Articles Written by Charles Vander Kooi

Chart your work flow; know where you stand

By Charles Vander Kooi

There are 3 things you need to consider when deciding whether or not to bid on a job. The first 2 are Does the job fit your company and give you an advantage? and Do you have the time to do the job?

But here I want to focus on the third thing you must do in deciding what to bid: Determine how the job fits into your work flow. We do this by creating a work flow chart. Before we launch into a discussion of the chart, I want to share with you a few of my personal philosophies.

Philosophy 1

I believe that an estimator – or contract administrator as I prefer to call them – should, as much as possible, involve themselves in the day-to-day operations of the company. I think one of the worst things that can happen is to have the person who does the estimating stuck off in some ivory tower of a back office.

Here's what happens in that ivory tower: In one door march the plans and specifications to be bid. The contract administrator works up a bid and sends it out another door, crunching numbers, day in and day out. Eventually those numbers will become as bogus as a $3 bill. Why? Because that person will lose touch with the reality of their business. They won't hear and feel and experience the harsh realities and difficulties that go into getting something built.

I have an education that is worth at least $200,000. I did not pay for it. The contractors I worked for did, God bless them. It is an education of mistakes, misjudgments and misunderstandings. However, if I hadn't learned from those mistakes, that education would be of no use to me or to anyone else.

I can't overstate how important it has been for me to be a part of every problem so that I could learn from those problems! A contract administrator needs to be aware of everything that goes on in a company. He needs to know of problems when they arise and be part of the team that helps solve those problems. He needs to know when and why jobs don't go as fast or bill as much. And that's why the work flow chart is such a valuable part of the estimator's work day. With the work flow chart, an estimator can chart the ups and downs of any given job.

Philosophy 2

My second philosophy complements the work flow chart. We in the construction field believe that we are in the business of building things. We think our business is a product- and material-oriented business. After all, we take all kinds of different things and assemble them to form structures, walls, pavements or landscapes.

Not so! The greatest risk, the greatest problem, and the greatest factor in the success of your company is in labor. Material doesn't get drunk over the weekend and then not show up for work on Monday. Tractors don't get married to trenchers and have back-hoe babies. Nor do they break up with their girlfriend or get a divorce. People do!

Labor is the biggest risk in the construction business! And so my second philosophy is this: Construction is a people business. Contractors who realize this and know how to motivate and work with people are successful contractors.

Employee attitudes are also extremely important. If you get a company full of people with positive, aggressive get-it-done attitudes, you won't have a cash register big enough to count the money you bring in. However, if you get a company full of people with negative, complacent, we-have-all-day attitudes, you won't have enough money to even buy a cash register. Construction is a people business, and the attitudes of people make or break construction firms.

Starting the chart and recovering overhead

Keeping all of that in mind, let's look at the work flow chart above. To set up my own work flow chart, I use a 12- or 13-columnar accountant sheet. Each column is assigned a month of the year across the top of the sheet.

Right under each month I put in a dollar amount goal for that particular month. That is how much we need to bill in order to recover our overhead and to make a profit.

Before we go any farther, I need to explain the goal figure and how we arrive at it. I believe the owners of a contracting company must sit down and pre-plan a budget for overhead. Then they need to establish how much work they must do to recover that overhead.

Notice the word I have stressed: recover. I don't believe that you charge for overhead when you bid a job. Rather, if you get and do the job, you are able to recover a part of your overhead off of that job. Overhead is something that goes on whether you do any work or not. The rent, telephone, salaries, etc., are there no matter how much work you do.

Consequently, you must look at overhead as something that is, for the most part, a fixed cost that must be recovered if you are to survive. Once that overhead figure is established, you need to decide how much work you can do with that overhead. You then set up goals as to how much work you need in order to recover your overhead.

Assigning dollar amounts

Let's say you feel you can do $1.2 million in gross sales in a year. (How you establish your overhead recovery numbers for that volume is a lengthy topic best saved for another time.) Now, spread that $1.2 million over a year's time. If your sales are seasonal, distribute it according to the months when you feel you will likely be doing more or less work.

These figures become your goals for each month enabling you to have a plan for your work so you can work your plan. If you're not meeting your goals then your overhead must be adjusted downward.

Going back to the work flow chart, you'll notice that on the left-hand side is a list of all the jobs your company has under contract, with the dollar amount in thousands next to the name of the projects. Sit down with the person responsible for getting the work done in the field. You both decide how each job is going to be done and what work will be done in each month.

The contract administrator working from his original bid then puts a dollar value on that work and sets up a goal of when the job will bill what amount. After that is done on all the jobs you have, each month is totaled and the contract administrator is then able to see what months met the goal so they do not need more work. He can also determine which months fall short and need additional work. Thus, the work flow chart becomes a tool for helping decide what to bid.

The chart motivates field people

Because you can see your year's goals easily and clearly, the work flow chart is also a great tool to motivate your field people. Remember, it was the person in charge of your field operations that told you when and what he would get finished on each job. That should become their goal and responsibility to accomplish. So they need to be made aware of what is expected of them.

I used to make copies of this chart and hand them out to the field people. Then when the monthly billing was finished, we would fill in the line that says "actual." During the next month's operations meeting, we would go over the chart and discuss the results. We would go over each figure and discuss why it was more or less than anticipated. Each job was then readjusted for each month based on the new plan of approach and billing for that job. So the work flow chart becomes a great indicator of what's really happening on each job.

Use the chart to build credibility

The chart is so versatile it can also serve as an accountant's tool to inform the contractor, his bank, and his bonding company about how he is and will be doing, financially. Two of the contractor's best friends in this business are his bank and his bonding company. Any tool that you can use to show them that you are a 'front door contractor' and that you know what you are doing, is a tool that you should use.

Bonding companies and banks judge contractors based on 2 things: Liquidity and credibility. I find that almost every contractor understands liquidity. It simply has to do with determining how much cash would be left if you sold your business in a day. But I find that a lot of contractors don't fully understand credibility and how important it is to bonding companies and banks.

If you know what's going on with your jobs on a month-to-month basis and you can quickly recognize when a job is going bad, then you are a credible contractor. If you know what months you're going to make money and what months you're going to lose money, you are a credible contractor. If you understand your cash flow and when you will have extra cash and when you will need to borrow, you are a credible contractor.

Bonding companies and banks are more likely to extend bonding limits and loans to credible contractors than they are to contractors who don't know what's happening in their own company, or who don't have the tools to understand why their company isn't doing well.

Can you blame them? Many contractors remind me of a guy sitting on a chair in a dark room when someone or something knocks him off the chair. Then he gets up off the floor and right back into the chair. He gets knocked off again, and once again he gets up and back into the chair.

Many a contractor will keep up this cycle until he goes broke. The sad thing is that if he would've turned on a light, he would've been able to do something about that someone or something that kept knocking him off the chair. A work flow chart and a cash flow projection are the kinds of tools that will turn on the light.

Chart your cash flow projection

Take a look at the cash flow projection I added to the bottom half of the work flow chart. The first line of information requires the contract administrator review the bids and come up with the direct job costs in the big 4 (material, labor, equipment and subcontractors) for each month. Those costs are based on the anticipated billing.

The next line is for anticipated overhead for that month. Next line down is for the anticipated retentions on the billing. These 3 figures are subtracted from the billing. To that figure you add any retentions that you hope to receive that month.

The total on the bottom will tell you the amount of cash you can expect to have in the bank after you collect all your billings and pay all its associated costs. This figure shouldn't be confused with profit, because it has retentions and potential overbillings included that will greatly affect the final figure. This figure will only indicate when you should have money in the bank and when you can anticipate having to borrow money.

Use tools you like

I want to conclude by making a final observation about these kinds of tools. Tools are for people, not people for tools. In other words, whatever tools you use should be tools you understand and like. No one should be forced to use something that they do not understand because the tool will just become a millstone around their neck. Eventually they'll find reason enough not to use it.

Today you can easily buy a large magnetic board for construction planning. I have been in some contractors' offices who use them with great success. Their people like them, understand them, and use them. I have been in other contractors' offices where these boards are merely expensive decorations used to write messages on or pin up notes.

Why? Because their people tried and tried to use the board, but it just wasn't them, so they devised other tools. No tools or forms should be forced upon your people. And don't force them upon yourself. Don't make people for tools. Rather, you should take tools like this and work them over until they suit you and your staff. Then they will be tools for your people.

Since 1980, Vander Kooi & Associates, Inc. has been helping business owners add more to the bottom line of their company's financial performance. We accomplish this through seminars, workshops, home study publications, audio/video, software and private consultations. We would be proud to help you with budgeting, estimating, high-performance management, marketing, sales, productivity and field training. For more information, visit www.vanderkooi.com or call (303) 697-6467.