There will always be mistakes in your work, but the real cost of those errors might be greater than you realize.
As an electrical contractor, you know the cost of rework amounts to more than simply labor and materials. Let’s say you have a quantity of work invoiced at $10,000, and it must be removed and replaced. The original cost of labor and material was $8,000, and you added overhead of 15 percent and profit of 10 percent. Removal costs $6,000 for labor and incidental materials, and the equivalent overhead and profit figures are not recoverable. In fact, these are “opportunity costs” because they could have been included on similar work, but you did not have the opportunity to perform that work because you were correcting this error. The replacement figures are the same as for the original work.
This simple example serves as a reminder that opportunity costs are real. For the same type and quantity of work performed outright, you could have invoiced $27,200 but in this case, you are only able to bill for the original $10,000. You are unable to bill for, or recover, the overhead and profit you could have included if you were not fixing an error. Even in accurate cost accounting systems, supervisors may feel pressured to minimize or bury related costs, making it difficult to verify them.
Performing error corrections may cause delays in the invoicing process, pushing your payment back by one or two payout cycles. Cash flow is affected every time there is an error, and if these errors continue, you may have to draw down on your line of credit, eroding your cash flow with unplanned interest payments.
How much revenue will you have to add in order to recover the loss from this one error? Do you add the lost $17,200 to your overhead and recalculate the allocation over the remainder of your estimates for this year? Do you try to make up for the loss by obtaining another $70,000 in work and hoping for the best? Will you even have the capacity to perform additional work to replace the losses you have incurred from such errors?
These effects on your overhead recovery and profit are difficult enough to calculate, but there are intangible damages that are nearly impossible to accurately measure. For example, morale can be eroded when electricians are assigned to tear out and replace each other’s work. The original installer may not even agree that there was an error and may be resistant to performing a correction. Productivity suffers in any case.
Opportunity costs also affect productivity at the administrative level. Staff must spend time administering, assigning and managing paperwork related to the problem, as well as dealing with unhappy customers and resentful field employees. Accidents may result from poor attitudes and attempts to save time when performing rework, adding to the paperwork burden. Because of these ripple effects, some experts estimate that the actual cost of rework may be three to five times the original estimate.
The effect on your reputation can be unpredictable and even unsalvageable. Does the customer know about the error? Are other subcontractors delayed by the rework? If enough small mistakes occur with one customer, will you retain the business? A loyal customer will probably tolerate a few minor errors, but eventually, you risk losing a valuable source of sales revenue. What will you do to replace those jobs, and will you have to settle for less desirable projects or clients?
Over time, morale may erode to the point that employees begin to grumble. When they are overheard by co-workers and customers on job sites or at community events, it is presumed that quality is deteriorating and management isn’t watching the details. You may have to lower prices to compete for new work. Your profit margin suffers, and you begin to cut corners, failing to replace tools, buying cheaper materials, and laying off staff, thereby adding to the workload of those who remain. Invoices are sent late, cash flow is delayed, and estimating errors further reduce your profits.
Although it is unlikely that you will lose your company over a few small errors, the potential for erosion of morale and reputation is serious. Your company is perceived as trustworthy and quality-conscious by employees and customers only as long as they can verify that status. Given enough small incidents (or one sufficiently disastrous mistake), that trust is broken, and in some cases, it may never be totally reestablished. Don’t let a few small errors become a self-fulfilling prophecy that damages your reputation beyond repair. Do your best to be perfect the first time.
NORBERG-JOHNSON is a former subcontractor and past president of two national construction associations. She may be reached at email@example.com.