Monthly Archives: January 2011

Liquidity Indicator

Key Performance Indicators

Over the years, several key performance indicators (KPIs) for decision-making have evolved.  KPIs are meaningful yardsticks that contractors can see and use to effectively communicate the day-to-day operations of the business, supported by the best practices of construction.  The most profitable and successful construction companies have improved their businesses by aligning people, processes, and technology to produce results that are better than the industry average.

The construction industry has generally accepted KPIs that indicate the overall health of a firm. However, the definition and understanding of each of these KPIs varies widely since a typical construction company has a complex combination of requirements.

Here are the important indicators which many successful companies follow:

1. Liquidity indicator

2. Schedule variance indicator

3. Work-in-process (WIP) reporting

4. Margin variance indicator

5. Project cash flow indicator

6. Unapproved change-order indicator

7. Committed cost indicator

8. Backlog indicator

9. Scorecard indicator.

This article describes the Liquidity Indicator.  For more information on the other indicators, please contact me.

Liquidity Indicator:

Cash is the single most important asset that keeps a construction business operational; all sins are forgivable except one: running out of cash. The complexity of contracting makes forecasting cash flow difficult at best. Late client payments, schedule delays, invoice processing, change order approval, vendor/subcontractor payments, labor costs, and numerous other factors affect the timing and ultimate receipt and disbursement of cash.

Understanding cash flow is critically important and is examined in detail when working with the WIP indicator.  One key aspect of cash flow is cash demand or liquidity which is discussed here. A manager should have the ability to evaluate organizational liquidity (availability of cash) and then should be able to drill down and see which projects are providing liquidity and which are using liquidity.  Once the amount of liquidity at the project level is known, an organization can work to improve it.

The next step toward liquidity improvement is to identify actions that will improve the cash generation process.  A project that is losing money may still be generating positive cash flow.  Conversely, a project that is making money may produce negative cash flow.  For example, a positive cash flow can be achieved inappropriately by not paying subcontractors and vendors. Therefore, causes of both negative and positive cash flow should be investigated and analyzed.

Looking at cash flow from a contractor’s perspective reveals four key balance sheet accounts that are largely controlled by project managers. A contractor is funding his WIP with his own cash if accounts receivable (including retention), and underbillings (costs and earnings in excess of billings) exceed accounts payable (including retention) and overbillings (billings in excess of cost and earnings on contracts).  The funding can be in the form of equity or borrowed money. Read more »

Profitability – Strategies

Five Strategies to Improve Profits

Companies can enhance financial performance by implementing planning and minimizing risk with some often-overlooked practices
Contractors have always had to deal with risk, but in these uncertain times, their exposure is greater than ever. However, many companies simply react to their growing risks rather than anticipating them through sound analysis and management.

Here are five strategies that contractors can use to improve financial performance.

Develop a Risk Strategy

Effective risk management is about playing both defense and offense. The process begins by assessing risks, including:

> Competitive risks. Competition has intensified among contractors and with full-service, mega real estate firms competing against traditional contractors.

> Pricing pressures. Clients are pressuring contractors to cut prices using reverse bid auctions that drive down prices and squeeze profits.

> Rising materials and fuel costs. Materials shortages and increased costs for fuel and construction materials will continue.

> Litigation costs. They never go down.

> Fast-changing markets. Contractors are having to adapt to rapid changes in the public and private sector markets, including power, telecom, commercial and others.

> Geopolitical risks. War, terrorism and other global events have increased risks to contractors and their clients.

> Labor shortages. Contractors face looming shortages of qualified people.

> Sarbanes-Oxley. The tightening of accounting and auditing standards has put public contractors, like public companies in general, under a microscope, requiring them to disclose deficiencies in their internal controls.

> Insurance/surety. These areas continue to tighten, with costs rising, deductibles increasing and coverage shrinking or disappearing. Sureties are pressuring private contractors to improve internal control standards and systems.
Once risks are identified, they can be quantified, prioritized and strategies can be developed to mitigate their impact.

Develop a Growth Strategy

Companies must decide whether they want to grow and how much. They need to analyze current markets to determine if they are still attractive. If existing markets are declining, companies may need to diversify, expand geographically, acquire other firms or recruit new talent.
A growth strategy also requires the resources to get more projects done. These include sound internal processes, experienced managers and a strong “bench” of new managers who can free senior managers from day-to-day operations to pursue new business.
Alternatively, a company can choose a no-growth, negative growth or selective growth strategy to reduce risk. It can focus instead on reducing costs, increasing profits and capturing market share in existing markets or making selective acquisitions in related business areas.
While a moderate or no-growth strategy may work for large companies, smaller companies that follow the same strategy must consider the risk of losing business to bigger competitors that can work on larger, more complex projects or provide a broader range of services.

Develop a Profit Strategy

How can a company meet its profit goals? Reducing costs can boost profits, but once excessive costs are eliminated the payback from cost cutting diminishes. If a company is not generating enough profits, it may have to grow or diversify to reinvest in the company, create a reserve for future opportunities or pass profits through to shareholders and investors.
If a company chooses growth as a way to increase profits, it should employ the least risky growth strategies, like generating new business from existing customers rather than trying to win new ones. Keeping current customers happy also keeps competitors at a distance.

Develop a Competitive Strategy Read more »

Profitability

Profitability is affected by almost every aspect of a business in one way or the other from the negotiation of a contract to the number of paper clips used in the office. Almost every business decision will affect profits either in the long or short term and it is management’s job to evaluate every decision based on its impact on both long and short term profits.

Managers are often too concerned with short term gains to carry out long term strategies that will allow for greater profitability. In the following discussion, we will show that short term decisions to increase profit can cause long term losses.

Sales and marketing: There is an old adage that something is worth whatever you can sell it for, no more and no less. The price we set on our contracting services is affected by a number of factors:

a) Market conditions: if there are other contractors who will perform the same services, prices may be dictated by the market. On the other hand, if you are one of the only people who can perform a task, it is much easier to set your own price.

b) Reputation/Name Recognition: if we have a reputation for integrity, quality and service, we may be able to command a premium for our services. The building of a reputation is a long term job that can be accomplished only with consistent effort.

c) Risk: if we are willing to take on risky jobs for a fixed price, we deserve and can often command a higher profit.

d) Quality/Service: if we provide better product or service, we may be able to command a higher price. What is important here is the perceptions of the buyer. If the buyer does not perceive the value of additional quality or service, they are of no value to the sales conversation.

e) Repeat Sales: it is often said that it is much easier to sell to a previous client than to a stranger. It is also true that a former client can have a greater appreciation for the extra service and quality that you provide. Selling additional work within a contract can often be more profitable than selling additional work to a new client.

f) Marketing planning: Too few companies take the time to develop a regular marketing practice that they can carry out every day. They are usually reactive marketers, putting a lot of energy into selling when work is slow and stopping entirely when they are busy. The establishment of a long term plan that can be acted on every day is the only way to even out work demand and be able to anticipate slow periods.

g) Professional Alliances: Developing long term professional relationships with the people who can refer business or assist your reputation should be a part of the marketing practice of every company.

Please contact us if you would like to learn more about instituting a comprehensive training process.  Thank you.

Proposals

The Proposals screen (6-9) is one of the most difficult for Master Builder users to deal with.  On the one hand, we want to create a nice-looking Proposal or bid to present to the potential client.  On the other hand, the default setup of this screen and its output require a fair amount of work to produce that kind of result.

When I work with a new MB customer, one of the most popular topics is Proposals.  I’ve had many conversations something like this:

Customer:  “I have a really nice bid form [or contract form] I’ve set up in Word [or Excel], and I’d like to import that into Master Builder’s Proposal screen so that I’m only using Master Builder.”

Me:  “How is the bid displayed?  By cost code, division, sections of work, or one lump sum amount?”

Customer:  “It depends on the bid; it could be one or more of those displays.”

Me:  “Then we would have to create different reports and forms for each display.”

Customer:  “Doesn’t Master Builder’s Proposal just display what I type on the screen?”

Me:  “Not necessarily.  The generic Proposal in Master Builder looks like this.”  [In the Sample Company, I display a Proposal]

Customer:  “That’s not what I want.  I need it to be in a letter form, and I need to be able to present different types of breakdowns, maybe more than one per job.”

Me:  “That will require a fair amount of custom reporting and form design.  In addition, you’ll have to use the Proposal screen in a very specific way by inserting the text before the number breakdown in one place and the text after the number breakdown in a different place.  And the text can only be edited by e text editor like Notepad, not a word processor like Word.”

Customer:  “Forget it, I’ll stick with my bid form and spend a lot less time and money.”

The above conversation is usually not that short, and it can be more frustrating than that.

There are a couple of solutions I can recommend:

1) If you’re adept at using Excel and have a bid form set up in Excel, import the MB Budget into the MB Proposal screen.  Then export the Proposal using the Print to Excel feature.  Manipulate the numbers there, and paste them into the Excel form which you’ve already built;

2) If you’re using the Takeoff screen (9-5), by using custom reports and form designs, you can create many variations of bids.  For examples of this, see the Reports page on this site.

It’s important to remember that, in Master Builder, Proposal is often synonymous with Contract.  If you submit a proposal or bid to a prospect and it becomes an agreed deal, the Contract amount should be entered in the Contract field in 3-5 Jobs. Read more »

Teamwork as a Motivator

Employees Are Motivated By Being Part of a Team

Motivation is more likely when employees believe that the company is a good place to work and that they are a fundamental part of a team.

Something people notice when visiting your company whether in the office or on a job is whether or not the employees seem to function as a team. You can become much more successful if you encourage the various departments within the company to work together. If each member of the team believes that his contribution is important to the others he will be motivated to increase his performance. This concept satisfies a basic human need – the need to feel important and needed and to be part of something larger than just one’s self.

How can you help foster this teamwork?

One of the most common team breakdowns in the construction industry is between the accounting departments and the production department. Many offices use two completely separate systems and have very little (or very poor) communication between these groups.  The accounting department has to beg and plead for information, such as project budgets and approval of payable invoices. The project management department resents the nagging and distrusts the reports they do get because of errors.

You can help solve this problem by using an integrated software system.  The key lies in providing each group with what they want and need from the other group.  And you may need to nudge each group a little to communicate with the other group more.

Purchase orders, subcontracts and change orders can bridge the gap between departments and make teamwork so much easier. By learning how to effectively create budgets directly from the estimating software, you have eliminated the “begging” that the accounting department previously had to do for budgets. And, with properly prepared purchase orders and subcontracts, the accounting department no longer has to wait forever for invoices to be coded, only to have a big “rush” on entry when they finally get the invoices back. The invoices are effectively “pre-coded” when the purchase orders and subcontracts are issued.

From the project manager’s point of view, reports can be trusted more because the invoices are pre-coded so there is minimal chance for clerical error.

Everyone’s job is easier and more pleasant and now the departments who were formerly at odds with each other can work together as a team. It won’t take long for the increased productivity in both of these departments to begin to show on the bottom line.

Please contact us if you would like to learn more about instituting a comprehensive training process.  Thank you.

Payroll

Payroll is a big subject.  It’s the second-largest module in Master Builder, and subject to more laws than any other part of business.  Setting up, operating and maintaining the Payroll module in Master Builder is beyond the scope of this article.  The steps outlined below are only intended to be a general guide to setting up Payroll.  Since each company, each state, and often each region within a state involves different laws and practices, the best way to set up and operate the Payroll module of Master Builder is by working with a qualified Master Builder consultant.

Without a good foundation, the Payroll module in Master Builder becomes very difficult to deal with.  Many companies choose to outsource their payroll, hoping that it will take a burden off of their overhead time and costs.

Since Master Builder relies on Payroll for a large portion of its job costs, a company running the program is almost required to run Payroll in Master Builder in order to obtain its true job costs.  The savings in overhead by outsourcing Payroll become almost meaningless, and the supposed shifting of liability to the third party is a mirage.  In the eyes of government agencies and insurance companies, the company which is the employer is always liable for payroll inaccuracies.  So there is no reason not to run the Payroll module in Master Builder, and there is every reason to learn to run it well.

It’s a really good idea to test the Payroll setup prior to starting to use the module by entering a few records with specific scenarios and taking them all the way through the process.  Some refinement of the setup will often be necessary to achieve the correct results.  Any test records which may be entered can always be voided.

Screen 5-3-1 Payroll Calculations:

To set up this screen when no calculations have been entered, click on Options, Setup Payroll Calculations, Standard Calculations.  If you have the current version of MB, certain calculations will be set up according to Federal and state law and tax tables.

Screen 5-3-2 Workers Compensation:

Enter the classifications, rates and Experience Modification supplied by your Workers Comp carrier.  Ignore the Liability column for now – it’s too large a subject to tackle without a detailed explanation (consult with Technical Support or a Master Builder consultant).  If the state(s) in which your company does business require(s) Hourly or Maximum Wage amounts to be entered, consult with Technical Support or a Master Builder consultant.

Screen 5-3-3 Positions: Read more »

Marketing and Sales

The following are a number of questions, talking points and suggestions which you may find helpful in management discussions.  Use this outline as a framework for your own ideas.  Print it and write notes in the margin.

I. Designing a marketing program:  What is the Market?

1.  Describe what is being sold

•          What is the product?

•          What are the value added services?

•          What is the guarantee?

•          What differentiates you from your competition?

2.  Identify the target client

•          Who are they?

•          Where are they?

•          What kind of person are they?

•          What are they motivated by?

•          What are their fears?

•          Where can they be reached the easiest?

•          Radio

•          Direct mail

•          Networking

•          Client referral

•          Professional referral

•          Other

3.  Design experiments and test the results

•          Who is not the client?

4.  The office environment

•          Neatness counts

•          Creating a comfortable conference center

•          Using photos to sell satisfaction

•          Training for client satisfaction

5.  Building a reputation

•          Describe it

•          Speak it

•          Train employees

•          Advertise it

•          Make it true

6.  Creating customer satisfaction

•          Neatness counts

•          Employees matter

•          Contact the neighbors

•          Communication, communication

•          Dot the i’s and cross the t’s

•          Get the job done on time

•          Bill early, bill often

•          Handling complaints

•          Slow down

•          Ask for more

•          Thank them

•          Have a plan

•          Keep your promises

•          Guarantee your work

•          Give a gift of appreciation

II. The sales process: Read more »

Bank Reconciliation

Overview

The Bank Reconciliation screen in Master Builder is driven by the Statement Cutoff Date.  Enter the checking account you want to reconcile, and enter the cutoff date displayed on the bank statement.  If you don’t enter the exact ending date of the bank statement, the reconciliation will probably be wrong.  Master Builder does not display transactions entered after the date you enter.

To maintain accurate records, it is a good idea to reconcile accounts each month when you receive the bank statements.  It’s important to understand that the Bank Reconciliation is a worksheet.  It relates to the General Ledger, but it is not the General Ledger.

Reconciling a bank account in Master Builder is like reconciling your checkbook at home.  The bank statement and the display in screen 1-5 must match when you are done.  If not, you need to find out why it doesn’t match.

Maybe there are entries on the bank statement which aren’t in Master Builder.  If so, research them, and if they are correct, enter them in MB.  Or there could be entries in MB which aren’t on the bank statement.  If that’s the case, you need to research them, and if they don’t belong in MB, void them or credit them.

The MB Bank Reconciliation (Screen 1-5) is similar to a check register.  It displays transactions that have not cleared. As you compare the bank statement to the transactions in the Bank Reconciliation, clear the transactions listed on the bank statement by double-clicking in the Status cell next to the line item in the Bank Reconciliation screen.

Master Builder displays transactions in transaction number order. If a check number falls out of numbered sequence, Master Builder displays an asterisk (*) next to the transaction number.

The Statement Beginning Balance box displays the balance as of the previous reconciliation.  If the amount in the Statement Beginning Balance box does not match one amount displayed on your bank statement, clear all the transactions you can, then do a Trial Save (Trial Save is explained below).

When you display records for a checking account, the Statement Ending Balance box displays the balance as of the previous reconciliation. As you change the status of transactions, the amount in the Statement Ending Balance box changes.
After clearing the transactions, the ending balance in the Bank Reconciliation screen should match the ending balance of your bank statement.

Master Builder lets you save a reconciliation that is only partially completed (Trial Save).  Master Builder saves each transaction with the status that you have assigned to it. You can then return later to finish the reconciliation.  (When you display the trial reconciliation, Master Builder displays any records entered since saving the trial reconciliation.)

After completely reconciling the account with the statement and you do a Final Save (which you should not do until the Beginning and Ending Balances match the bank statement), Master Builder rolls the amount in the Statement Ending Balance box to the Statement Beginning Balance box for the next month’s bank statement.  Never perform a Final Save without printing the last Trial Save reconciliation displayed on the screen first.

Detailed Steps to Reconcile a Bank Account Read more »

Schedule Variance Indicator

Construction project owners are demanding faster construction, cutting the typical project duration dramatically. This schedule compression has made scheduling today of crucial importance. General contractors with the ability to meet and deliver projects quickly have a major competitive advantage.  The goal of scheduling is to create a tool that can be used to drive the project and build credibility with all the participants, particularly the owner. Quality, safety, communication, planning, coordination, and resource utilization are all enhanced through the scheduling process, which includes updates to it and integration of input from all project participants.  Scheduling and its value in communication to owners sets expectations, seeking owner satisfaction with the project’s execution.

Project schedules represent a detailed plan of individual activities, sequencing, duration, and interdependence. Many project schedules are prepared simply at the inception of the project. Though most owners require submission of these schedules as part of the contract, not all general contractors leverage the full advantage of schedules by using them continuously to drive projects to successful completion.  The integration of subcontractors into project schedules is critical to effective scheduling.

Schedules that are loaded with costs, resources, and labor hours help identify cash flow and overall resource requirements. These schedules are invaluable in developing an aggressive schedule of values that are then submitted to owners for payments on progress billings.

Effective scheduling techniques include the integration of subcontractor schedules into a master schedule from which project execution is driven. This process establishes and communicates critical milestones, critical paths, and delivery dates. Read more »

Change Orders

Overview

Change Orders document any modifications to an agreement (events, information, changed conditions) that are unknown at the time the contract is signed.  Changes may modify contract time and/or dollars. In order to confirm the changes in your contract, a written change order is needed to convey the changed agreement. Entering change orders gives us the ability to:

1.       Print prime change orders (change orders to the client).
2.       Modify the budget while still maintaining the original budget.
3.       Modify subcontracts and print subcontract change orders for existing subcontracts.
4.       Track the routing of the change order.
5.       Create an Accounts Receivable invoice for the change order when approved.
6.       Create a purchase order for materials from the change order when approved.

To enter a basic Change Order, remember to enter information in all blue-titled fields:

Job; Description – brief description of change order. (You can create a Quick List of descriptions by using the F5 key on your keyboard after entering your description.); Change #; Date; Status – one of six options:

1–Approved (Changes Contract amount)
2–Open
3–Review
4–Disputed
5–Void
6–Rejected

In connection with the article on Budgets, it’s a good idea to get used to entering data on the Budget and Subcontract Details tab.  If the data is entered correctly and the Change Order is saved with Status 1–Approved, the budget Change Order will be visible in several job reports and will be available in 3-7 Progress Billing.  This also creates a trail of changes to the budget which would not be otherwise be available.

If the 5 columns Vendor, Subcontract, Change #, Status and Date are used in the grid of the Budget and Subcontract Details tab, a Subcontract Change Order can be printed.  You can create a change order which affects the budget without involving a subcontractor, but it would be unusual that a Subcontract Change Order would not affect your budget.

In the grid, on the Budget and Subcontract Details tab, if a subcontract is involved, change the status to Approved and enter date approved. This will modify the Subcontract amount and appear in the Subcontract Audit (screen 6-7-4).  It will also allow us to print subcontract change orders from 6-4-3 Subcontract Orders.

When entries are made in the grids, the following fields are required: Read more »