When you’re full of energy you can get a lot of work done. After a week of working hard, you start slowing down and aren’t as productive.
The same can hold true for your company. Over time, as your company grows, it becomes less efficient. The reason isn’t complacency, it’s human nature. As you add employees to a growing company, you’ll both increase production and decrease productivity. You need to account for it when you’re estimating and pricing your jobs.
Let me explain. If you’re a one-person company and are doing all the work yourself, you can sell, build and collect a certain dollar volume. A remodeling contractor using subs should be able to sell, build and collect at least $500,000 a year without employees. The figure varies for specialty contractors, depending on the specialty, but it’s roughly $250,000 per year.
Things change when you hire employees. They won’t work as efficiently as you, so adding an employee won’t double production. A remodeling contractor with two employees (yourself and another) should be able to produce annually about $400,000 per employee, which is a total volume of $800,000. A third employee will decrease the annual production per employee to roughly $350,000, for a total of $1,050,000 per year for the company.
Look at that again. You should be able to sell, build, and collect at least $500,000 a year working on your own, $800,000 per year with a second employee, and only $1,050,000 per year with three employees. The figures aren’t exact, but the trend is accurate, and it applies to specialty contractors and new home builders as well. The volume of work you can build per employee will continue to drop with each additional employee until you have about fifteen employees, when the volume per employee begins to level out.
If you don’t adjust your estimated job hours to account for that lower productivity, your actual labor costs will exceed your estimates, and you’ll start losing money.
This is why many construction-related business owners focus on improving the productivity of their employees. They believe the reason they aren’t making the profit they should be making is that their employees aren’t working fast enough. They think, “I charge all I can get for my work, we aren’t profitable because my employees take too long to build the jobs!”
Attend any major construction convention. Classes on job supervision, job production, working with a lead carpenter, or anything to do with production will be attended at a rate of two and sometimes three to one over other classes. They discuss how to build the job, how to supervise the crews, how to retain employees, how to find good employees, and of course all the latest new materials. These are all production-related issues.
If articles and classes on production are effective, why do construction-related businesses fail at such a high rate? Because most construction-related business failures are not caused by production problems.
If you are going to survive in this business you must be sure that you are using the correct markup to arrive at the sales price for your work. To get to that sales price, you also must be realistic on your estimates in your expectations of your employees’ production.
Now, let’s take a look at those volume-per-employee figures from another point of view. It’s not uncommon to hear from contractors who are losing money and have serious cash flow problems because they have too many employees. If you’re a remodeling contractor selling $1 million a year with five employees, that’s only $200,000 per employee. Make sure that you are selling enough work to support the number of employees you have.
Keep an eye on your production per employee because it can be a marker for how well jobs are getting built, but recognize that adding employees decreases overall productivity. If you’re losing money, don’t point the finger at your employees for not working hard enough. Low productivity is seldom the reason companies go out of business. If you are pricing your jobs to cover your job costs, overhead, and make a reasonable profit, and if you’re estimating those job costs reasonably well, you should be profitable.