Keeping Score for Contractors
Written by Wally Adamchik
January 16, 2022
One of the biggest problems in the Dirt World is that we have people who like to do the work. They like to build things, or move dirt, or maybe even blow things up.
Why is this a problem? Because if you want to be in the construction business, you have to recognize that it is a business, and not a hobby.
And here’s the thing about the business of construction. You need to understand how to keep score. As Adamchik put it, “Like any game, if you don’t know how to keep score, you can’t win.”
How to make more money.
As a contractor, you want to be profitable. And that means you’re always on the lookout for ways to make more money.
You could try to make money by raising your prices, or cheating. Neither of these are great options, though. Raising money doesn’t work, because the construction industry is hyper-competitive. As for cheating, it comes down to ethics and integrity. Is cheating really what you want to do?
That leaves you with one final option for making more money: get better at what you do. But as a contractor, how does getting better at what you do help you make more money? Won’t that just fill your company’s pockets?
“When your organization makes more money, I guarantee you, you have a chance of making more money too,” Adamchik pointed out. “Now, some people might say, the owners will just take it all, but I’ve never met a business owner who didn’t want to share it. It might be indirectly, through compensation or benefits, like health care, or your cell phone, or the pickup truck you’re driving. But here’s the thing. They can’t share it until they have it.”
Know the scorekeeping lingo.
Getting better at what you do means taking a good hard look at how contractors keep score.
First, you need to know some of the business lingo you’ll be using to keep track of how well you’re doing:
- Sales. In the construction industry, this is often called contract revenue, or contract size.
- Direct costs. These are costs directly attributable to the job, such as labor materials and equipment.
- Gross profit. To get gross profit, you subtract your direct costs from your sales.
- Overhead costs. These are costs that you’ve incurred that aren’t directly attributable to a job. For example, your accounting staff would be a part of your overhead costs.
- Net profit before taxes. To get to this number, subtract your overhead costs from your gross profit.
- Taxes. This is what you need to pay Uncle Sam.
- Net profit after taxes. You get here by subtracting your taxes from your net profit before taxes.
Understand your scorecard.
Now that you know the lingo, you need to understand how these numbers work in your scorecard. Your scorecard is your business’s profit and loss statement.
In this lesson, Adamchik used the following scorecard as his example:
Sales: 100
Labor: 30
Materials: 25
Subs: 5
Equipment: 30
Gross Profit: 10
Overhead Costs: 7
Net Profit: 3
“You can see that we’re spending 30 cents on the dollar on labor, 25 cents on the dollar on materials, 5 cents on the dollar on subs, and 30 cents on the dollar on equipment," he explained. "Your percentages will be different, of course. But generally speaking, the higher these percentages are, the worse it gets. The lower they are, the better it gets.”
He noted that the gross profit was 10%, or 10 cents on the dollar. This means the direct costs in the example was 90%. And since you can’t take your gross profit to the bank, you have to figure out your net profit, by subtracting the overhead of 3 from the gross profit of 10. When you do this, you have a net profit of 3.
“If you’re in construction, and you have a net profit of 3, you’re in the wrong business,” he advised. “Because if your business is in the Dirt World, you should be making double or triple that amount.”
Make more money: playing with the financials.
So how do you make more money, now that you understand your scorecard?
Increase your labor productivity. There’s lots of lost time in construction: time spent waiting, time spent doing rework. “If we make a lot of this lost time go away, we can increase labor productivity,” Adamchik pointed out. “In our example scorecard, if we increased labor productivity by 10%, the labor number goes down by 10% of 30, bringing us to 27. So, where does that 3 go? It filters all the way down to your bottom line. It increases your net profit by 3, to 6.”
By increasing labor productivity in this example, the hypothetical company depicted by the scorecard doubled its net profit from 3% to 6%.
Labor efficiency for the win. What about the other numbers? “You could make more sales,” Adamchik noted. “But you’ve still got to get the work done. So you won’t make much difference to your bottom line. Or you could cut overhead. Let’s say you eliminate some of your accounting staff, and cut overhead by 10%. You get to move your net profit to 4. But then who’s going to do payroll now?”
Labor efficiency is a different story. “Become more efficient and you increase your productivity,” Adamchik advised. “I guarantee you, when labor efficiency gets better, material efficiency generally gets better too. And equipment efficiency and utilization. So the positive impact on your bottom line is significant.”
How to improve labor productivity. So how do you go about improving labor productivity?
“So I said a 10% labor productivity improvement,” Adamchik said. “Here’s what it looks like. You’ve got 60 minutes in an hour. What’s 10% of that? It’s six minutes. So, six minutes an hour. If you can find six minutes an hour over the course of an eight-hour day, you double your bottom line.”
Think about your wait time — for example, time spent waiting for materials to show up, or being idle because something broke down. Eliminate some of that. “Do this, and you’ll find those six minutes every hour. It all adds up. And at the end of the day, you’ll have doubled your bottom line.”
Takeaways.
Construction is a business, and to make money with your business, you have to know how to keep score. As a contractor, here’s how you can win by keeping score:
- Know what the scores are. Take the time to understand what the different scorecard numbers mean, and how they’re determined.
- Understand your scorecard. Your scorecard is your profit and loss statement. It shows you what you’re making, what you’re spending, and your overall bottom line.
- Increase your labor efficiency. Play around with the numbers on your scorecard, and you’ll see that increasing your labor efficiency has a significant impact on your bottom line.
