We've all likely seen a movie in which the police parade a lineup of suspects in front of a two-way mirror and ask the witness behind the glass to finger the perpetrator. Among the most common "crimes" of any construction project is profit fade — when the job's margin dims from view as work progresses (or finishes). So if you collared the five prime suspects in an investigation of profit fade at your company, whom would you likely see? Probably the following five bad guys:
1. Unusual project type or scope. The rocky economy may force you to turn to unusual jobs or those that involve work beyond your typical scope. Projects like these often trigger profit fade as unexpected costs and delays arise. So in these situations, be extra conservative in your estimates. Perhaps even do some networking with other contractors, architects or developers familiar with the work to get a heads-up about what could go wrong.
2. Inaccurate estimating. One could say that profitability begins with the estimate; therefore, invalid assumptions at this stage can doom the job's bottom line. Compare your estimates on jobs that lost money with those you used on profitable projects. Look at elements such as labor costs, direct costs and indirect costs. Can you see where you went wrong (and right)? Are your estimates relying on outdated concepts or data?
3. Poor project management. All too often, project managers lose sight of the contract once work is under way. This also can lead to profit fade. Try holding preproject meetings to discuss contractual provisions for scope of work and change orders as well as to remind your managers of your estimates. As the job goes on, check in with them (or ask them to submit reports) about how actual costs are comparing with bid cost amounts.
4. Faulty cost reporting. Sometimes profits aren't lost on the job site, but in the office. Bad information can lead to bad project management because decisions are being made with incorrect data. Ask your CPA to perform a fade analysis for all active jobs to see not only how profit fade is affecting your bottom line, but also where it might be originating.
5. Fraudulent activity. Obviously, profit will tend to fade when someone is stealing from you. So if profit fade has been an issue, and none of the other usual suspects seem to apply, it may be time to check into whether foul play is involved. Your CPA may be able to help you determine if any fraud has taken place.
