Most construction companies go through periods of good times, which are inevitably followed by a cycle when work is scarce, when profits turn to losses.
In an attempt to remain profitable, construction companies and projects resort to cost saving measures. Many of these cost saving measures are necessary and yield the desired results. Unfortunately, some measures are handled badly, go to extremes, or are counterproductive and eventually exacerbate the losses.
Cost saving measures that can cost money
- Employing someone because they are affordable. The right person could literally be worth their weight in gold. The right person can save the company thousands of dollars. The wrong person is often very costly. They’ll make mistakes. They could damage the company’s reputation. Always employ the right person for the job at a salary that’s commensurate with their knowledge and experience. Good people attract good people. An experienced and knowledgeable person can do the work of two or more inexperienced people. Pay your employees what they are worth.
- Not employing sufficient people. The default action of most managers when a project is losing money is to cut people. But, often this is the wrong thing to do. Sure, people who aren’t performing need to shape-up or ship-out, and when the company is struggling it may be a good time to trim dead wood. Unfortunately, some projects are under resourced – regrettably I was sometimes guilty of under resourcing my projects. Having too few people could result in the project slipping against the construction schedule, it could result in shortcuts being taken with quality, and it could mean that mistakes are made because managers are under pressure and don’t get to all the items that they should. But, more importantly is to ensure that there are sufficient people with the right skills, so that others aren’t been held up waiting for tasks that should have been completed. Getting rid of people often causes low morale, which can negatively impact productivity. Furthermore, often the good people leave first on projects that are under resourced. Good people are often the ones shouldering the additional work load and they’re the ones to feel the pressure first.
- Not training. Often the first thing that gets cut when times are tight is training. Yet, we depend on experienced and knowledgeable people. Where will we get experienced people for our next project if we aren’t training them now? People with the right training will add value to construction projects and to the company. Training your team shows commitment from the company, and this commitment is usually rewarded by increased loyalty and productivity. Sure, we shouldn’t just be training for the sake of training, but rather we need to be filling in the knowledge and skills gaps for now, and for the company’s future.
- Paying suppliers and subcontractors late. Paying suppliers and subcontractors late will cost the company money. Suppliers and subcontractors who are paid late are less committed to help out when the project is in trouble. They’ll have a low morale. Subcontractors and suppliers who are paid late could run into financial trouble – even becoming bankrupt before the project is completed and they’ve delivered what they should. Losing a contractor or supplier midway through a project will be costly. But also, contractors and subcontractors who are paid late will be loath to work for the company again, so next time they price a project for the company they’ll inevitably add more money to their price to cover for the inconvenience of being paid late. High subcontractor and supplier prices could cause the company to become uncompetitive on future projects resulting in the company not winning projects. Treat your suppliers and subcontractors fairly and you’ll have the best suppliers and subcontractors wanting to work with the company in the future.
- Employing the cheapest suppliers and subcontractors. It’s important to employ reliable suppliers and subcontractors that will deliver quality work and products on time. Don’t employ subcontractors and suppliers only because they’re the cheapest. Check their capabilities and ensure they can deliver the products when you require them. Poor subcontractors and suppliers can damage your company’s reputation, they take more time to manage and they can delay the project. Poor subcontractors and suppliers cost money.
- Not servicing and maintaining equipment correctly. When construction equipment breaks down the cost of the repairs are often only the small cost. The greater costs are caused by the loss of productivity resulting from the breakdown. Usually people and other equipment are left standing while the machine is repaired. The breakdown could result in time being lost on the construction schedule – which results in further costs and even penalties from the client for late completion. But as important, construction equipment that isn’t maintained and serviced correctly will probably have a reduced life, and its resale value will be less.
- Not investing in technology. The right technology implemented properly can benefit construction companies. It can save time and it can improve productivity. The new generation have been brought up with the latest technology at their fingertips. They expect to have access to the latest technology – not in their office, but out in the field close to the action. People will often change companies to have access to the best technology.
- Taking short cuts with safety. Don’t play with peoples’ lives. Poor safety could cost your company and project money. Accidents cost money. Accidents lead to higher insurance premiums, they take management time to investigate, they’re bad for reputation, they could lead to monetary fines, the project could be shut down until safety is improved, and a key person could be injured, or an item of equipment damaged which will interrupt progress on the project.
- Cutting on quality. Bad quality destroys reputation. It often leads to additional expenses to fix the poor quality which delays the project further. In the worst case, it can even endanger peoples’ lives. Even if you lose money, a good quality project can lead to other work which hopefully will be profitable.
- Cutting out all celebrations. When times are tough it’s easy for morale to be low. Low morale often results in reduced productivity. It can also lead to good people leaving. It’s sometimes important to celebrate milestones and small wins – obviously not with excessive and extravagant functions. Even a couple of drinks with staff after work can help lighten the mood and bring enthusiasm and determination back to the team.
If your construction project or company is losing money it's important to understand why, and then get to the underlying cause. Maybe you are losing money on wages and salary, but what is the real cause? It’s often not simply because there are too many people, and cutting staff may in fact exacerbate the problem. Sometimes there are even a number of reasons contributing to the problem so it’s important to uncover them all. Knowing the real reason the project or company is losing money enables you to rectify the problems.
Frequently it only takes small adjustments, or changing a few key people and the project can turn around. Unfortunately, some projects are doomed to make a loss – maybe they were priced badly, things didn’t go according to plan, or mistakes were made at the beginning. In these instances it's important to get the project finished as soon as possible while maintaining good quality and safety standards.
It’s easy to be depressed sometimes, but depression can be like a viral infection quickly spreading through the rest of the team, impacting morale and productivity. It’s important to keep the team’s morale up, to maintain good productivity. People don’t want to feel like they’re working for a losing team.
Construction companies will go through cycles of little work and scarce profits, but in these times good people, the right technology, good equipment and a good reputation are even more vital to the company’s survival.
It’s always vital to take a critical look at costs to see how we can reduce them, but we must do things for the right reason and not just for the sake of cutting costs. Don’t let your cost cutting measures cost you more than they are worth.
What cost cutting measures has your company taken that have backfired?
Have you taken a critical look at your costs recently to see how they could be reduced?
'Construction Claims: A Short Guide for Contractors' is another of Paul's useful books.
Paul has recently published 'Construction Management: From Project Concept to completion'.
These books are available on Amazon and other online book stores.
Paul publishes articles regularly on LinkedIn and his website.
Paul writes regular articles for other websites, gives lectures, mentors, and is available for podcasts and interviews.
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