This is Where We Excel
Small 4-Year Old Custom Home Construction Company
We gave this small family-owned custom home construction a new cash flow outlook and real clarity on their margins for each client.
Our client is a small custom home construction company that builds about 8 to 12 houses a year. So, what that means, is they can't afford to have a costly mistake on any of their projects. If one project loses money, it can take 3-4 projects to recover.
Though they're experts in construction, they lack formal business training in bookkeeping, budgeting, forecasting, and pricing. We came in and helped them excel in these areas. This case study will show the results of that effort.
With rising material costs, fuel costs, and labor problems starting to become an issue, the company started to slow down and realize that some of the jobs and projects they were doing were not nearly as profitable as they though. Even though they were busy, they knew that they weren't making as much money as they thought, but they couldn't figure out why.
A Multi-Phased Process
The first thing we did was look at their P&L over the last couple of years. As they expected, they were not making any money or hitting the expected margin targets for their projects. We realized it was not an overhead problem, meaning they did not spend a lot of money on rent or inventory or even payroll.
Once we realized this was not an overhead problem but more of the cost of goods or pricing issue we started a deeper dive into individual jobs/projects from start to finish. How were the projects estimated? How did they perform during the process of the build? Did they take longer than usual? Were they tracking change orders properly? Were they collecting the money they were expecting? This is for us a standard process that we run on all of our clients finances regardless of their industry.
As we dug deeper we uncovered a few critical issues:
Lack of Pricing Discipline
They weren't disciplined in their pricing, they weren't using the proper markup in all aspects of the project and were not checking some of the sales guys as they altered estimates.
Expenses
They were not tracking their expense for each project correctly; meaning that they may have spent money for a project but it wasn't track properly so there was no clarity on how much they were actually spending on each individual project.
Change Orders
There was no discipline in any of the change orders that happened through the project and did not price them accordingly and it sometimes did not even get charged at all.
Our Next Steps
The first thing we did was develop a monthly budget and forecast to make sure they can track spending and managing cash flow. They got into a bad habit where new jobs were helping to pay for old projects that no longer existed.
Next we developed a process for pricing the project and sign off on the pricing.
Their pricing model now takes into consideration not only all the estimates of the material, the labor, plus contingencies but also contemplates and overhead portion and ensure that they have the proper markup in all aspects of the project. Once the estimate was created the CFO and CEO needed to sign off on the estimate and the salesperson is no longer allowed to touch it after the fact.
Next we watched progress and tracked their spending meticulously through Quickbooks and BuilderTREND to make sure that they are getting the proper return on every single aspect of the project.
As change orders come in, the pricing of the change order has to be signed off again by the CEO and gets added to the original estimate so we can start tracking it just like we do the base project.
At the end of every project and final payment is received, we do a final review and track the original estimate against the actuals of the project. We look for differences and determine what needs adjusting going forward.
THE RESULTS
Profitable Pipeline
Now the pipeline is much more profitable than the previous pipeline. Working the current pipeline shows how they'll be back in the black for the foreseeable future.
Thriving Business
The entire team has a new positive outlook as they have clarity on each project and know the exact amount of margin to expect. It's no longer a guessing that leaves them in the red.