Construction Business Talk

Replacing a Great Employee

Contractors who have been in the business for a while know only too well the value of a great employee. You know this individual! They show up on time, solve their own problems, and always have your best interests at heart. If you have ever lost a great one, you probably remember that pit in your stomach when you found out they were leaving. Why so?  Because you knew you would have to go through the very difficult process of finding a replacement. We want to examine this in terms of dollars. First we will look at a skilled craftsman. Then, we will look at a project manager or superintendent.

SKILLED CRAFTSMAN

Let us assume your great journeyman was being compensated at $72,000 per year. Let us further assume that management time to supervise this individual was minimal and compared to the average journeyman this individual consistently produced at a 20% higher rate. For some reason, they are leaving your company.

So, you could go to the union hall or place an ad in a trade journal for the replacement. The union hall is relatively inexpensive. The ad will cost you about $500. Not to bad on either count. You get 20 applications for the job. You have your staff run some background checks and narrow the list to 5 who you will interview. That took someone about 4 hours. It will take you another 4 hours to do the interviews. So far, so good.

You hire this individual and begin familiarizing them with your projects and the way you do business. Let's be conservative and say it takes 3 months to get them up to speed. We have to assume their productivity is less than normal at the outset (assume 75%) and that this person will probably produce at 100% at the end of 3 months. If we do the math, that ramp up cost you 1500 the first month, about $1,000 the second month, and about $500 the third month for a total of $3,000. Add to that your hiring expense of about $2,000 and the cost is a total of $5,000.

Now ask yourself what the likelihood is that your new employee will be around after the 3 months? You never really know who you have hired until they have been around for a while! The chances are between 2 and 3 to 1 they will stick. If we assume we have to hire 3 to get the one we want, your hiring expense is about $15,000 or about 20% of their annual salary. This does not take into account the fact that your great employee was producing about 20% more work. If we have to pay about the same for the replacement, your cost has now gone up about $1,200 per month; another $15,000 per year!

So, the pit in your stomach was not only the prospect of having to hire the replacement and all the time it was going to take, it was the cost you may not have realized it would take; a lot of money!

PROJECT MANAGER

It only gets worse when we have to hire new management people. The salaries are higher, the hiring costs are more, and the ramp up time is longer. Get used to the fact that the national average for this individual is about 80-100% of the annual salary. So, a project manager making $100K will cost about $80-100K to replace.

HIRING RISKS

Let's add another something to consider when we hire new folks; employee fraud and/or incompetence. You may not have had the pleasure of either of these, but then again you probably have. Here is a list of things you need to at least be aware of with regards to hiring construction workers:

1. Fraudulent workers comp claims that raise your work comp costs
2. Stealing materials and tools
3. Fraudulent time reporting
4. Hiring phantom employees and subs and pocketing the wages
5. Submitting phony supplier invoices and pocketing the cash (usually working with the suppliers employee)

This just adds to the potential misery. What's the answer? Figure out how to keep them around. See my article on motivating and keeping employees.

Pricing the Job

Real Estate appraisers use 3 methods to arrive at the value of a property:

1. Income Capitalization Approach
2. Cost Approach
3. Sales Comparison Approach

Contractors would do well to apply some approaches to the price they bid on jobs. But first, let us look at the objective we are trying to attain which is the highest price the client will pay and be satisfied they are getting a fair deal. That being said, do you have some built-in rules for pricing that are cutting profits? If so, change!

Cost Estimate

Most contractors first consider their costs first by detailing the quantities of material, labor, equipment, subcontractors. Then, current costs are factored in to arrive at a total cost to finish the job. Let's not confuse your costs with the price you charge. And, let's not forget to add an overhead factor to your costs before adding profit. A lot of people add a margin that includes overhead. We like to do the overhead calculation first (gets us to break-even) and then play with the profit figure.

Market Assessment

If the market is such that lots of your competitors are also bidding, then you need to lower your profit to get the work. In a really poor market you might not factor profit in at all so you get jobs to keep your employees busy. In a "bull" market we believe you should raise the profit figure substantially depending on work load and your limited resources.

Your resources

Your ability to finish your project is limited by your resources in supervision, skilled labor, availability of materials, and availability of subcontractors. Once you have maxed these out you simply cannot do any more work. You will have to make a conscious decision to grow the business to take on more jobs. Please consider that fast growth is many times uncontrolled. Uncontrolled growth can lead to lots of problems that have hidden costs. These costs may very well eat substantially into your profits so that the extra work might not be producing what you thought it would under normal circumstances.

Client Assessment

We know that some clients can be difficult. This difficulty manifests itself in slow or no pay for work, lots of disruption, and a potential for being sued. Not fun to be sure! We suggest doing a series of background checks to root these out before you price the job. If you are doing work for a proven bad actor, this will definitely need to be added to the price. We know of subs who routinely mark up for GC's who are slow pay and difficult.

Example

Let's assume we are bidding on a job where we are confident our hard costs will be $50,000. We then determine that last year our overhead was 8% of hard costs and have every reason to believe that overhead will be about the same this year. So, we add $4,000 for a break-even cost of $54,000. In a poor market this might be our price to the client. In a normal market we might figure a 10% profit and bid $59,400. In a bull market, perhaps we bid $65,000. In a bull market with a difficult client we might bid $75,000. Remember these percentages are for illustration only. There will be differences depending on your trade.

Dictating Emails with Jott.com

Cell phones have added a new dimension for the project manager. We can get hold of suppliers, subs, clients, inspectors, etc. from the field with a call. The problem is phone tag. Many times these people are not available and we leave a message. Wouldn't it be nice to send them a quick email and have a copy sent to your in box? Here is the latest to make this device even more useful: Jott.com.

This service is relatively inexpensive and allows you to dictate messages to anyone in your email list by pushing one button on your phone. A nice female voice asks Who do you want to Jott? You give her the name and it looks it up. You then dictate your message (30 sec. max). You are then asked to confirm delivery and away it goes. You can also do some other useful things with the service. When asked Who do you want to Jott? you can say Reminder or Appointment. Reminders are transcribed and sent to you. Appointments end up in your Outlook Calendar.

We think this might very well be worth a try. The basic cost is $13.00 per month.

www.jott.com

Marketing and Promotion are Meant to Build Relationships

Where do you get your business from?  The answer is from people who trust that you will get the job done on time and on budget. 

How do they know that will happen? 

1)      You have done work for them previously and did a good job at a fair price.

2)      You did work for someone they know who sang your praises.

3)      They saw one of your jobs and like the quality of the work.  They asked around.

 

For some reason they trust you and are willing to put their project or part of it in your hands.  Construction clients spend a lot of money and need to feel very good about your ability to do it the way they intended it to be done.

 

So, how do we get new clients?  We start by letting them know we exist.  That is one of the main purposes of advertising, signage, and all the other ways we spend the advertising dollar.  Do they trust you just because of the promotional stuff?  Not yet. 

 

The next step is to make the sales call to see what they need, what the budget is, and the schedule.  This gives the client a chance to meet us and get some particulars like references.  How we act during the pre-contract meetings and how well we respond to questions and concerns will have a huge impact on whether they put their signature on the contract. 

 

At some point a trust is established and we do business.  Are you done yet?  NO!!  The next step is to deliver what was promised in a professional manner that leaves the clients perceiving that they got more than what was promised.  Notice I said “perceiving”.  Usually this means that your project manager went the extra mile and communicated with the client over the course of the project.  Weekly reports, returned phone calls, proper and accurate billing, consideration for neighbors, etc. don’t cost much but greatly enhance the perception of the client.  Now we are done, right?

 

NO!!  You spent a lot of money getting the client.  You spent a lot of time and money preparing the estimate and proposal.  You went the extra mile to make sure they loved working with you.    So now you let them drift away?  That would be the height of foolishness. 

This will turn them into enthusiastic referrals!  Referrals cost much less to obtain than the clients we got from the advertising and they are much more likely to buy the job from you!

• Now you pay attention to post construction calls and make sure they are attended to promptly and professionally. 

• Now you put them on you contact list and call them every few months just to check in. 

• Now you include them on any mailing pieces you send to prospects