Thirty-two years ago, Steven was an estimator for a major electrical contractor who decided to start his own business. His co-worker and friend Roger decided to join Steven in the business as a project manager. The business started in Steven’s home, and after only two years, Steven rented a small office and warehouse downtown. Once they settled into their new digs, the company began to experience substantial growth.
As the years passed, the company grew from a meager $1-million-a-year company to now a $150-million-annual operation. During that time, Roger became vice president of operations, responsible for all projects. Roger was Steven’s go-to guy in all aspects of the operational side of the business. Recently, Roger walked into Steven’s office and said, “We’re not making the money we once did and we need to either reinvent this company or I need to retire and let someone else take over.”
Steven knew that Roger was a person of few words who always gave a lot of thought to what he said or did.
Roger went on to explain that in the last decade—although the company’s revenue increased year over year—the net profit of the company has eroded to the point that it just was not worth the effort. He told Steven that he was not willing to stay on board and watch the company slowly decline.
Steven sat there looking at Roger not knowing what to say. He knew Roger was right in saying that company profits had seriously declined over the years. The only thing Steven could think to say was, “You and I have been together since the beginning, and I don’t want you to leave.” Roger replied, “I won’t leave if you commit to finding a solution.”
Steven agreed, and the two of them started the process by creating a list of items they believed might be the cause of their low or no profit margin problem. They reviewed every one of their overhead expenses and found there were very few expenses they could cut. They looked closely at estimating and competition and found very little room to increase margins. Next, they did an in-depth study of their job costs for all projects completed in the last five years and this is where they began to see a trend so they went back another five years, and again they saw the same trend.
The trend they identified was a steady decline in productivity over a ten-year period. Now they began to focus on finding the root cause of the problem. To do this, they decided to review the schedules, RFI logs, change order logs and daily reports on ten projects completed in the last five years representing roughly $100 million-worth of work.
To start, Steven and Roger found that altogether the ten jobs experienced 1,120 schedule revisions, 61,500 RFI’s, and $28,000,000.00 in change orders. In addition, they found that the number of daily workers on these ten projects fluctuated substantially from start to finish. The spreadsheet they put together for daily reports included a variety of key word searches, including constraints, material deliveries, equipment and inspections, but there was this one glaring issue with manpower they felt might be the crux of the problem.
They noticed that projects didn’t start with a small crew, slowly grew to a peak and then slowly tapered off. In fact, on a monthly basis, the manpower chart they put together looked like a saw tooth, meaning that the number of workers in one month went up and down like a yo-yo. Now the question became, what is the root cause of these labor fluctuations knowing there could be a variety of reasons including internal reasons?
At this point, Steven and Roger had eliminated all possible reasons for substantially lower profit margins and isolated the reduced productivity trend as being caused by severe manpower fluctuations. At this point, they felt they had too much information and were beginning to get somewhat confused as to the root cause of their profit problem and decided to hire an outside expert to review the data.
When they met with the expert, they asked him to determine the root cause of their productivity problems on the ten jobs. It took the expert two weeks to review the data and submit his findings. When Steven and Roger sat down with the expert, one of the comments the expert noted in his report shocked them.
The report consisted of about 20 pages of typed information as well as nice looking charts and graphs, which the expert suggested they look at later. He then directed them to the conclusion page, and this is what it said:
The projects reviewed were cumulatively impacted by an excessive number of design changes—an indicator that the original bid documents were under designed resulting in significant impacts to each projects schedule—which may have resulted in severe manpower deviations.
The projects reviewed were cumulatively impacted by an excessive number of RFI’s, constraints and changes orders, which appears to have caused significant schedule deviations, and may have contributed to the severe manpower deviations.
Of the ten projects reviewed, it is apparent that the subcontractors project teams failed to mitigate the impact of the following:
- Design changes
- Change orders
- Schedule deviations
- RFI’s and constraints
“Are you saying we failed to mitigate these issues?” asked Roger. The expert responded by saying, “Yes, you did, because nowhere in your change order logs did you request compensation for the things that decreased your productivity.”
Steven chimed in by asking, “So, you’re saying that the root causes of these severe manpower deviations were caused by these things?” Again the expert replied, “Yes,” but went on to say, “the point is that all four of these things increased your cost to complete the work in terms of productivity, and that is why your productivity decreased on the ten projects you had me review. You did not lose money just because your manpower deviated, you lost money due to the cumulative impact these things had on productivity.”
At this point, Steven is looking at Roger, and Roger is looking at the consultant while realizing this issue falls squarely on Rogers’s shoulders as vice president of operations. Steven asked, “So what you’re saying is that we have to either lower production rates in our estimates or we have to start charging our clients for the things that impact us?”
The expert replied, “You can do either, but I’d suggest that you focus on mitigating project cost impacts rather than raising prices. In other words, you and your project teams have to be able to identify impacts to productivity, and learn to communicate the impact to your clients. If for example, your client make’s a scheduling decision that you know will impact your productivity, you then decide if you’re going to charge your client for the impact the change in schedule will have on productivity. It is simply a business decision.”
Steven and Roger shook the expert’s hand, thanked him, and retreated to the conference room to talk where Roger admitted, “This falls on my shoulders to fix and I’m on board to fix it, if you want me to?”
“I do want you to fix it,” said Steven, “but I want to be involved because we have to find a way to do this without damaging the relationships we’ve built with our clients. You know Roger, when I look at the data we put together on all the jobs we reviewed, the common thread was that production year over year declined little by little. In other words, the declines happed slowly over time, and we just didn’t see it happening. At this point, I’m trying to figure out what it is that changed over the years?”
Roger replied, “I can tell you that in the last ten to fifteen years, the one thing that has changed drastically is the way general contractors and owners manage projects overall.” In other words, you would think that with all the technology we use today that projects would run much more efficiently and far more organized than they once were, but in reality we pay a price when they’re not. We know we don’t have control over how general contractors and owners manage projects, but we can improve how we manage and how we address cost impacts.