How Much Administration
is too Much?

By Charles Vander Kooi

One of the most difficult things to establish is how much administration your company should be performing. How many systems should I have in place? How many reports should you require, and on what areas of your business? Are you receiving enough information to effectively run your business? Or, are you not receiving something that you should, resulting in ignorance in a certain area, which will eventually cost you dearly?

You can Overdo it

I remember talking once with management people from a certain company whose owner held an engineering degree from a respected university. Immediately upon graduation, he started his own company. At the time I was talking with him, he was working 7 days a week, and in excess of 12 hours per day. He was paying himself a meager salary, and his company was not making any money. I soon discovered why.

As an engineer, he was a very precise person who wanted to know every detail of what was happening in his company. He was, by national standards, a small-to-medium-sized contractor.

Yet, as I listened to all of the systems that he had in place to supply him with all the information he demanded, I realized that he was doing things that only large contractors could afford to do. And, that was exactly the reason why he was working so many hours and not making any money both personally and as a company.

Most Don't do Enough

I must say that in my travels around the country, I have found that this type of person is an exception. Most contractors are on the other end of the spectrum, and do not attempt to get nearly enough information to run their business. Toward the end of this article, I will discuss some of the minimums and maximums, as I see them.

You see, I believe that there is a fine line that each company must locate between how much is too much and how much is not enough administration for that particular company. That fine line is a balance between what is necessary versus what can be afforded.

To stay short of that fine line is to not get enough information. This is the more common error because, in the short term, it saves money. However, in the long term, it costs a great deal of money, because it causes contractors to make poor and uninformed business decisions.

Company Size is a Deciding Factor

To cross over that line is to do what our engineer friend did; to spend more money for information than you can afford given the current size of your company. This is often done because these things are seen as the right things to do - and they are. However, just because something is right does not mean that you can afford to have it always.

Other times it is done (and this is the worst reason) because the owner has seen or talked with a larger company who is doing it, and he wants it done in his company because the other company does it. I have seen this ego trip cost people their company.

The Fine Admin Line

The key is to find that fine line that balances how much administration your company needs and how much it can afford. Once you have found it, go as close to it as you can without going over it.

And, as I have said over and over again, recognize that nothing stays the same in this business for very long and, therefore, that line will be moving constantly. You must remain flexible, and always be aware of where that line is in your company at any given moment.

Peaks and Valleys

Another principle that I wish to point out, is that our industry is always full of what I call peaks and valleys in this area. This first peak is what I call a Ma and Pa operation. I have found that a contractor must do at least $350,000 worth of gross sales of work that is not subcontracted in order to make a decent living.

It is difficult to operate much of a business doing any less. Ma and Pa can operate this kind of business themselves with Pa doing the estimating and running the jobs and Ma answering the phone, doing the book work and letter writing. I have found that they can go as high as $500,000 doing it this way before estimating will get too difficult.

Now I must qualify the dollar figures that I have used in my examples with this explanation. The figures are based on a contractor who does most of the work with his own forces. Also, the average job is in the $10,000 range. If the jobs are larger or smaller, on the average, then the figures used in the example will change, up or down.

Then there is a valley between $500,000 and the next peak of $1 million to $1.2 million. There is another valley between $1.2 million and $1.5 million with the next peak around $1.6 million. On and on go the peaks and valleys, with the peaks getting farther apart the larger your company becomes.

When you are at the peak points, you are operating at maximum efficiency with the people you have in overhead positions. Each peak position usually requires the addition of a person to your overhead, as well as some associated overhead costs. These additions of people cannot be done gradually, but usually require a quantum leap in your overhead when you take on this new full-time person.

Dealing with Valleys

The question is: What do you do in the valleys? Let's say that you are moving from a Ma and Pa operation to the next peak where you will add another person to overhead. At that time you must make a decision. You must either:

A. Work longer hours to carry the company through the valley until you can afford that new person, or

B. Do what I would do at my age: hire that person, realizing that only part of their salary will come through overhead during that first year when you do $650,000, and the rest of it will come out of profit. Then, he or she will already be in place for the next year or 2 when you get to the next peak at $1 million.

C. Or, rely on computers to help you make it from peak to peak without hiring people. With the very affordable prices of PCs, and some of the very fine tried-and-tested software for this business, companies as small as Ma and Pa operations, can move from peak to peak with the aid of computers. The key is to get both your hardware and software from a company that specializes in your type of business.

What's Too Much or Not Enough?

Let me give you some quick guidelines that must be tempered with the understanding that you are all so different that, for a few of you, these guidelines will not fit.

Financial Statements - Every company, regardless of size, should have a monthly financial statement. If you have a smaller company, it can be done outside your office with a simple compilation of billings and of checks written from your checkbook.

Larger companies should get a more sophisticated statement breaking down income and expenses into divisions (or profit centers) if you are doing more than one kind of work. Again, I have found very few small companies that can afford this last type of accounting, even though they may be involved in many different things.

Payroll Administration - If you have a smaller company, payroll can be done by an outside company. It can also be extended to biweekly if needed since it costs money every time you put out a payroll regardless of how many people you have on the payroll. Larger companies can afford to do payroll themselves, and to pay more often.

Job Costing - I believe that every contractor, regardless of the size, should do job costs. Smaller companies should not spend the money to job cost every penny on every job. Rather, I recommend that they just have a simple job costing system that tracks the most important and most risky part of construction: labor. Simply keep track of the amount of hours estimated versus the amount of hours actually used. Larger companies should keep track of equipment, as well as material, through their job costing system.

Secretarial and Phone Answering Help - For some smaller contractors, the best that they can do is to use a phone answering machine, themselves, or their spouse. I find that, for most contractors, their first hired person (past the Ma and Pa stage) should be a versatile secretary who can also do light bookkeeping.

The next major person hired is either an estimator/sales person or a person who can manage the field. Again, the decision of which one to hire will depend on which one most makes the owner better off than he would be otherwise.

Evaluate

I conclude by reminding you that there are no hard and fast rules in this area. Every company and their approach to business, can be very different. The people that run it, the people they hire, and the amount of work they can do, can vary greatly from one company to another.

The key is to evaluate, evaluate, and evaluate every chance you get. Administration--determining how much is enough and how much is too much takes a mixture of good management science and reading your gut feelings.