Volume 40, Issue 12 December 2005
Did you know that there is a nasty little creature living in your contract backlog? Well, there is. You can’t see him but he’s there. He has an insatiable appetite for your profit and he doesn’t care how big your company is or where you’re located. I call this little booger “The Creep.” The Creep can be compared to a leach but, unfortunately, cannot be removed as easily.
Since we’re almost to the end of the year, you may just now be feeling the effects of The Creep. Of course, I am metaphorically referring to the movement of the projects within your contract backlog. There are tangible and intangible effects of project delays, so let’s take a look at how The Creep affects our business.
In my opinion, the most significant negative effect that The Creep has on a contract glazing business is the loss of capacity. When we plan our year, we base our plan on an expected cost-to-operate divided by our expected revenue. This, in turn provides us with the amount that we must mark-up our work to break even. Any additional mark-up or revenue will result in profit. Any reductions will, of course, result in profit loss. If you have structured your business properly, your staffing and resources are sized proportionately to your anticipated revenue.
Let’s analyze the effects of a single delayed project on a company named No Damage For Delay (NDFD) Glass that has annual sales of $2 million. The company has budgeted for $400,000 in expenses, which means it has a 20-percent cost to operate. NDFG Glass has properly marked its jobs up and has sold out the first half of 2006 by establishing a $1 million backlog of work through June. As you can see, Mr. Delay is feeling pretty good about the first half of 2006 (see chart 1).
The NDFD Glass Company is a very responsible glazing contractor and is always very careful not to take on more work than it can handle. The company diligently planned the first six months of 2006 and has spent a considerable amount of time managing project schedules. If everything goes as planned, NDFD will make a 4-percent profit margin as illustrated in its backlog report (see chart 2).
Mr. Delay rings in the New Year and starts installing his contracts. The first quarter actually goes better than planned and his installers beat his labor budget on the North Middle School project yielding an extra 2 percent of profit. He has an excellent group of guys and he realizes that they are one of the keys to his success.
NDFD Glass was scheduled to start installing aluminum framing on the Get Well Hospital project on April 10. Six men were scheduled for the project, as the original schedule was very aggressive and had the glass work being completed in just eight weeks. On April 1 the general contractor contacts Mr. Delay to inform him that the mason has had a difficult time manning the project. He further explains that he does not want the aluminum frames going in before the masonry and, as a result, does not need NDFD Glass on site until June 1. Since this is one of their best customers, Mr. Delay refrains from telling the general contractor exactly how he feels.
June 1 rolls around and the Get Well Hospital project is indeed ready to receive aluminum frames. On June 5, the general contractor phones Mr. Delay to explain that a grand opening for the hospital has been scheduled for August 1 and that he would need to have his glass work completed in six weeks instead of eight. Since the general contractor is a nice guy he offers to pay the overtime costs for Mr. Delay to immediately begin ten-hour workdays. Since Mr. Delay is being reasonably compensated for his additional costs, he agrees to only be compensated for his ten-hour workdays.
July 1 rolls around and it looks like Mr. Delay is keeping up with his hospital project. Unfortunately for him, the Research and Municipal Building projects are on schedule. As a result, NDFD Glass ends up seriously over capacity for the month of June and seriously under capacity for April due to the delay on the hospital project (see chart 3).
As you can see, NDFD Glass ends up with six idle men in April. Mr. Delay can’t afford to lay them off, as he is afraid they will go to work for someone else. NDFD Glass ends up with 960 man-hours that it is forced to absorb in April and May at a cost of $19,200. To keep up with schedules in June, the company also ends up working overtime on the Research and Municipal Buildings at a cost of $1,280.
The delay on the hospital project also kills the second quarter revenue for NDFD Glass. Revenue for the first half of the year was only $900,000, which meant the company was $100,000 under budget. Costs were $200,000, as expected, but the drop in revenue cost $25,000 in gross profit for the first half of the year. Although NDFD Glass will recognize the gross profit for the hospital project in the third quarter, the second quarter absorbed wasted capacity and the loss of $24,000 in gross profit is real. So, let’s add up the damage: $24,000 of lost gross profit and $20,480 in labor costs means that the delay in the hospital project will collectively cost NDFD Glass $40,960.
This is why general contractors bury “No Damage For Delay” clauses in their subcontracts. Many times these clauses are negotiable, but they must be addressed at the point of contract execution in order for the contract glazier to have a chance of recovering its damages.
When you get to the end of the year and you wonder why you weren’t able to maintain that slim 4-percent profit margin, start looking for The Creep … and when you find an exterminator, please let me know.
Andrew Gum is the president of Thomas Glass Co. in Columbus, Ohio. He also owns a consulting company called Glazing Management Solutions.
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