We’re going to continue discussing some of the reasons construction businesses lose money, in spite of the owner’s hard work and effort. Today we’ll focus on three issues concerning employees.
1. Do your employees know what their job is? Many contractors hire employees without a clearly defined job description. “Clearly defined” means that it’s in writing, because verbal communication isn’t always clear.
You need a well-written job description for everyone in the company, including the owner. You can’t expect an employee to do a job they do not know they’re supposed to be doing. A well-written job description also eliminates the possible conflict between two employees when both of them think something is or isn’t their job.
I was consulting with a construction business some time back and, as I always do, I interviewed each of the key employees. After I was done, I sat down with the owner to discuss the employees and he told me he was very upset that “Joe” wasn’t doing his job as foreman of the cabinet shop.
But Joe didn’t know he was supposed to be acting foreman. Joe had told me his job was to fill in wherever he was needed. No one had ever said to him, “Joe, you’re the foreman of the cabinet shop, make it happen.” In fact, Joe told me that he didn’t want to be in charge of anything, let alone be named a foreman or superintendent.
On another consulting job, I watched as it took three different people in an office to post a job assignment for one of the employees on a white board. Why? None of the office staff had a written job description, so they were all doing parts of a job but no one was doing the complete job. As a result the office was grossly overstaffed and very inefficient.
You need to write a clear job description for every employee. It would be wise to have it reviewed by a second party. Then sit with each employee and review that job description. Make sure they know and understand what you expect of them.
2. When estimating a job, make sure that every employee’s time is accounted for in that estimate, before the price is prepared and presented to the potential client.
If an employee is working on jobs, then their time is accounted for in the labor category on the estimate sheet. If you intend to hire, make sure the time of your future employee is included in the job estimate before you hire them.
All too often I hear from owners worrying about not being able to make payroll. One reason this happens is because they hired employees, put them on the jobs, but didn’t account for the cost of those employees when they quoted the job. They assumed they’d do the work on the job (for free, of course). All labor required to build a job must be on every estimate sheet for future jobs before the employee is hired.
The same holds for office or supervisory staff. Their time (hourly wage or salary) is accounted for in the markup before the employee is hired, not after. If you increase your overhead by hiring employees, but don’t adjust your markup, you’ll have cash flow problems.
3. Too many employees for the volume of work being produced. This is the other reason a contractor might not be able to make payroll. In our book Markup and Profit; A Contractor’s Guide Revisited, Chapter 6, titled “Build the Work Profitably”, we talk about the amount of business that should be produced to keep a good balance between the number of employees and the volume of business sold, built and collected. All too often this gets out of balance. When the contractor has too many employees for the amount of work being produced, boom, the cash flow goes right in the toilet. If you haven’t checked your ratio of employees to volume-produced recently, today would be a good time. This is one of those ratios we hate to think about, but keeping on top of it is the difference between being profitable and not being able to pay your bills.
You aren’t in business to employ people. You’re in business to provide a service and make a profit doing it. When you make a profit, your business is stable and the employees you have gain security. When your business doesn’t make a profit, everyone’s job is at risk. Make your business secure by maintaining the proper balance of employees to volume of work, and everyone wins.