Hey folks, Phil Zito here and welcome back! In this post, we are going to be discussing how to manage project costs. This post is sponsored by our Project Management Bootcamp course. If you are looking to learn more about project management, and you would like to learn how to run your building automation projects profitably and on time, then you definitely need to check out this course.
Alright, so let's dive into this thing called project costs. Okay, so if you think about it, up to this point, we've discussed the primary project costs, we just haven't gone into a whole lot of detail from a cost management perspective. So, to back up, there are three types of project costs:
- Labor
- Material
- Subcontractors
Now whenever I teach this, I inevitably get people who point out, “What about any bonds you need to do, any permits you need to do, any travel fees,” So yes, there are miscellaneous charges, but the typical effect of miscellaneous charges is usually less than a percent on a job unless you're doing a risk factor where, I have seen risk factors get all the way up to 10%. Worst case scenario, that's where you add an extra 10% of cost to projects, due to risk. If you do proper scoping, and you really do a proper takeoff, a proper re-estimate, you should be able to negate most risk.
So now that we have those three buckets of cost broken out, how do we manage cost? I'm going to walk through several different ways to manage cost. Now, not all of these are my preferred ways to manage cost, but just being real with you, they are ways that are used to manage costs.
Subcontractors
So, for example, first cost we'll focus on is subcontractors. Now, what typically happens with subcontractors, and we're talking about extra low voltage electrical subcontractors here, what's going to happen is we are going to get three prices for our subcontractors. When a salesperson goes out, they should ideally be getting three prices for their electrical subcontractors and picking either the lowest cost one or picking the one that best fits the job, just depending on the circumstances and how competitive the bid is.
Once that's done, during the re-estimate, the Project Manager or the Sales-to-Operations hand off, either one, they may, and I don't recommend you do this, shop the subcontractors again to try to reduce prices even more. Now, this is something that I see a lot in the large OEMs. They train their Project Managers to do this because their Project Managers are incentivized by how much more profit they can bring into a project. Booked margin versus executed margin. If you increase executed margin, you get a percent and that's a bonus for you.
In my opinion, that is incentivizing a bad behavior, and here's why. Today, you absolutely cannot do that. I already know I will get emails from some people who will say, “Well, I'm doing that right now,” but on the macro level, you can't do that. There's just not enough supply of electrical subcontractors for you to get one to commit to your job and then start bidding them against each other once they've spent all that time. You're going to get a name for yourself, and people just aren't going to go after your work. They’re going to go after someone else's work. Why would I give you my best price only to have you beat me up on price right after I gave you my best price. So that's their mindset.
It's critically important that you take the time, as you recall, when we talked about lining out our subcontractors in the last post, to establish these relationships with these subcontractors so that they can execute work according to your standards. This is where a bidding strategy of bidding your subcontractors against each other, after already having bid them against one another, can come back and bite you in the butt. No one will want to establish a relationship with someone who's not trying to establish a relationship with them back. So, just be cognizant of that from a costing perspective.
Additionally, from a costing perspective, and this is going to be across material and subcontractors, not across labor, look for favorable payment terms. Now, once again, this is something that, taken to the extreme, can actually be very detrimental to yourself. Look for, paid on paid, ideally, so that means you don't have to pay out to your subs or to your materials until you've been paid. Some of you will be able to do that, based on the size of your company, others will not.
Also look for terms like NET 60 or NET 90, which then means that you collect the money for the bills that are owed to you, but the bills you owe on, don't have to paid for 60 or 90 days. That means you're working off of other people's money, and you're having positive cash flow because you have more money coming in than you have going out. Ideally, that's how we want to manage our projects, by having more money coming in than we have going out.
Now, the downside to this is, it takes advantage, in my opinion, of your material suppliers and your subcontractors. I personally am a fan of NET 30, at the longest terms. I think going longer than that, you're basically working off of other people's money without interest, and I don't feel like that's right. I am not naive in that. I realize the business world operates based off primarily a sense of profit, not necessarily a sense of right and wrong, but I just don't feel right if I've been paid and I have the money to pay my subcontractors, often who are much smaller companies than me, or not paying my material providers, who often are at very tight margins themselves. It just doesn't feel right.
Like I said, it is a strategy to make sure that your costs are being delayed against you, and you're working off of other people's money, which makes your projects profitable. It makes things look nice.
Labor
Now, you really can't do that with labor. Unfortunately, with labor, you're fairly limited because you have to pay out paychecks. So, your strategy with labor is based on two approaches:
- You can do the lowest skill that I can do, for the highest task. What I mean by that is, if you're able to have someone who's a technician, who you're paying $40 an hour, do some programming, which normally you pay your programmers at $90 an hour, then you're saving $40-$50 an hour on all of that labor. Even if that person is 10% less efficient, you're still making money in the long run. So, one school of thought is to try to use the cheapest labor for the most tasks.
- The other is the inverse, which is using the more expensive labor for tasks with the theory that if this is a task that can be completed easier with this more expensive labor, then you're going to make up your money in efficiencies. So, you want to aim for efficiency.
Now what would this look like actually played out in a practical example? Well, if you had 1000 VAV boxes, even if you had someone who was semi-unskilled and brand new, you train them on 1-2 VAV boxes and then by the time they're at the 100th VAV box, they should be extremely efficient at both programming and graphics, so you can start to turn over a ton of stuff to them and they will do it efficiently. There may be a little inefficiency in the beginning but by the time they get to the 500th VAV box, they are going to be really efficient at the graphics, the uploading, the downloading, the programming, the point-to-point check out, the functional test, etc.
It's when you have smaller projects, that are very complex, that I tend to like to use a more senior person. Although you're paying a lot to have them do point to point, they're checking out the entire system. Like, if you have a central utility plant with a decoupler and it has a differential pressure sensor on another controller on the other side of the campus, and it’s just a messy program, having someone who's very experienced work on that, will pay off, even though you're paying more. You're going to spend less time and you're not going to have to go back and check it out again.
So, it's a balance, right? It's a balance with your labor as to where you go and apply. Most people don't even have that delineation. They just have a blended labor rate and whoever goes, goes, but if you're following what I've taught earlier, which is to have a labor breakout by task, then that labor breakout by task is going to give you the ability to allocate costs, according to what tasks should be executed, and you can really start to see the efficiencies of your projects.
Material
So up to this point, we talked about subcontractors, and we talked about our tasks and our costs, related to labor. Now let's talk about material. One of the first things we're going to do on our projects, as I mentioned, is submittals. As soon as we get submittals going, then we can get material on order, typically. The nice thing about getting material on order is that by having material on order, we are now going to be able to bill for that material.
Typically, on a project, sometimes it has to actually be on site for us to be able to bill. Sometimes it simply has to be on order, but that gives us the ability to bill. When we're able to bill, we're able play that game that I mentioned of, “Okay, we've billed, we've received revenue, we're going to do paid-when-paid plus NET 60, and we're going to work off of that revenue.”
If it's large enough, we may be able to fund our labor or subcontractor cost. But basically, funding costs until we get a steady cash flow flowing in, so that we don't have to worry about having negative cash flow on a project. At the end of the day, it's all about getting positive cash flow into the project. It’s about getting more cash flowing into the project than we have flowing out of the project, so that the project itself is self-funding. That is how you build a large business.
If those of you are wondering, “How do I scale my building automation business? How do I take it from 5 million to 10 million, or from 10 million to 20-30 million?” You do it by having your projects be profitable because that means that they are self-funding, right?
Well, I should be clear, you have it so that your projects are self-funding, and profitable, because those are two separate things. You can have a project that is not self-funding the entire way, but ends up being profitable at the very end, but you want a project that is self-funding so that your general capital can be invested into other things like hiring more salespeople, expanding territories, etc. Then, you want your projects to be profitable, because then you can take that excess profit at the end of the project, and you can apply it back to the general fund for your business, so that your business can continue to expand.
So, that's kind of the trick, right, you get your projects profitable, you get them to also be self-funding, and the self-funding reduces your overall capital burden on your companies so your company can expand, so it can hire new people. Then, the fact that it's profitable, grows that capital fund by taking the profit out of the projects and allocating it to the capital fund at the end of the project.
In our next post, we're going to explore how to validate installation and perform point-to-point checkout. I hope you all enjoyed this. If you have any questions at all related to project costs, do not hesitate to reach out. I encourage you to reach out to us as we'd love to answer those questions for you.
If you really want to get down to the bottom with your project management, you want to get your project management skills, or maybe your project management team up to speed, I encourage you to check out our BAS Project Management course, which will teach you exactly what you need to know to succeed in building automation project management.
Thanks a ton and take care!
