For subcontractors, the best way to control and increase profit is by managing labor productivity. Too often, project managers, foreman, and executives focus on material buyouts, squeezing subcontractors, and cutting back on overhead to make gains on profits, but these actions pale in comparison to what can be accomplished by having highly productive labor. There is no doubt money to be made by being a smart buyer and ensuring there is no unneeded overhead costs, but focusing too much attention on these items will take your eye off of the real prize.
Let's take a look at a hypothetical, yet realistic, breakdown of a project’s revenue. Shown below is a $10 million project’s revenue broken down into six categories.
| Category | Value | Percent |
|---|---|---|
| Material | $2,500,000 | 25% |
| Labor | $5,000,000 | 50% |
| Subcontractors | $1,000,000 | 10% |
| Equipment | $400,000 | 4% |
| Overhead | $800,000 | 8% |
| Profit | $300,000 | 3% |
| Total | $10,000,000 | 100% |
Material & Subcontractor Savings
Most projects hope to build contingency and/or profit by saving money during the buyout phase of the project. If more competitive prices can be obtained, the project’s finances can be enhanced and future problems might be covered with this additional money. As I stated before this should not be overlooked, but if (and I mean if) you can save 10% on the material and subcontractors you are very lucky. In today’s highly competitive market, estimating departments are squeezing every ounce of savings out of vendors just to win the project. Vendors who are the apparent low are unwilling and unable to reduce their price by another 5%, let alone 10%.
Even if you could achieve 5% savings from your vendors in our sample project, the total savings would amount to $175,000. This is not an insignificant number and will increase the profits by 58%.
Labor Productivity
According to numerous studies, productive labor utilization on most construction sites stands at about 50%. Productive labor is defined in these terms as actual hands on work installing a finished product versus all of the other labor spent on project to get to that point (i.e. staging, walking the site, waiting for elevators, communicating, waiting for others, etc.). If on average 50% of the labor is spent actually creating value and 50% in spent preparing for that or being wasted there is tremendous room for improvement.
If time is spent managing the labor and ensuring it is the most productive, labor savings of 5%-10% can be easily obtained and savings of 20-30% are not unreasonable.
Now let’s look at the impact of a modest 8% gain in productivity. In our sample project, an 8% gain would lead to a $400,000 savings, or in other terms, the profit would increase by 133%. The increase from labor is more than twice what we could get from material and subcontractors combined.
How To Improve Productivity
Productivity gains can come from many different changes, like:
- staging materials differently
- planning the work better
- providing better tools
- only working in areas where you can be productive
- as well as many other ways
Each project and company has specific needs that are different, so the implementation will vary. The first thing you need to do is ensure that you are measuring your productivity. You can’t manage what you don’t measure. By just measuring your productivity, it will give you insight into what is happening in the field. Having numeric measurements is the best way to make informed decisions on what actions to take.
Other Benefits of Better Productivity
As you increase productivity you are reducing labor hours. These labor hours relate directly with schedule, manpower, tools, and equipment. By saving some hours, you are actually reducing the costs in other categories and you are reducing risks. With less people, safety incidents will also be reduced.
One last thought on other benefits, overruns. On a project that has a reasonable budget, material and subcontractor costs typically have a low risk of going over budget, but labor is always a risk. Why is this? Obviously, it is because of labor productivity. If you focus on labor and are reducing it, you eliminate the risk of it going over, and in our example project, a loss in productivity of just 6% eliminates all of the profit on the project.
Summary
Anyone that is accountable for project performance needs to be thinking about ways to save money, but don’t waste too much time on the minor items: focus on labor productivity. If you manage the labor productivity on the project, you can improve profits by 100%, allowing for better salaries and bonuses in the future.
| Category | 5% Material/Subcontractor Savings | 8% Labor Savings |
|---|---|---|
| Material | $2,375,000 | $2,500,000 |
| Labor | $5,000,000 | $4,600,000 |
| Subcontractors | $950,000 | $1,000,000 |
| Equipment | $400,000 | $384,000 |
| Overhead | $800,000 | $800,000 |
| Profit | $475,000 | $716,000 |
| Total | $10,000,000 | $10,000,000 |
| Profit Increase | 58% | 138% |
It is easy to see the much greater impact labor savings has on your profits in comparison to material and subcontractors.