Every extra dime you spend chips away at your profitability.
In the construction industry of today, to grow or even preserve your profit margins you need to find smart ways to cut costs, especially as salaries for skilled workers are rising and material prices continue to increase.
Shaving money from the budget necessitates uncovering hidden waste and reevaluating spending. Here are some first steps to take.
Develop relationships with suppliers
Cultivating a strong relationship with a select number of key suppliers can help you trim material costs. A friendly supplier might be able to give you a price break and will likely make the negotiation process faster and easier. Focus on suppliers who want to build a long-term partnership and not those who are fixated on maximizing current margins. Consider negotiating long-term contracts that net you lower prices for higher volume.
Some costs are hard to account for ahead of time, such as those related to unforeseen weather events or accidents. But most can and should be planned for in advance.
“In our industry, we tend to have reactive behavior, but reactive behaviors in the field cost money,” said Gregg Schoppman, principal at FMI Corporation.
He suggests solidifying a list of tools and materials early on to get the best prices. Then, if problems arise and other supplies are needed at the last minute, do the math to determine which will cost more, slowing down productivity while you wait for better-priced goods to arrive or paying more for an immediate solution.
Stop wasting time (and therefore money) on paperwork
When it comes to processes around paperwork, “status quo is the devil,” said Schoppman, especially when completing the paperwork involves an unnecessary number of people. “Maybe we don’t need 85 people touching this document. Streamline the process,” he added.
If you don’t know where to start, Schoppman suggests determining which processes are the most important — for instance, accounts payable or payroll — and then identifying ways to improve them. Some of the solutions will no doubt be digital. Cloud-based software makes information easy for stakeholders to access, and input. Construction software companies like Procore offer a unified platform that connects multiple applications so you don’t end up end having to transfer information from one app to another.
“Maybe we don’t need 85 people touching this document. Streamline the process."
Use historical data to better estimate costs
Data drives better better-informed decisions and planning. When estimating material prices, for instance, don’t look at cost books, which are not region-specific and are often inaccurate.
“You see people with estimate costs from five or 10 years ago, but we were just starting the worst recession,” Schoppman said. “But that’s what we are using as our source.”
Instead, keep a database of prices on previous projects and let those be your guide. Schoppman added that the “best in class companies” are doing audits of historical costs so they don’t create an estimate “out of fiction.”
Likewise, keep subcontractor invoices for future reference. Together, this data will help you produce more accurate cost estimates and could reduce your bid and your project costs.
Minimize change orders
Change orders are a money suck. They can lead to expensive legal disputes with owners and eat away at profits. While some are inevitable, there are ways to reduce change orders.
The first step is to review all project documents and get answers to any questions before work begins so everyone is on the same page about project requirements. Contracts such as IPD lead to closer collaboration and often, more successful outcomes. Using BIM can not only streamline communication but also help you spot design clashes before they happen.
Rework leads to budget overruns and missed deadlines. And it’s often avoidable. Consider abandoning paper files and automating administrative processes such as submittals. This allows information to be updated in real time and should reduce errors and lead to better coordination. In the same vein, using cloud-based construction management software will improve stakeholder communication and make sure everyone has access to the latest information.
Finally, hire good subcontractors, even if it means paying a little more. When you do, establish a set of quality standards based on the project requirements, and make sure your subs understand them. Even if you trust them, a manager from your company should closely monitor their work.
Perform equipment maintenance exactly when needed
If you’re following the maintenance schedule the manufacturer recommends, which is typically based on miles or time driven, you may be wasting money performing service before the machine needs it. With telematics, sensor-embedded equipment can predict ahead of time when maintenance will be necessary based on the actual condition of the machine.
Emily Canal is a staff writer at Inc. Magazine and has previously written for The New York Times, Boston Globe and Forbes.