Over Head Production, Year-End Profits

How do you make critical management decisions that affect overhead in your business? Do you know your company’s true daily overhead cost? Do you maintain an annual sales forecast report? What resources do you tap to make the best decision possible when addressing growth or shrinkage in your company’s personnel pool?

My company is in a growth mode. We have seven custom homes ranging in size from 5,000 to 10,000 sq. ft. in six different towns separated by more than 100 miles. My support team includes an estimator, a bid manager, a client selections manager, a project manager, a handyman and a laborer. We are able to support all these jobs with only one project manager because of the effective systems we have in place. For example, we have installed Web cameras at all our sites so we can keep a constant eye on the job. We use Buildlinks, a Web-based software program to manage the selection and scheduling details. Buildlinks is programmed to e-mail me a daily report showing which subcontractor is supposed to be at which site.

Since transitioning my business from building 80 percent spec homes and 20 percent custom to almost 100 percent custom homes, it has become imperative to have consistent production levels to cover overhead and remain profitable. While building custom homes exclusively, I have learned the importance of controlling the time frame for client selections so production does not grind to a halt while the overhead meter keeps spinning.

Following are some key steps to take when evaluating your company’s personnel needs:

Step one: Calculate your daily overhead costs. This should provide you with a greater sense of urgency when confronted by subcontractor delays and no-shows. I recently calculated my overhead to run my business at $325 per hour! Start by adding up all salaries, including owner’s salary, insurance, rent and all non-job-cost expenses, and then divide that number by 250 work days of 8 hours each. This exercise is valuable to remind you of the true cost of not having as much production as possible going on in the field. As a result of having a solid report of your annual overhead costs, you will know exactly how much profit your company requires to merely break even.

Step two: Create a company sales forecast report. Prepare the report on a per-job basis starting with completion date, projected total annual sales, job cost budget and gross profit. Deduct from the total projected gross profit the annual company overhead. This will show your projected net annual profit. Knowing this number, you are ready to evaluate if you can afford additional personnel or if you need to cut staff and costs immediately.

Step three: Consult with key employees. After completing steps one and two, I evaluated my personnel needs, then had private one-on-one meetings with each member of the production team and asked what suggestions they had in regard to keeping up with production of the custom business. Then, I scheduled a meeting with the entire team. My initial idea was to offer a group bonus to the team if they could devise a plan to meet production goals, while maintaining our reputation and avoiding adding another project manager to our payroll.

After our meeting, we identified options: Hire an additional project manager to entice a prospect who soon will be building an 8,000-sq.-ft. home. Hire a project manager on a per-project fee basis. Conduct weekly site meetings with our project manager and client manager to improve the communication and results of our current team.

The solution you select must work best for your circumstances. Invest the time necessary to make a well-thought-out, carefully planned decision. Good luck!

Jay Grant is president of Grant Homes (granthomesusa.com), a residential design/build firm in Mendham, N.J. Grant’s business focuses on controlling and developing land for construction of luxury custom and speculation quick-delivery homes. His strict attention to weekly cash flow reporting results in industry-leading profit margins. Grant has given numerous seminars across the country and is available for consulting by sending e-mail to granthomes@msn.com. Read his past columns at rdbmagazine.com.