June 10, 2019
Entrepreneurship published an interesting article in Managing Your Finances, by StrategyDriven entitled
“
5 Effective Strategies for General Contractors to Cut Costs
” on May 17, 2019. The article discussed several ideas that are worthy of sharing with you. StrategyDriven is an organization dedicated to providing executives and managers with the planning and execution advice, tools, and practices needed to achieve superior results.
The five strategic initiatives StrategyDriven recommends to contractors to cut overhead costs are:
1. Cost Audit
– Conduct a complete audit of existing expenses. Consider ways to reduce operational expenses without comprising quality. Three cost cutting suggestions provided by StrategyDriven are: relocate the office to a location where the rent is lower, shift from in-house to cloud operations, and cancel subscriptions to apps, services, and publications that you don’t use.
I would like to add outsourcing business functions that could be accomplished more efficiently by qualified experts such as payroll, bookkeeping, CFO services, human resources, IT, and marketing.
2. Time and Contract Clause
– Include an add-to-exceed clause to contracts for:
- Actual material costs
- Actual direct labor costs at a specific hourly rate
- Agree on add-on to cover profit and overhead
This cost structure gives you the flexibility to make adjustments, replace features, and cater to changed orders without taking a hit on the bottom-line.
Another good idea is to add an escalation clause to all long-term projects or larger jobs to protect you from material price increases. This strategy is particularly important today with escalating lumber, steel, and other building materials due to tariffs and complying with government regulations. An escalation clause must clearly define the materials in question and specify the “triggering event” that activates the clause. A typical triggering event is a 2% or 3% rise in the originally estimated materials cost.
3. Seek Multiple Bids
– Try to always get three bids from sub-contractors and make sure you compare the overall prices, as well as what is included. I recommend getting quotes from sub-contractors that you have a long-term relationship with, as well as ones that you don’t at least once per year or at the start of a new job. This is the best way to ensure you are getting the best price and the most value for your money.
4. Inspect Your Schedule
– Keep an eye on your schedule for any potential stacking or acceleration of activities. Compressing the job schedule will save you money in labor and material costs if the job is well managed. I recommend reviewing the progress on each job at the beginning and end of each week to ensure that each job is properly staffed, and the materials needed are at the job site. Avoid ordering materials too far in advance to improve cash flow and avoid waste.
5. Financial Prequalification
– Prequalify all subcontractors to reduce your risks. Make sure that each sub-contractor has the funds to complete the work you contracted them to do. This will help to absorb cost overruns or deviations in a project that result in increased costs. It will also protect you from having to pay for a sub-contractor’s labor and material costs if they default. I recommend that you review a sub-contractor’s financial statements (audited), as well as schedule of upcoming jobs, days of cash, and work in progress.
The above tips are just a few of the ways you can reduce overhead costs. Feel free to contact me or any member of our team to discuss your situation at 610-828-1900 (PA) or 732-341-3893 (NJ). You can also email David, CPA, CCIFP, MBA, partner, at
[email protected]
or me at
[email protected]
. We are always happy to help.
Martin C. McCarthy, CPA, CCIFP
Managing Partner
McCarthy & Company, PC
Disclaimer: This alert is for informational purposes only and does not constitute professional advice. Information contained in this communication is not intended or written to be used as tax advice, and cannot be used by the recipient to avoid penalties that may be imposed under the Internal Revenue Code. We strongly advise you to seek professional assistance with respect to your specific issue(s).
