Eye Openers

As a contractor, there were times when I bemoaned the attitudes of employees who failed to understand our company’s cost structure and the battles we waged to make and keep a modest profit. Finally, it dawned on me that sharing this information could help create a common understanding and more accurate perception of fairness and balance among the entire staff. You might find it beneficial to offer similar examples to your own managers, office staff and field employees.

Real profit margins
Employees often have inflated notions of company profits. Create an example using a small project estimate, with a side-by-side comparison of actual to estimate costs for each line item. Open a discussion around whether the entire group believes the job could have been estimated differently, managed more efficiently, or the company would have been better off passing up the job. Offer information on the range of construction industry profit margins and an example of how easily one project can sidetrack an entire year of profitability.

Explain what profit really is—fuel to grow company revenue, a cushion against future economic slowdowns, and the foundation that supports the owner’s family, and by extension, the families of company employees.

Actual cost of an employee
Each year, create and distribute a report with each W-2 form that shows the entire investment you have made in that person. It will include not only the gross salary with federal and state tax deductions, but also the company portion of Federal Insurance Contribution Act (FICA) and Medicare, health insurance, retirement plans, union benefits, vacation time, holiday time, and the cost of providing company vehicles and tools. Include a prorated amount for your investment in general liability and worker’s compensation insurance and other items you include in your overhead burden. If you pay for coffee, company parties and the occasional lunch, prorate those expenses, as well. Many employees will be shocked to learn that their true cost to the company is two to three times the amount on their paychecks.

Make versus buy
Employees in our shop became nervous when we began purchasing items through outside vendors instead of continuing to make them. They were convinced that our cost to make the items was competitive with vendor pricing. After we held a workshop in which everyone estimated and calculated the labor and material cost to make the items, it was obvious that their time was better allocated to more challenging and creative work. When highly compensated craftspeople understand make-versus-buy calculations, they can appreciate the value of reserving their time for more interesting tasks. Take the opportunity to share the supporting facts for similar decisions in your own company.

Effect of errors
It is easy to overlook the true cost of errors, especially if the rework can be quickly and easily completed. Do your employees realize that you incur other costs besides labor and materials to remove and replace the unacceptable work? Travel time, shipping cost, order processing, wait time, and delays in completing subsequent work add to the burden of correcting errors. There are also opportunity costs—while the previous work is being corrected, you have lost the opportunity to perform other planned work. Finally, errors demotivate craft workers who are uneasy about the consequences of their own errors or frustrated with being assigned to correct someone else’s work.

I remember the first time my father shared his exercise in calculating the cost of an extra two minutes added to a five-minute bathroom break in the middle of a journeyman’s shift. We multiplied this across an entire year, and I was astonished at the financial impact and the realization that this was a 40 percent increase in the expected time for a personal task. Even the most efficient employees are often unaware of how much time is wasted during an average workday. A couple of extra minutes on a break, a personal phone call, stopping to talk to a co-worker on the way to the copier—none of these is costly in and of itself, but the collective impact is impressive. Create a couple of examples to raise awareness of the true cost of cumulative waste.

For the owner of a privately held contracting company, it takes a great deal of trust to share financial information with employees. If you struggle with the idea of sharing the numbers, consider the misunderstandings that arise when your staff is ignorant of your true cost structure and profit margins. The potential benefit of creating  “ownership” through a company-wide understanding of the facts, and the chance to debunk the mythology surrounding cost, profit, errors and waste, can make a big difference in how your employees perceive your investment in them and their value to the company. As they re-evaluate their own commitment to continuous improvement, they may also develop more appreciation for what you add to the process.

NORBERG-JOHNSON is a former subcontractor and past president of two national construction associations. She may be reached at ddjohnson0336@sbcglobal.net.

About the Author

Denise Norberg-Johnson

Financial Columnist
Denise Norberg-Johnson is a former subcontractor and past president of two national construction associations. She may be reached at ddjohnson0336@sbcglobal.net .

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