Not everyone knows what you know
Sometimes we get so consumed with the nuts and bolts of our profession we forget that not everyone knows what we know.
I was talking with a contractor the other day. He’s the head of the local office for a regional construction firm. I commented to him that I had seen his guys working on a new retail building project. The walls consisted of two concrete block walls with insulation between them, and an insulated stud wall on the inside.
That’s a pretty complicated and labor-intensive wall. I explained to him that he could use the Polycrete Big Block ICF wall system to accomplish all that in one step, that he would only have to use one subcontractor, and it would save him a ton of time.
He said to me, “Construction speed is not that big a deal to us.”
Over the years, hard lessons have taught me to suppress my sarcasm reflex – particularly here in the south where it’s easy to hurt someone’s feelings and they make you pay for it a long time. I let the comment pass, but couldn’t get it out of my head.
I’m a trained accountant, and I spent a bunch of years running finance and accounting in job-shop manufacturing companies. That makes me intimate with job costing and profit / overhead allocations.
Maybe this guy didn’t know anything about accounting because he had an engineering background. Or architectural. Maybe he started out swinging a hammer and advanced to management because he was terrific at running a crew and getting the best out of his people.
I realized there might be a lot of other folks out there who don’t instinctively know how important construction speed is to the profitability of their project.
In manufacturing, we call it “throughput.” It’s the amount of raw materials and labor you can turn into finished products in a given amount of time.
For a contractor, when you have fixed overhead costs like office rent, insurance, telephones, salaried workers, and payments for machinery and equipment, throughput is critical. When you’re the developer paying interest on a construction loan, throughput is just as serious.
For example, let’s say your overhead (regular monthly expenses like office rent, salaried workers, etc.) amounts to $25,000 per month. You’re bidding a job and figure it will take 6 months to complete. You build in $150,000 of overhead into your bid. You also decide you want to make $60,000 profit.
What happens if you increase your throughput and finish a month early? For starts, you turn your profit rate into $12,000 per month instead of $10,000.
You also save $25,000 of overhead so your $60,000 profit has now become $85,000 and your total monthly profit is now $17,000 ($85,000 / 5 months) instead of the $10,000 you originally planned on – 70% higher.
Run that out for an entire year and you’re talking about making $204,000 rather than $120,000.
When you’re the developer and you’re paying on a $25 million construction loan, what’s the interest savings if your building is delivered a month early? $90,000? $100,000? More? …And that doesn’t even include the cash advantages of getting leased up and cash flowing a month sooner.
You can also see very quickly that getting behind schedule can kill you in no time at all. But that’s a story for another day.
These examples are simplified, but they illustrate that speed of construction is a critical factor in the success of your business and you need to look for every advantage.
The market sets the price that you can get paid for a job, and you can’t do much to control that. What you can control is your costs, and they are not limited to what you pay for a 2x4.