Many construction company owners are reluctant to share any job cost information with the person who should be most responsible for the successful completion of the work—the job foreman. And if you have that philosophy, you are robbing your company of additional profits! Without sharing the job cost information, the responsibility for completing the project cost-wise remains with the person who has that information. Wouldn’t it make more sense to make the foreman responsible and accountable for completing the job within certain cost parameters? Afterall, isn’t he directing the work at the job site? Shouldn’t he be the one planning the steps to complete the job in the most efficient manner? Without having the cost information, and thus establishing a cost goal, the foreman can only be expected to do his “best” to get the job done. I think we can agree that “best” is not a quantifiable measurement. Job costs are. Let me give you a real life example of how sharing this information will improve your bottom line.
Back in the mid 70’s, I worked for a national contractor that serviced heavy industry. Our jobs were spread out all over the United States. Early on in my position as Construction Manager, I started giving the phase breakdowns and estimated manhours to my foremen. I wanted them to have all the tools they needed to manage their work and since I wasn’t able to be at all these jobsites, I wanted them to manage it. We communicated almost daily, and most of that communication revolved around their progress on the job and how much time it was going to take to get the job done. When upper management heard about all the information I was sharing, they almost blew a gasket. They had no trouble with me sharing estimated material usage rates, but they had a huge issue with me sharing the estimated time. The concern was that the foremen would “milk the estimate” and take all the allotted time. Another concern was that the foremen would somehow figure out how much money the job made. My response was that if they “milked the estimate” and took all the allotted time that it would be an improvement over exceeding the estimated time. After a lot of discussion, they decided I could share this information on a temporary basis. What we discovered is that the good foremen took pride in beating the estimate. Sharing that estimated time on a temporary basis became standard operating procedure.
This was my method of delegating responsibility to the foremen for their job performance. I have to admit that I didn’t use those terms back then. This was my method to make job management easier for me. It wasn’t possible for me to keep track of all the ongoing work while planning upcoming work too. I was counting on the foremen to help me out by letting me know when their job may be in trouble or to let me know when it may finish early so that I could effectively schedule the upcoming work.
The combination of sharing information, providing the proper support to the field, and setting the sense of urgency tone resulted in the division becoming more profitable than ever. In fact from a profit percentage standpoint, our division had the highest profits of any in this large corporation! And all I was doing was sharing estimated time along with expected productivity rates.
Moving now to this current century, my philosophy has expanded to sharing actual job cost information. Let me explain why. Dollars is the universal language that everyone understands. What has more meaning?
1. If we don’t take corrective action, the job is going to run over 500 hours.
2. If we don’t take corrective action, the labor costs are going to be $25,000 more than estimated?
I believe that talking dollars is much more effective than just talking about time. I have seen what happens at companies that adopt this philosophy of openly sharing job cost information. The job level profits dramatically increase!
Let me take just a moment longer to explain my philosophy about active job costing. Active job costing is a project management tool, and it is forward thinking process. It requires job planning, which is a proactive or a forward thinking process. Assuming you have an estimate based on costs for comparison sake, there are four main steps to active job costing:
1. Know where you are cost-wise right now. Your accounting software can give you that information if it is up-to-date. (passive)
2. Taking the costs-to-date and being able to project the costs to complete. (proactive)
3. And this is probably the most important step in my opinion. Use the information you have from #1 & #2 above to improve on the outcome. (proactive)
Steps 2 & 3 are forward thinking. And you can’t accomplish #2 unless you have a plan in mind…a plan on how the job is to progress.
4. And the last step is the job autopsy. At the end of the job, you analyze what went wrong and what went right. You take a hard look at the productivity rates and determine whether any adjustments should be made on future bids.
If all you do right now is share cost information at the end of the job, or you don’t share any cost information at all, you are making a very costly mistake.
It’s time to change your way of thinking and watch your profits grow.