March 27, 2024

Accounting For Inefficiencies

Something that cost me a lot of money over the years has been inefficiencies in workflow. Whether it is a phone call that demands my attention, material being delivered incorrectly or not at all, mistakes in the field, bad weather, or any other headache, we are rarely productive one-hundred percent of the time. Shoot, if I take ten minutes to go to the bathroom during a workday I am creating inefficiencies. So why are these inefficiencies and mistakes tolerable in other industries but not the construction industry? Why do our clients get paid when they make a mistake at work and not have to eat the cost of the mistake? Why do they not feel the need to work on weekends because they did not think that their work project would take six days instead of five? Why are they not working for free? I understand there are plenty of people who do work for free and concede a lot of time, but in our industry it is extremely prevalent. We are expected to guess how long a job will take, how much it will cost, and then execute the contract regardless of the actual profitability of the job. Most of the time and money lost in our world is due to undercharging, but not simply based on the fact that your time is worth more money. We are undercharging for the amount of time it takes to complete a project due to inefficiencies and downtime. 

It was not until a handful of years ago that I was bidding and budgeting projects with the assumption that everything would go perfectly according to plan. I based my labor rate and budgeted time on sunshine, zero mistakes, and eight hours of belt-on head down work per day; from myself, muy subs, and my employees. As soon as a mistake was made, it was an expense to me and the business, cutting into my profit margins. I started thinking about how other companies account for these inefficiencies. Are they simply bleeding money with every mistake as I am? Do they gamble when developing budgeting as to how many mistakes will be made? Are they upcharging to cover their asses? I realized that most other industries and businesses account for inefficiencies on a daily basis. We cannot expect our employees to work one hundred percent of their eight hours each day and make zero mistakes. It is unrealistic and impossible. We must account for these inefficiencies within our business model.

I cannot speak for everyone, but I realized a few years ago that If I want to be productive for forty hours a week, I need to have my toolbelt on for forty eight hours. Well, what if I do not want to work six days a week? Why am I losing or more realistically not capturing eight hours of inefficiency each week that is directly billable to my job? Most of my lack of productivity is because I am doing a material takeoff, meeting with the customer, meeting with a sub, making phone calls, sending emails, digesting plans and specs, etc. These are tasks that are directly related to this job that I never saw as work because they did not include swinging a hammer. 

The same thing goes for employees. There is time each and every day where our workforce will stand around not being productive. This is not milking the clock or taking advantage of the situation as much as it is just impossible to be productive one hundred percent of the time. Think of every other person who works for someone else, has a corporate job, or works in a different industry. Are they allowed to take five to ten minutes to chat with someone while passing them in the hall? Does this expense get passed off to the consumer? Is their boss bleeding money each minute that they are not entrenched in their work? Generally speaking these inefficiencies are accounted for with larger operations and businesses. They should be accounted for in our industry as well. Whether this cost is addressed in your market rate, your labor burden, or your markup, it needs to be accounted for or you will be eating the cost.

I want to ensure that accounting for and charging for inefficiencies should not be an excuse to become complacent or lazy. It is not a reason to ignore workflow optimization or refine your systems. Ideally you have systems and processes that alleviate as much inefficiency as humanly possible because that is what drives your margins higher, but we need to be more realistic when developing our budgeting and our pricing structure. If we assume a six month job will take exactly six months based on the production of four individuals working 40 hours a week with zero mistakes and zero downtime, we are shooting ourselves in the foot. You must realize that in a real world environment, workflow and productivity can be reduced 15-25% due to interruptions, distractions, complications, and mistakes. Some of these mistakes are completely avoidable and that creates valuable lessons, but the percentage that is unavoidable regardless needs to be accounted for. If you can reduce your inefficiencies to 10-15%, that would be ideal. In the above example a 10% reduction in productivity would result in a net loss of 416 hours of work over the approximately 26 week project (4 men/women x 40 hours per week x 26 week = 4,160 man hours reduced 10% = 3,744 productive hours  and 416 unproductive hours). It does not seem like a lot of downtime when you look at one day with one employee (48 minutes of inefficiency), but when you have multiple employees for multiple months it stacks up quickly.

I cannot tell you what your efficiency or inefficiency target rate should be. I cannot tell you what you can capture within your market. You have to figure that out on your own just as you have to figure out your overhead and profit. What works for me is completely independent or variables that make your rate work for you. Your market, your labor pool, your labor rate, your employees' experience, and what your customers will bear are all unique to you and your operation. You cannot charge for unique one off mistakes like breaking a window, mismeasuring a countertop, installing tile that fails, etc. Those are experiential lessons unique to that specific project, but you can capture business and operational inefficiencies that are common to every project regardless of who is on your team and what the scope of work looks like. Once you realize this, and you realize that all other industries account for inefficiencies within their pricing, you will see your profits increase and your stress level reduce. You are no longer walking a fine line between profitability and failure. Again, you must ensure that you are not cultivating or breeding complacency within your organization, but we must also be realistic. No one is productive for every second of every day. We in the construction industry should not be held to a standard at which no one else is held.

And if you enjoyed this blog, be sure to check out my thoughts on vetting a client before meeting in person or controlling every aspect of a job.