In the construction industry, the accounting and finance functions of construction companies often operate in a certain way that often results in repeating issues. There needs to be more transparency regarding financial performance, which plays an important role in optimizing cash flow and profitability.
As a construction business owner, have you experienced where your projects consistently exceeded a certain budget, your company’s profit margins spiked as years passed, and the cash flow became quite challenging? If yes, then what you are facing is profit fade.
Profit fade is a critical issue among construction companies. And when it becomes a recurring, systematic problem, its impact on your bottom line and financial performance can be devastating. In this blog, we will introduce what profit fade is, the main causes of why it happens, and some of the best practices and tips that can help you alleviate it. Find out also how a cloud-based platform can help you in your efforts to prevent profit fade from escalating.
What is Profit Fade in Construction?
As the name suggests, profit fade means a major decline in the expected gross profit of a construction project. There are many possible causes behind the occurrence of profit fade, and see these reasons below:
- Inaccurate job costs
- Overly optimistic production costs and estimations
- Unbillable change orders and extra work
- Poor supplier and subcontractor performance
- Insufficient field supervision, training, and resources.
- Adverse weather conditions
Ensure that you will find out the main reason why your company is experiencing a profit fade. That is the first step in determining the root of the problem. Also, keep in mind that in construction, it is rare for projects to be fully completed exactly as planned. The real measure of your credibility in this matter is your ability to manage the ongoing changes that occur. Along with assisting internal transparency and efficiency, your overall awareness of your company’s profitability shows that you can determine profit fade early, analyze the main causes, and reduce the impact as the progress of your project.
Mitigate Profit Fade with these Best Practices
By implementing these best practices, your construction company can effectively mitigate profit fade, significantly improving your financial performance.
1. Budgeting for profit
The ability to determine and manage profit fade is the key to reducing profit fade and eventually improving your overall financial performance. You can start preparing a budget for your project based on the bid, and it includes a streamlined workflow that allows accurate and consistent reporting. The reports should include job progress and existing costs that can be compared to the original cost estimates.
Unfortunately, many construction companies today fail to integrate many processes – estimating, budgeting, bidding, job costing, and more. As we share these facts with you in this blog, we expect you not to overlook these processes and align them in a single platform.
Consider implementing the best construction project management software. This type of software serves as a single central hub for all your workflows and operations. Integration is never an issue; you can just integrate with multiple applications.
2. Actively manage your cash flow
For many construction companies, it is sometimes rare to have full visibility into their cash flows in a way that allows them to manage cash actively. In many cases, companies find themselves faced with unpaid invoices and unfavorable contract terms. In addition to this, the delayed receipt of money often becomes a burden on the company’s finances.
As a construction business owner, ensure your project managers and financial departments are aligned. Doing so guarantees a better and positive cash flow. Also, it results in faster payment processing because everyone involved agrees on certain terms.
Only with the use of construction time tracking software can you able to track any of these seamlessly and easily. This all-in-one construction software is built to ease the stress of managing every part of your construction business and operations.
3. Realistic Phase Codes
Numerous problems that often lead to profit fade can easily be addressed through a much better understanding of the actual costs of a certain job. Project managers have to track and accurately asses the work performed by each crew member and make adjustments in the field to reduce profit fade.
This is where job-cost phase codes must be used to help project managers better understand cost data between the financial department and the field. It is impossible to get accuracy without a common understanding of the data among all involved parties.
4. Become more aware
One of the things you must focus on is adopting a forward-looking approach when it comes to financials. A lot of construction companies review their project financials right after completion. Often, everyone looks back and expresses frustration over mistakes and profit loss, and this has happened every single time.
Do not take this kind of approach toward your financials. Never. Rather than looking back at how things performed, you need to alter everyone’s mindset and press on. This requires a major shift in the role your finance department plays in your company and how it interacts with the project leaders.
To start in your forward-looking approach, you begin by tracking data consistently, especially regarding the yearly budget. Doing so will help you understand the connection between your budget and finance to your business goals, and this is crucial to maximizing your company’s profitability and hitting performance targets.
5. Professionalize your construction company
It is a major requirement of a construction business, especially middle market firms, to work with third-party constituents. This includes bonding companies and banks. When meeting with these partnerships, the members of your finance team should possess exceptional financial insights to acquire better terms on important financial agreements.
Professionalizing your company and maximizing its profits helps build the type of platform that can be useful in making smart acquisitions in the near future.
More Key Tips to Effectively Mitigate Profit Fade
- Report labor and equipment used daily using reliable inventory management software.
- Report and input completed quantities of work every single day
- Implement a purchase order system to track job costs
- Consistently allocate insurance, benefits, payroll tax, equipment costs and overheads.
- Track equipment usage, operating costs, and ownership of every piece of equipment
- Distribute and produce labor cost reports weekly (per job and phase)
- Deliver monthly job profitability reports
- Require your project managers to forecast overall construction costs during completion. With the use of today’s latest construction management software extensions, they can determine the size and complexity of the projects and produce reports with accurate information.
- Devise a plan for remedial actions that will be carried out when necessary. This includes adjustments to crew size, construction project schedules, equipment assignments, and others.
- Require forecasts and bids to be approved by the upper management.
- Discuss with your construction project managers the importance of finding profit fade and the reliability of profit fade estimates.
All the best practices and key tips we shared with you above can help you clearly communicate the financial circumstance of your company and the projects you handle. So, make sure to know how to turn around your profit fade situations.
A Single Cloud-Based Platform Is Key to Reduce Profit Fade
Unfortunately, in today’s uncertain and troubled economy, there is no way to eliminate the risks of profit further fading altogether. However, knowing what causes profit fade, how to determine it, and how to prevent it are great first steps toward holding onto as much of your profits as possible.
Finally, the ultimate step you should take is to deploy the right technology. We introduce a fully-integrated and cloud-based construction scheduling software that is now leading in the market – Pro Crew Schedule.
This construction software is built with tools that allow you to track analytics and collect data in the field via mobile, enabling you to review the project data and reduce any inefficiencies. Here, we breakdown in detail how Pro Crew Schedule can ultimately help you in any circumstance:
- Giving you greater construction management visibility in the field and office so you can determine whether projects are on time or delayed.
- Project management and inventory management features integrated into one – the most unique and powerful features that Pro Crew Schedule possesses. No software solution in today’s market has the same features and capabilities as this technology.
- Field productivity is where you can deliver reports that can help capture how much labor your team has done. In addition to this, this tool helps you track issues beyond your control.
- The power of integrations. Pro Crew Schedule can seamlessly integrate into your existing construction software tools and hold on to 3000 integrations.
- It ensures your entire stakeholder team can consistently communicate and collaborate on a single solution anywhere and anytime, improving teamwork and removing data silos.
Discover firsthand the amazing features of Pro Crew Schedule.