The problem: The team needed a tangible to understand why hitting budget on jobs matters – and what’s in it for them if they do. Also, Matt Wells, co-owner, was looking for a way to better manage expenses, and fully understand whether his company could afford that new truck or piece of equipment.
“We needed a real goal, a number the guys could go after,” says Wells, adding that the incentive for achieving the goal would be an opportunity to voice an opinion on how the company should reinvest the profit.
The solution: Identifying the budget break-even point – when expenses and revenue are equal, there’s no loss or gain – helped Wells and his employees understand when they could start talking about that new truck or skid-steer loader. Once the business hits that magic number, usually mid-season, the rest of the revenues are dollars to reinvest.
“Now, it’s easy for us to say, ‘This is what the company has to do if you want a bonus, if you want that raise,’” Wells says, quickly adding that money isn’t the sole driver for his employees’ performance. “But it puts them in the game, and having that number in mind makes it more than just me talking about goals.”
The break-even point is that tangible Wells needed, a number his team can grasp and go after. And once the company passes that point, they can join a conversation about what the business needs to continue growing. “It gets them thinking, ‘OK, we are going to have $100,000 to reinvest in the company, what is going to give us the most bang for the buck?’”
Another key benefit is a greater focus on acquiring the type of jobs that will help the company reach that break-even point more quickly so they can focus on profit and reinvestment. “Knowing our break-even point is helping us look at more big-picture stuff,” Wells says.
The problem: “I was clueless about pricing trucks and equipment into our jobs,” admits Jeff Wichman. A couple of years ago, he says the company was “pretty far off track” with assigning an hourly rate to trucks and machines.
Yes, Wichman was figuring in how much the equipment and trucks he owned cost the business, but he was not allotting for the cost to purchase a new truck to replace one that’s already running. So, the hourly rate applied to the company’s vehicles and iron was not accurate, and over the course of a year, Wichman estimates that the company was probably off by thousands.
“I don’t know how far we were actually off,” Wichman says. And this, too, was part of the problem.
The solution: Wichman needed an accurate hourly rate to assign to trucks and machines so revenue earned from jobs could recover those costs – and give Wichman an opportunity to purchase new equipment and vehicles when necessary.
Wichman needed to allot for equipment/vehicle replacement, repairs, parts, labor and insurance, plus the hours the machines would “work” on each job. Now, Wichman knows the exact cost of his working capital so he can make smarter purchase decisions when the time comes to acquire new vehicles and equipment.
“We know those numbers and have stuck with them throughout the year,” Wichman says, noting that this benchmark has also helped the company reach a broader goal, to bid more accurately.
Wichman says the company has not yet purchased any new, large equipment like excavators, but billing the correct amount for machines has put the firm in a better financial position with its fleet. “We have been able to pay off equipment sooner than we would have before,” he says.
The problem: Taking his eye off of labor costs during a rough patch in life caused Mike Callahan’s profitable, cash-rich business to lose $70,000 during a period of eight months. “Cash flow was so good, it was going in to help with the bills, and there was money in the bank, but at the end of the day, I thought, ‘How did this happen?’” Callahan says of the money that seemed to disappear out of thin air.
Then he realized where that money went, and why his profit margins were eroding. He evaluated the budget, and his numbers were meeting targets within 2 to 3 percent. Except field labor was way off. “Labor had always been around 25 percent of sales, but that number got completely out of whack because guys got away from putting their daily and weekly totals on the time sheets,” Callahan says.
At the time, Callahan was going through a divorce and his attention was taken away from the business to personal matters. Once he identified that labor was the culprit for the lost cash – and profit margins that sunk from 20 to 25 percent down to 10 to 12 percent – he went searching for a solution.
An industry colleague who had implemented a piece-rate pay system in his company visited Callahan and rode along on a few routes. He crunched some numbers, too, and told Callahan, “I think you have 35 to 36 wasted labor hours per truck every week.” Callahan, flabbergasted, thought there was no way this could be possible. Then, he studied historical job reports and found his company could actually beat that labor hour loss, improve profitability and build a culture of accountability.
The solution: “We fixed our most variable cost,” says Callahan of labor expenses. This happened by implementing a piece-rate pay system where employees are paid per job completed instead of per hour.
First, Callahan analyzed job reports from the past several years to determine the cost of doing specific tasks on properties. The company has standardized systems for completing work, and this is critical for accurate estimating and job costing, Callahan says.
With exact numbers for estimating properties, every job is assigned a time and cost, and that includes travel time. Employees know how much they’ll get paid for that job, no matter how much time they spend doing the work. This motivates them to stay on time and on budget.
“We had one crew that was backed up, and they were budgeted for 1.5 days of work from 7 a.m. to 11 p.m., but they got the job done by 5 p.m.,” Callahan says. “I paid them until 11 p.m., and that was a big game-changer at our company. Employees heard about that when they got their checks Friday." Another game-changer was a lesson learned about travel time and preparing for jobs. One crew neglected to load their truck before heading across town to the job site. “They knew it would cost me more than $100 for them to drive back and grab the equipment,” Callahan says.
“I said, ‘Your shop time is 8:05 to 8:10, and I paid you for that, so you’ll have to come back and get the equipment (on your own time). Once we held those guys accountable, others heard about it and it changed the culture to where the guys are working for themselves under my umbrella – they are making the right decisions within the guidelines we set.”
Specifically, crews will show up to work early to load trucks before their shifts starts so they can get out the door and beat rush hour, and that way be sure to hit or beat the budgeted hours on a job.
Callahan says introducing the system to employees and gaining their buy-in required a couple of incentives. After a careful look at the numbers, he realized he could give employees a $1 raise with the new system, so he gave the team an instant boost. Then, he explained that the point of piece-rate pay is not to take dollars away from employees – rather, to reward them for doing good, efficient work. So if they finished a job faster than it was budgeted, they’d still get paid the full amount, plus have an opportunity to earn more by filling the “extra time” with more work.
With the piece-rate pay system in place, Callahan’s is adding more billable man-hours per truck, per week to routes. Before, the company budgeted 40 hours per crew. “We were able to add an extra 15 to 17 hours on top of that per week because of added efficiency and the guys working more effectively,” he says, adding that profit margins are back up.
This year, Callahan’s is poised to grow beyond its $850,000 revenues in 2013 and reach about $1.2 million.
“Don’t get me wrong, this was not an overnight process,” Callahan says, adding that he implemented the system seven years ago. “Every couple of months, we tweak it a bit.”