Risk: are you managing it or is it managing you?

Columns - Industry Voices

July 15, 2013
Jim Huston

Jim Huston

During a recent consulting trip to the western U.S., I met with a number of landscape contractors who were having difficulty bringing in their installation projects on budget.

One company in particular comes to mind. It was doing high-end residential work in the greater San Francisco Bay area. Its maintenance division was fine.

Crews were adhering to the budgeted number of labor hours for each account and, subsequently, margins were in accordance with industry benchmarks. However, the margins on individual construction projects and, as a result, the whole division, were too low.

The office manager told me that she was so busy that job costing for installation projects often did not happen until two weeks after the projects were completed.

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Diagnosing the problem.
This story isn’t uncommon. Many installation companies have difficulty establishing the systems that allow them to not only price their work accurately, but also job cost them in order to identify where things go wrong or where they go right.

A contractor needs to understand the concept of risk management. Ask the question, “What is it that jeopardizes the profitability on a job or division?” The answer to this question is almost always labor hours. My analysis shows that approximately 90 percent of the risk to profitability is caused by labor.

Materials, equipment, subcontractors, general and administrative overhead all contain some risk, to be sure. However, the risk they cause pales in significance to that caused by labor.

Measuring and controlling risk.
Once you identify your major risk component, you then need to control it. To control it, you need to measure it. Here are some suggestions to help you measure and control risk.

  1. Establish labor hour budgets for your installation projects. Break larger projects into categories (demolition, soil prep, irrigation, hardscape, trees, shrubs, etc.) with individual bid items in each (shrubs: one gallon, five gallon,15 gallon, etc.). For projects less than one crew-week in duration, identify the number of crew days or crew half-days.
  2. At the end of each day, track and monitor labor hours in the bid and compare them to those actually expended on the job. You can use my Excel worksheet for this – email me at the address above and I’ll send it to you.
  3. Share this information with everyone (owners, project managers, crew leaders, etc.) concerned with the job on a daily basis.
  4. Make any production adjustments as needed.
  5. Keep it simple!

When in doubt, sub it out.
If you have serious concerns as to how many labor hours certain functions require, consider subcontracting it out to someone who specializes in that kind of work. Or you could do the work on a “time and materials” basis. Either way, you will dramatically reduce your risk.

Quality (and profitability) is free.
Achieving 100 percent quality means bringing a job in on budget, on time and according to its specifications and requirements (design).

In order for you to achieve profitable installation projects (or any projects for that matter), you have to measure your risk – labor hours.

You have to plan (estimate) it and monitor (job cost) it. If your are bidding your work by factoring your material costs (material cost multiplied by two, three, etc.) or unit pricing ($500 per irrigation zone, $45 per flat of color, $18 per patio square foot, etc.), you will never be able to measure and control your risk.

You can’t measure what you don’t quantify. As Tom Peters says on in “Thriving on Chaos,” “What gets measured, gets done.”

My recommendation to the San Francisco Bay area company was simple. Have the project manager, not the office manager, fill in the labor hours at the end of every day for each project. Break down the project categories as necessary.

Then print out and show crew leaders, designers, estimators and owners the results daily.

The office manager should still do a final job cost report for each job, but this won’t improve production. Job costing projects on a daily basis will do the trick.

You will be amazed at how this simple exercise will improve production and consequently, the bottom line for individual jobs and the entire division. L&L

JIM HUSTON runs J.R. Huston Consulting, a green industry consulting firm. See www.jrhuston.biz; mail jhuston@giemedia.com.