Cost-Benefit Analysis

Cost-Benefit Analysis for commercial construction contractors

Cost-Benefit Analysis and numbers

The cost-benefit analysis allows commercial construction subcontractors to compare expected potential revenues to likely potential costs.

In effect, a cost-benefit analysis allows you to minimize risk and proceed only when there is more certainty than uncertainty.

While the essence of decision making in the construction industry often calls for quick reasoning and decisive action, an adept cost-benefit analysis takes time to gather information from trusted sources before a decision is made. Simply put, it is a technique used to bring greater objectivity into the decision-making process.

Keep in mind; this method works best when you consider the possibility of unforeseen events or circumstances.

Prioritizing through analysis

Whether the question concerns projects, new hires, or acquisitions, using the principals involved in the cost-benefit analysis also allows you to prioritize through added clarity.

Using a cost-benefit analysis helps make the implications and impact of potential decisions, something that can be visualized.

For example, you determine you need a new piece of construction equipment. Your choices are:

  • Purchase the big, shiny, new one
  • Buy the used, well maintained one
  • Lease or rent one

The purchase or rental price of the equipment is not the only cost to consider. For example, expected maintenance and upkeep costs, downtime, as well as potential resale value, need to be examined in the process.

Then throw this bit of difficult information into the mix – would your long-term equipment operator prefer something with all the new bells and whistles, or would he prefer equipment more in line with what he is used to using?

Or, if you don’t already have someone in your employ who operates equipment, will finding that new employee be easier because of the equipment offered?

Cost-Benefit Analysis and people

It is important to note that cost-benefit analysis may include intangible benefits and costs or effects. For instance, many decisions have the potential of affecting employee morale or customer satisfaction.

Is it worth it?

The principles concerning this process have been true since humans began making choices. In its purest form, the question being asked is, “Is it worth it?”

Using the data at your disposal and common sense concerning those parts which are more difficult to quantify (for instance, customer satisfaction) allows you to get to the bottom line and determine the values involved.

 

We desire to familiarize you with business concepts, which will make it easier for you to be a better commercial construction subcontractor through our blog posts. Some are new ways of looking at things, and others are refreshers. 

The Profit Constructors Provide Contract Document Management and Advisory Board Level counsel for small to medium commercial construction subcontractors.

So you can Run With the Big Dogs! Call us 866-629-7735

Trust and Risk Mitigation in Construction

Trust and Risk Mitigation in Construction

Editor’s note: Our social calendar (including blog posts) is scheduled weeks (sometimes months) in advance. The following post was written over a month ago and “calendared” at that time. In other words, we did not plan this post to coincide with the Coronavirus scare and reaction. But it has proven to be well-timed.

Trust is about taking risks

I learned of some folks who took in a young foster care child who had been abused by his parents. He was unwilling to trust. He couldn’t trust anyone or anything in the world he inhabited. His mistrust of life was so deep-seated it even included simple addition. No matter how many times his care family showed him that two apples plus two apples always equaled four apples, his response was, “What if it doesn’t equal four the next time I try it?”

This story broke my heart when I first heard it, and thinking of it now still saddens me.

Trust is a basic tenant on which we all make it through each day. From the floors we stand on, to the chairs we sit in, to the mugs we pour our hot drinks in, we trust they will continue to do their jobs. Yet, there are those times they don’t.

For example, you trust that when the traffic light is green one way, it is red the other. Further, you trust that when the light is red for the cross-traffic, the drivers in that lane will stop. And this sometimes leads to trusting that the ambulance drivers will take you to the nearest (or best) medical facility.

Every day, we get up, and without thinking about it, we trust. But sometimes we realize we must verify before we continue to trust.

Verification is about risk mitigation

From the products you purchase to the services you take advantage of, to the people you hire, there are ways to verify if you’re likely to receive that which you desire. A prudent verification process is essential.

It can be as simple as looking for the number of stars other users have given a retail item or as difficult as checking a doctor’s background and credentials.

In the end, verification allows you to eliminate, reduce, or control the impact of known risks.

Because our practice consists of management accounting, we advise commercial construction subcontractors to protect themselves from data fiascos through the process of risk mitigation.

Risk mitigation through contingency planning

There are multiple ways to lose data, such as fire, storms, cyber-attacks, employee theft, and beyond.

The key to developing a good plan is to focus on possible losses rather than events.

 

Think in terms of which data takes priority. What would cause the most pain if lost? With this understanding in mind, here are a few items for you to consider while developing your data contingency plan.

 

  • Rank which data are most important
  • Review data back-up and storage procedures
  • Find back-up service providers (you may find this article helpful)
  • Develop a back-up procedures manual
  • Secure outside support for payroll or other financial issues

 

Remember to include client and employee management strategies to be used during a crisis when developing your back-up procedures manual.

Risk mitigation through back-up

The goal is to establish data back-up systems to protect critical documents.

Remember when someone pointed out you were comparing apples to oranges rather than apples to apples? Yep, that sometimes happens. And the simple solution is to remove the oranges as you make your decision based only on apples. If only it were that easy when trying to determine which method or service to use for backing up your data.

It turns out that deciding between your back-up options is more along the line of comparing tacos to tacos. Do you prefer street tacos? How about deep-fried tacos or fast food tacos? Do you want to sit and enjoy handcrafted tacos?

The plethora of options can tend to get in the way until you determine the specific needs of your construction company’s data back-up and recovery needs. Which tastes better to you? How much time do you have available? Does location matter? Does the price make a difference?

Further, back-up is not the only piece of the equation. Fast recovery of all that backed up data is important. The point is to quickly put everyone back in touch with the information that’s needed.

Risk mitigation through insurance

You already insure your building, equipment, vehicles, life, and health. It only makes sense that you use insurance for the data you have stored in the cloud. In an article posted on The Balance Small Business, it is stated, “Cyber liability policies protect your business from claims and expenses resulting from a data breach.” The article, What Does a Cyber Liability Policy Cover? explains various components and aspects you need to look for and consider when purchasing this type of insurance.

You can check to see if your present provider offers cyber liability protection, or you can purchase this insurance as a stand-alone product.

Risk mitigation through checks and balances

Finally, as management accounting specialists, we advise contractors to mitigate risk with the simple process of checks and balances. Following is a list of checks and balances you may wish to consider for your construction company.

  • Use a system of double-signature requirements for checks, invoices, and payables.
  • Make use of the services of an accounting firm and the different services of a tax preparer.
  • Provide multi-department authorization for final figures.
  • Separate handling responsibilities from record-keeping functions and purchasing responsibilities from payables functions.
  • Before payroll preparation, require supervisors to approve employees’ timesheets. (Or automate time tracking for accurate timesheets using an app such as ClockShark)

A couple of other ways you can mitigate internal risks are:

  • Require accounting department employees to take vacations.
  • Make use of independent audits.

In conclusion

If you define risk as being the probability of an event attended by the possible consequences, then risk mitigation is the practice of using various tools to manage the risks.

Keep in mind; risk management is not a one-off exercise. Continued monitoring ensures that risks have been correctly identified and assessed and that appropriate controls are in place.

Editor’s note 2:  We are working hard to see to it that our clients weather the storm. Definition of “weather the storm” from Merriam Webster — to deal with a difficult situation without being harmed or damaged too much.

We desire to familiarize you with business concepts, which will make it easier for you to be a better commercial construction subcontractor through our blog posts. Some are new ways of looking at things, and others are refreshers. 

Schulte and Schulte Provides Accounting, Contract Document Management, and Advisory Board Level counsel for small to medium commercial construction subcontractors.

So you can Run With the Big Dogs! Call us 866-629-7735

Drone Thinking in Construction Contracting

Drone thinking sets you above the crowd.

Drone Thinking as a tool

Before we begin, let’s get something cleared up. Capterra’s Rachel Burger wrote a blog post for The Balance Small Business titled, 6 Ways Drones Are Affecting the Construction Industry. She has some cool insight into how using drones is beneficial to construction contractors. It is worth the few minutes it takes to get her overview. Check it out, you may find a few bits you hadn’t already thought of.

It’s good stuff. Yet, it isn’t what this article is about. This article is about Drone Thinking, not Drone Using.

So, Drone Thinking is all about using your mind to soar above the happenings of the daily routine and getting a “drone’s eye view” of how your commercial construction business is doing. It is a step taking you to equanimity. Because, by definition, equanimity means having “mental or emotional stability or composure, especially under tension or strain; calmness; equilibrium.”

It is a matter of having the mindset which allows you to leave the minutia of chaos and confusion on the ground, while you soar overhead and look at the big picture.

Drone Thinking next steps

Instead of taking a step back, take a flight above. Look down on your business from a drone perspective. After completing step one below, you can use the time to deal with the other four components.

  1. Allocate time to think – put it on your calendar, at minimum one hour, once a week.
  2. Remove false assumptions – never mind boxes (or thinking out of them) simply work toward knowing your own false assumptions and how to deal with them.
  3. Know the data – of course, we’re here to help with that!
  4. Identify gaps – typically found in processes and procedures. (We can help with this too.)
  5. Pick specific goals – they might include increased profitability, efficiency, or sustainability.

Here are some questions you may wish to cover:

  • What funding, equipment, personnel, and technology will it take to reach my business goals?
  • What are three to five important initiatives that will have the greatest positive impact on my construction business? (Remember, having too many priorities means you don’t really have any.)
  • How can I improve my leadership skills?
  • What can I do to be better at holding others accountable?
  • Am I missing the boat (and if so how) in communicating the vision for my company?
  • What are the best strategies to use in these areas:
    • Marketing
    • Monetization
    • Sales
    • Social media
    • Operations
  • Who should I put in charge of developing tactics concerning each item in the above list of strategic areas?

It takes courage and focus to truly ignore what is going on IN your business, so you can soar above and work ON your business.

Further thoughts to use while you soar:

  • Financials – Are there ways to reduce times in accounts receivable? What can we do to reduce outstanding debt? Are our budgets current and active?
  • Operations – What can we use to improve productivity? How can we eliminate more waste? What can we change to make us more efficient?
  • Marketing – What methods should we use to increase brand awareness? How can we let General Contractors in our area know what we bring to the table? Is there something we can do to niche-down better?

Drone Thinking in the day to day

Taking advantage of your allocated Drone Thinking time is imperative. And, out of that time will come your ability to increase your Drone Thinking daily mindfulness.

Determine what will have the greatest impact on your business. From there, you can communicate better and assign responsibilities (and accountabilities) which push you and your staff toward the goals which improve your business.

The time you take to work on your business is time well spent. Take advantage of all this Drone Thinking strategy has to offer.

Also, pay attention to this bit of advice from one of the Masters.

“Every now and then go away. . . Go some distance away because then the work appears smaller and more of it can be taken in at a glance and a lack of harmony and proportion is more readily seen.” – Leonardo Da Vinci

 

It is our desire this article (among our growing library of construction-centric informational articles) is helpful in assisting commercial construction contractors build better building businesses. 

Providing Accounting, Contract Document Management, and Advisory Board Level counsel for small to medium commercial construction subcontractors.

So you can Run With the Big Dogs. Call us! 866-629-7735 

Developing Accounting Systems That Work

Through the gate to running a profitable construction company

Through the gate to running a profitable construction company

You need an accounting system for your construction contracting or service business because you need data. There are three basic reasons you need data.

  • Because the federal as well as state and local governmental entities require it. And, let’s face it, running your construction contracting business from a prison cell would be much harder than any issues you’re currently facing.

 

  • Because banks or lending institutions, as well as bonding businesses require it. Loan officers have a certain protocol for approving a loan and without accurate, current records getting a loan could be like trying to find a warm, sunny beach at the north pole.

 

  • Because growing or scaling your business depends on how accurate your financial information is. Knowing the financial position of your construction business, what some call understanding “the language of business,” sets you apart from the large number of construction business owners who fail.

 

Having accurate information, things like cost and earnings, liabilities and assets, profit and loss gives you the business guidance you need to either stay the course or take corrective measures. Well, sort of.

When records and reports aren’t enough

We’ve found that many construction contractors know well the systems required in their select industry, yet when they begin dealing with the systems necessary to manage their financial data, they feel as if they’ve run into a brick wall.

Even those who’ve managed to chip away at the brick wall creating windows of financial understanding have usually only gotten to “records” and occasionally “reports,” thus they’re lacking the “analysis” portion of the financially healthy equation.

Crunching the numbers

That’s when including a professional from the accounting world becomes necessary for the welfare of your business.

These pros make sure you understand the meaning of the financial information. They’re interpreters of a sort. They help you learn “the language of business.” They’re great at helping you develop the systems which are necessary to put you in the driver’s seat.

Putting a gate in the wall

Guiding you to create a system for measuring and summarizing business activities, interpreting financial information, and communicating the results is how your professional accounting team puts a gate in that brick wall. A few of the things you can expect to gain from a capable accounting pro are:

  • Guiding you through the SaaS options
  • Developing a tech stack best suited to your needs
  • Determining where you may be losing money
  • Showing you which types of clients are offering the biggest returns on your efforts
  • Enhancing your decision-making capabilities through better understanding of the numbers

Going beyond the brick wall

Because Schulte and Schulte, LLC is a professional accounting service specializing in working with construction contractors, we help our clients develop and use accounting systems which serve both their legal and their managerial needs in the wild and wooly world of construction contracting. And, because we’re a Profit First certified firm we take them beyond having a nice set of records and put them on the path to having a vibrant and profitable business.

You can reach us Toll Free: 866-629-7735 or get in touch the easy way right here.

Do You Really Understand the Financial Position of Your Construction Contracting Business?

 

 

If you’re like many people who own construction contracting and service businesses, you likely have little to no financial training. That’s OK, you probably have a slew of other skills which allowed you to move into the realm of business owner.

It is also likely that you put a lot of time and thought into knowing where your crews are, what they’re doing, and which tools and supplies they’ll need for the day. Yet, you may be less likely to know where your dollars are, what job each dollar has, and how well they’re pulling for the team.

Run a better construction contracting business

While business management is a multi-faceted matter, one of the best ways you gain acumen in the business world is to know and understand how to make best use of the money you control. You know you’re “getting it” when you can:

  • Grasp the benefits of Job Costing

 

  • Discern the difference between Revenue and Gross Profit

 

  • Recognize the importance of Document Management

 

  • Increase your savvy in the Budgeting department

 

  • Focus on the Important Data

 

Getting to the money matters part of accounting means you can know (not just guess) when to put your marketing dollars to use or which types of jobs will never be your friend. It means you can make sense of what was once a whirlwind of numbers and terminology.

Why build your money management skills?

Develop your money management expertise so you can help your construction contracting or service business prosper. When you see where your company’s money is actually going, you’re better able to build a path toward success.

How Schulte and Schulte fits in

Our goal is to assist you in creating an easy to follow and understand bookkeeping process. Further, we explain what is happening along the way, giving you the benefit of discerning your financial standing and taking advantage of that knowledge.

Let’s build this together. Call 480-442-4032 or get in touch here.

From Accounting to Bidding – Nailing It!

When you’re in the construction contracting business a lot rests on your ability to present an accurate bid.

Before you bid your next job consider how your financial records and reports can and should strengthen your bidding accuracy.

It isn’t about the luck of the draw, nor is it about hoping you get close. It is about knowing and understanding the basic numbers (i.e. how much the materials cost, how many people it will take, how many hours will be involved) as well as a slew of other numbers which must be considered.

Taking a holistic look at the numbers

Of course, numbers in and of themselves are useless; it is when you apply your understanding of the construction industry, add your knowledge of your team’s competency levels, and take into account the likelihood of Murphey’s Law plopping itself down in the middle of your job site that you begin to have a clear understanding of how to shape your bid. Still, your financial reports are your friends, you’ll do well to listen to them. Here are some of the things they can tell you:

  • The labor and labor burden rate for each of your field employees

 

  • What your equipment costs you to own annually

 

  • Your overhead percentages per job

 

  • Your cost of sales

 

  • Your gross profit

 

  • Your net profits

 

  • Your gross margin percentage

 

  • What your liabilities and debt are

Some further information your reports will divulge

  • How your fixed costs are affecting your bottom line

 

  • How well each department or division is doing

 

  • How your sales are affected seasonally

 

  • Your past history concerning number of hours needed to complete tasks or portions of projects

 

  • Which subcontractors have proven most beneficial to you on previous jobs

What’s the point?

When you use your financial records in your bid preparation you have an historical guide as well as an up to the minute guide to assist you through the process. Plus, knowing your numbers puts you well ahead of the “average” construction contractor.

Know your contract numbers. Listen to your financial reports. Top construction business owners know their contract numbers because they listen to their financial reports.

There’s an app for that

And as for bidding, of course, there’s an app for that! Well, there are quite a few apps for that. Yet, there is one which we highly recommend and use with our clients, because of its many features as well as its ease of use. “Use Knowify’s powerful budgeting tools to create detailed materials/labor/subs breakdowns for each phase of the job, then translate your budgets into a bid in no time. Fully customizable bid templates. Syncs with QuickBooks Online.”

Additional Knowify features

  • Quickly create cost estimates or bids, and use progress or AIA billing to invoice your clients

 

  • Never re-enter the same information again. Create service templates, build a catalog, and waste no time in getting your bid to the client

 

  • Accurately track POs, expenses and revenue per job

 

  • Manage multiple jobs simultaneously

 

  • Put an end to re-entering data with Knowify’s QuickBooks 2-way synching

 

  • Quickly email bids and invoices to your clients, or POs to your vendors

Do you need help making heads or tails of how your financial reports can make a difference to your construction contracting business? Want to know more about Knowify?

Schulte and Schulte can help! 480-442-4032 or Toll Free: 866-629-7735