For the past several years, I’ve tried to drum into our company culture a simple, if somewhat novel, mantra of “grippage, not slippage.” Although our company core values of excellent attitude, communication, teamwork, honesty and reliability inform how we conduct ourselves each day, it is grippage or slippage (along with volume) that determines whether the doors stay open.
What we call grippage is really another term for variance, or any part of a budget not spent to complete a contracted task. Slippage is the opposite: unplanned contingencies outside of the construction budget or unbudgeted costs.
If you can pull even 1 percent of gross revenue out of slippage, it can translate into real money. A percentage of lost gross profit is also a percentage lost of net profit. (Gross profit minus overhead equals net profit.) Put another way, in an industry where a 5 percent net profit represents a fairly successful firm on average, each point off of a 5 percent net profit removes 20 percent of the total profit.
In a full-service design-build firm, slippage can happen anywhere along the project life cycle. The following are some examples of where slippage commonly occurs:
Sales: If the project is overpromised when it is initially sold into the design process, the entire team must attempt to shoehorn the project into a budget. Sales also can make promises without communicating them to design or production, which often results in giveaways and slippage.
Design: Our design department has its own project budgets, which can be mismanaged. Failure to listen to the client or manage the client’s expectations or showing the client options that do not fit into the budget can lead to duplicated or misdirected design work. A mediocre or incomplete set of drawings and specifications also can lead to an underestimated project.
Estimating: Typical problems include missed or underestimated scopes of work, incomplete subcontractor quotes that are unquestioned until work commences, and the estimator failing to get a bid for something he thinks he knows the price of and which costs more than expected. In addition, if the schedule of a given task or the project is underestimated, all costs linked to the schedule lead to slippage. There also can be “pushage” from sales to minimize the price of the project.
Production: Because production manages the bulk of a project’s costs, the team also is responsible for the bulk of a project’s success or failure. If our project managers don’t properly manage the budget, client, subcontractors, in-house labor and schedule, slippage will occur and money (and sometimes jobs) will be lost.
Between 2010 and 2011, our firm had positive volume relative to our overhead, but we also experienced a rash of poorly performing projects. When we closed the books at the end of the year, we discovered project slippage had consumed about three-quarters of the company’s projected net profit. Anecdotally, we knew during the year many projects were underperforming, but we didn’t take timely measures to stem the loss.
For the past 10 years, the key individuals involved in a project have been meeting to perform job autopsies. We discuss specifics of what went well versus what didn’t and review the numbers. This is the opportunity for members of the team to share any lessons learned.
What we hadn’t been doing until recently was compiling data about specific slippage areas to determine whether there were trends across projects. We collect data in a Master Builder database with accurate accounts payable and accounts receivable information. If you don’t have this or similar software, I highly recommend the investment. We then assemble a spreadsheet and match costs versus budgets across all tasks we completed for all jobs in a given year. From this, we are able to determine where money was made and lost.
One might say slippage could be combated by adding variance to future contracts to make up for whatever average slippage we have experienced. In this competitive marketplace, that isn’t an option. With the information garnered from our job analyses we were able to make strategic decisions about many things, including subcontracting certain scopes of work we had been self-performing, making employee changes and adjustments, and reducing and increasing job budgets for certain tasks. Our goal was to create efficiencies and minimize mistakes rather than add costs.
Making a profit in residential construction is challenging. My firm is thriving by focusing on quality and service and keeping a keen eye on costs. Analyzing the job-cost data has allowed us to identify and correct issues within our production department, implement sensible best practices and limit our slippage.