How serious is labor and material management to your business? Serious enough to have a better process in place to account for all the variances that can crop up?
If you have a streamlined process for material and labor accountability, good for you. But you are in the minority. For many of us, there is room for improvement, especially in today’s market of margins.
The typical approach is a job by job basis in broad strokes. What did we bid the job for and what did it end up costing us? How many hours did we bid the job for? How much material did we actually install versus what was in the bid? We jot all that down occasionally and see if there is a trend. If that seems to be working for you, imagine what could happen if you took it a little more seriously.
Even a small tweak can have an effect on profits. Corporate America has teams of managerial accountants who track data on everything single thing they do, boil the percentages down, and produce variance reports. In these variance reports is a wealth of information that is presented to executives, who can then sift through the good and bad and make a decision on how to fine-tune their machine.
Think for a moment — these companies make billions upon billions of dollars and yet they are still concerned with a fraction of a percentage of cost variance. There is no such thing as a fixed cost to them; everything is a variable expense. Whether you like it or not, it’s your job as an owner to operate smoothly, make decisions, and most importantly turn slim margins into wide margins.
Let’s say you sell a boiler replacement. You bid the job as two workers for two days, coming out to 32 man-hours. The boiler and nearby piping you bid at $3,000.
The two workers you send out finish the bulk of the replacement in the two days, but they call at 4 p.m. on the second day and say, “We won’t get done today, and one of us needs to come back tomorrow to finish up a few things and do a proper start-up.” Let’s say the job actually ends up taking a total of 39 man-hours and the workers use $3,300 worth of material that you didn’t account for. To keep round numbers let’s assume you charge $100 per hour. You just took a loss of $1,000 on the job.
Now here is where some business owners in our industry have a problem. They’ll just mark this loss up as one job that took a little too long and hope it can be made up for on the next job somehow. Or owners who are very proficient and experienced will look at it and say, “The guys took too long, and the estimator underbid the job.” But in the end, daily operations continue as usual and nothing changes. The most that happens is a phone call to the guy who sold the job and a stern “Stop underbidding jobs!” lecture, along with a quick company meeting to emphasize that it shouldn’t take two and a half days to swap out a boiler.
It doesn’t take a rocket scientist to figure out that a job went over on labor and/or material, but it does take smarts and effort to consistently keep track of variances and make effective change using the hard numbers. You can’t be quick to judge material overages or labor overages off only general experience and feel. You are making business decisions with incomplete information. It can be as simple as having your secretary give you a daily report of the larger bid jobs you did — one column for actual labor versus quoted labor and the other for actual material versus quoted material. Once you have done that for a few months, take a look at the numbers.
With concrete numbers, you now have to be a good business person and not just a plumber. After looking at the numbers and with a working knowledge of your processes, why is material over? Are you not charging enough? What if it turns out your material is consistently 10% over? Can you pad the bid material 10%? Do you need a markup increase of 10%? If you can’t because of your competition, are they getting material 10% cheaper than you? Should you search out a different wholesaler? What about labor? Are you consistently showing a 20% overage in labor? Is it because your employees are bad installers? Do they need to be replaced or retrained? Are you merely underbidding by 20%? Test a few job quotes at an additional 20% and see if you start making some money.
The point is that we all wonder how to get out of a van and become a businessman, and even though we may hate it, the data and knowing what to do with it is the answer.
Anthony Pacilla is a registered master plumber for McVehil Plumbing in Washington, Pennsylvania. He has 23 years' experience in the plumbing and HVAC trades, and has a bachelor’s in business and economics from Thiel College.