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Focus on Labor Productivity to Improve Profits

The best way to increase profit is by managing labor productivity. Too often, project managers, foremen, and owners focus on material and package buyouts, squeezing subcontractors, and cutting back on overhead to increase profits.  These actions pale in comparison to what can be accomplished by having highly productive labor force.

Money can be made by smart buying and eliminating unneeded overhead costs, but concentrating too much attention on these items will take your eye off the real prize.

Let’s look at a typical breakdown of a project’s revenue. Shown below is a $2 million project’s revenue broken down into eight categories.  Depending on the type of project, these percentages will vary.

Category Value Percent
Basic Materials $300,000 15%
Quoted Packages $400,000 20%
Labor $1,000,000 50%
Subcontractors $50,000 3%
General Expenses $20,000 1%
Equipment $10,000 1%
Overhead $160,000 8%
Profit $60,000 3%
Total $2,000,000 100%

Material & Subcontractor Savings
Most contractors expect to add to their profits when they buyout the quoted packages and subcontractors.  Ethics should be involved when awarding purchase orders to the vendors who helped you secure the project.

Buying better is always a good thing.  This will always help your bottom line.

Vendors who are the apparent low bidder are unwilling and unable to reduce their price by another 5%, let alone 10%.  If the vendor is lowering his price more than 10% after the bid is awarded, you probably are not getting the right price on bid day.  The vendor is inflating his price because he knows the habits of some contractors.

In today’s highly competitive market, estimating departments are squeezing every ounce of savings from vendors just to win the project.

Even if you could achieve 5% savings from your vendors in our sample project, the total savings would amount to $37,500.  Profit goes from $60,000 to $97,500.  Thus, increasing my profit from 3% to 5%.  This only increases the profits by 62%.

Increasing Labor Productivity

Studies have shown that on most construction sites, productive labor stands at about 50% to 65%.  Productive labor is defined as actual installation time versus the non-productive labor, ie: material handling, supervision, layout, etc.

Management’s energy will be best spent on increasing labor productivity.  Labor savings of 5% to 10% are very realistic and 15% is possible.

Let’s look at how various labor-saving percentages would increase profits.

8% $80,000.00 133%
10% $100,000.00 167%
12% $120,000.00 200%
15% $150,000.00 250%

As you can see, there is greater potential for increased profits by focusing on labor savings in lieu of material and subcontractor buyouts.

Improving Productivity

Consider implementing as many of the following as possible:

  1. Staging materials differently
  2. Efficient material deliveries
  3. Preplanning the work
  4. Prefabrication of materials
  5. Providing better and sufficient tools
  6. Only working in areas where you can be productive
  7. Better coordination with other trades
  8. Reduction in crew size
  9. Regular site visits by the management and / or owner(s).

Each project and company has specific needs that are different, so the implementation will vary. The first thing you need to do is ensure that you are measuring your productivity.

Don’t wait until the project is 75% complete to make improvements.  The earlier you start, the greater potential for greater profits.  You need to know what is taking place in the field and why.

Tracking labor by systems, areas, etc. will give you greater insight to best manage your work.  Numeric measurements are a good thing.

Saving labor hours will reduce the number of workers and amount of work days.  This will hopefully mean safer projects, fewer accidents, and less stress.

Those who manage labor need to be thinking about ways to increase productivity.  Major on the majors and minor on the minors.  If you manage the labor productivity wisely, you can improve profits by 100% or more.