slippage — huh? I have never heard of negative slippage, have you? Where am I going with this? Is slippage a real item or a ghost cost? When we call waste, or lack of productivity, slippage, it seems to me we are endorsing slippery estimating. If we used idealistic costs we can’t produce and call the difference between that and the real world cost slippage, we are laying a trap for ourselves because our database becomes more and more corrupt. How do you analyze job cost variances when slippage is used for waste and a catchall. Simple, you can’t.
You need to estimate materials or labor such that you believe, under normal effort and conditions, you will be able to perform. To do anything else is counterproductive or foolish. If you use real-world conditions and then make an allowance for, say, 2 percent slippage because that is historical for you, what has been happening then justifies increasing the unit cost 2 percent in your database; that’s where it belongs. By doing so, you now are estimating the actual production cost so variances from budget to actual aren’t slippage and can be analyzed for what they are.
Probably the best way to illustrate the point — consider a job you are going to do at a fixed price for an owner, and if you meet budget, you earn a bonus of 40 percent of the savings whereas if you go over you eat all the overage. Now, where do you put an allowance for slippage? You put it in the item cost where it belongs because you are being held accountable? If we call a contingency slippage or miscellaneous, we are really lying to ourselves; we are hiding potential extra cost we haven’t identified. If you list the expected slippage amount in your estimate and mark it up, aren’t you charging your client a profit on your mistakes? On the other hand, you are perfectly within your right to mark up waste because reasonable waste is part of construction.
“Contingency” is one of the most misused terms in professional construction. It is defined as: “Something that may happen. An event that may occur in the future, especially a problem, emergency or expense that might arise unexpectedly, needs to be dealt with, and therefore must be prepared for.” (Microsoft Encarta Reference Library 2004.) Many contractors use a contingency as simply price-padding to cover items they forgot, or worse, were too lazy to take off and price. That does not work, not if I’m the owner. I will insist on a definition of what the contingent amount may be used to cover. If you get extra sloppy with your material staging and lose some framing lumber to mud or damage, that should be your nickel, not contingency money. Legitimate contingent funds when included, should be for the unexpected: a soil problem; a tornado, if defined appropriately, a spike in lumber prices, not for incompetency.
A very good friend of mine and a real professional, estimates a job as he sees it happening without contingency, and if the job comes in above the estimate, he calls it slippage — if the job comes in under estimate, he calls it talent. I would rather estimate the job as a doable entity, taking into account the productivity of the field manager, whoever it is and call that the cost, mark it up, guarantee it and then try like hell to bring it in under budget. This is where there is no self-kidding — we really learn something from the job cost analysis that guides us the next time we do a similar estimate.
If we are doing a $300,000 job and we suffer a 2 percent slippage over and above our allowance for waste, what has this done to our job? If the projected gross profit was to include a 7 percent net profit and 27 percent general administrative and overhead cost, our cost of goods sold would have been $198,000 plus 2 percent or $3,960 over budget; so our projected profit which was $21,000 is reduced by the slippage ($3,960). The effect on our profit compared to projected — it is reduced by $3,960 ÷ $21,000 (projected profit @ 7 percent) = 19 percent. That’s huge, and I will want to find out why. If I had used slippage for waste, I would not be able to track it.
A 2 percent slippage on a $5,000 job is $100 which is quite forgivable but as the size of the job goes up, the same 2 percent becomes a real attention getter. So, do yourself a favor. Do a thorough estimate with proper allowances for waste and productivity so that when you arrive at the true cost to do the job, the mark-up you apply is a real gross profit number you feel you can produce. If you can’t produce it, you need to find out why and not shrug and label it slippage; “because” was a good enough reason until your 6th birthday — if your workforce is not producing what they should, maybe a change is needed but don’t change the slippage, change the sloppage. While you’re here . . .