Fronting up to failure

How do you recover when you know a job is going to run at a loss? By acting quickly!

As a builder, it’s likely you’ll run into at least one job that starts to run at a loss. Even large companies have some jobs that just don’t go well.

It may be because of an oversight in pricing, mistakes requiring re-work, or because no one kept an eye on the schedule and the man-hours just blew out.

Whatever the reason, there is less money coming in than planned and, as the business owner, you must shoulder the additional financial pressure.

I’ve had the privilege of working closely with owners of building companies over the past 12 years and this is what I’ve learnt from observing those who have survived this type of setback.

Calculate how much income you have left

At the first hint of a problem in a job, do an analysis of the associated costs. This can be as simple as adding up all the money already spent on materials, subbies and labour and subtracting that subtotal from the total amount the client will be paying. This will give you an indication of how much you have left to spend before the job incurs a loss.

Make sure that you include any costs that you haven’t been invoiced for yet.

Estimate cost of completion

Estimate the materials and subbies you will need to complete the job and talk with your team about the remaining time (cost) required. Compare this total with the amount you have left to spend.

This will give you an indication of the job’s likely result.

Of course, this does not allow for the job to pay its share of overheads, but it does give a simple indication of the likely gross profit or loss.

It also gives you a target to achieve in order to break even or minimise the loss to a manageable amount.

Record any losses immediately

If you conclude that the job is going to run at a loss, then calculate the likely amount and build it into your financial accounts immediately.

Ultimately, the loss will be what it will be – but knowing its potential impact on your business in advance gives you options (see next section).

Don’t procrastinate and simply work harder, hoping it will go away. This is just delaying the pain. If you need to panic, then get it over and done with early.

Review all your options

Once you know the extent of the likely job loss, you can start identifying means to reduce its impact. Call a ‘Massive Action Meeting’ with your team.

Tell them that you need to identify every possible way to save costs across the company. Set the expectation that you intend to get the company through this challenge. 

If it’s a labour overrun, then spend time brainstorming ways to become more efficient. It’s a good idea to do this not just for the immediate job, but for all the jobs you have running.

It may be that there are easy profits sitting in some of your other jobs that you can capture to offset the losses, examples include:

• Scheduling work more carefully, so scaffolding can be removed early.
• Planning material needs meticulously to reduce the cost and frequency of deliveries.
• Rearranging the mix of qualified builders and apprentices onsite to reduce labour costs.

Talk to your subbies and suppliers about ways you might be able to save costs with them and check prices carefully to ensure you are getting your best rates.

While it may not be an easy conversation, it’s in everyone’s best interest to keep work profitable all round.

Avoid knee-jerk reactions

When our pet rabbit got frightened, he would react immediately by bouncing off the walls of his hutch! Heaps of activity, but nothing gained except bruises. Immediate reactions are not much better.

Once you have finalised your list of options, arrange them in order of difficulty and start implementing the easiest first. A quick success will encourage you and your team – and help you execute the more difficult strategies.

However, be careful about making strategic changes too quickly. Simply changing one strategy for another could compound the problem by replacing one ineffective activity with another.

Talk to your financial advisors

If you suspect that the loss could affect the viability of your business, talk to your advisors early.

Your accountant may be able to offset expected losses against tax already paid, your bank manager may be able to extend your overdraft, and a business consultant can give you some specific strategies to help guide you through.

Crashing out on a job can be painful and even critical to a business’ health, but it need not be the end – especially when you identify the problem and take action early.

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Graeme Owen, based in Auckland, is a builders’ business coach. Since 2006, he has helped builders throughout New Zealand get off the tools, make decent money, and free up time for family, fishing, and enjoying sports. www.thesuccessfulbuilder.com