Profit Fade – Avoiding It

Executive Summary: Reduce profit fade at the end of your projects by adjusting building habits and getting the right people in place to finish your jobs strong. Several suggestions from years of experience are provided here.

What is profit fade? So often a good job goes bad, but just at the end. Your company executive asks you “what happened, we were on track all job long to make a solid profit and then ‘poof’, just in the last two months the profit’s gone!?”

Your CPA, CFO, or surety agent calls it profit fade or profit erosion.

Taking steps to avoid profit fade. You’ve been there before, where you knock out the first 97% of a project and post a healthy profit to management. Next thing you know, you go back to visit the project and your crews are still out there, or you walk down the hall to talk with your contract manager and she’s still working on closeout documents. These small dollars are coming right off the bottom line of your project!Good executives, project managers, and field supervisors all know that profitable projects are ones where the company gets in and gets out quick. As an ex-marine, my superintendent described it as “one shot, one kill”. Here are some things to think about as you execute a project:

Good executives, project managers, and field supervisors all know that profitable projects are ones where the company gets in and gets out quick. As an ex-marine, my superintendent described it as “one shot, one kill”. Here are some things to think about as you execute a project:

1. Do it right the first time – as you go through your project, complete the work correctly the first time. This means adhering to the specification and getting inspector buyoff, in writing, as you go. There have been plenty of studies on rework, estimates saying the work costs as much to twelve times as much to redo – do it right the first time!

2. Punchlist – ask for it often and early, and get it in writing. Most engineers and owners are the same – they like to dribble out the punchlist. They say they can’t provide the punchlist until you have the job complete (see number 1 above!).  There’s the pre-pre-punchlist, the pre-punchlist, the punchlist, and the final completion punchlist. If you can, get just one punchlist in writing, complete it quickly and get it signed off while you’re still on the job with adequate crew.

3. The “Field Closer” – we had a foreman who specialized in punching out a job. He could MacGyver anything and he had a great personality with the inspector. If you can find a small crew foreman that can fix anything, has an amicable personality, and has a sense of urgency, give him another couple bucks an hour and make him your closer!

4. Start final documents early – many projects have a long list of final documents prerequisite to final payment: lien releases, completed punchlists, tax clearances, permit closure, as-builts, notarized statements of wages paid, and the list goes on and on. There’s no reason to start this at substantial or final completion. This document list is likely listed in your contract and there’s no reason you cannot start studying it around 75% of the way through the project. Find a champion in the office (usually an accountant-type) who can visit this list regularly and harass the proper member of the team to get it done and into the owner.

5. Refuse extra work – doing extra work at the end of the job one doorknob at a time is a loser. Because usually the pennies and nickels of extra work still require the dollars of management on your side. See if your client can bundle extra work in larger packages so that you can be compensated for the proper management effort; otherwise, you are better to politely thank your client for the great project, but to gently ask them to find another means of completing their wishlist.

6. Bill timely – there are two dangers in not billing original scope work and extra work timely: (1) delayed payment causes you extra money in funding the owner’s project and (2) the owner may be having profit fade too, and he’s running out of money to give you. Billing on a timely basis for base scope and change order work will help your cash flow and your bottom line – especially if your company charges your project interest when your money is a late receivable.

7. Avoid underbilling – underbilling is a red flag to your surety. I don’t care how long you have been in the business, they’ve seen more contractors and more projects than you have. They know that when the job is coming to an end and you’re underbilled, you’re likely looking through somewhat rose-colored glasses on your profit projection. They will continue to cheer you on, but they’re thinking twice about that next bid bond until you can formally close out that project and get the money in the bank.

My story. I can relate to all of the above – I’ve experienced them all. But one item that is not on that list is

8. Posting vendor invoices timely – it is easy to project the larger pending costs in your projects by using committed costs and/or a cost-to-complete module in your accounting software. For example, there should never be a $400,000 invoice sneaking up on you from a subcontractor if you had their budget in your system and your cost-to-complete asked you every month how much money you were going to spend against this budget line item. The problem is that project manager who has the stack of invoices in their desk s/he never cost coded, or the couple dozen purchases at Home Depot that were not in any sort of purchase order system with your controller. The cost impact may be in the thousands or hundreds of thousands of dollars showing up too late, and unexpected. These costs do nothing but erode the bottom line. Manage them better by ensuring your invoices are coded in a timely fashion, you have an adequate accounts payable invoice tracking system, and you have a purchase order system in use.

Oh, and Home Depot is a foreman’s candy store. Do your best to keep him or her on a diet.  These invoices always turned out to be the last few grains of salt in the wound to a project experiencing the challenges above.