The Most Dangerous Metric You’re NOT Tracking (For Construction Owners)

You know why construction companies get into trouble? It's because they ignore this one metric. I had this business owner, he came to me once and he's like, Steve, check this out. Here's my job profitability report and it lists about all of his jobs.

And he's like, we're making money on every single job, but I don't have any cash. I'm tapping out on my line of credit. I have payroll coming up in a couple of weeks and I don't think I'm gonna be able to cover it.

He's like, what am I doing wrong? And sure enough, I looked at his job profitability sheet, which listed out all of his projects, the revenue and the gross profit of each of his jobs. And sure enough, he was in the black, he was making money. And I explained to him this one thing.

I said, look, you could be profitable on every job, but if you're not paying attention to this one metric, you can go bust. And let me explain what that is. You have project A and you have project B and you're running a construction company.

And let's just say the contract value for project A is 100 Gs. And for me, it's 100 Gs, all right? So from a contract value standpoint, it's the same. But then we have gross profit.

And remember gross profit represents how much profit you're earning on your projects after accounting for material costs, your direct labor costs for your supers, for your foreman, for your laborers, everybody who's doing the work, putting in place the work. And then you have subcontractor costs and then other direct and indirect costs associated with doing the work. So it's gross profit before your overhead, okay? So let's just say you're earning a 50% gross profit margin on project A and a 30% profit margin on project B. Which one would you rather have, A or B? Okay, let me just illustrate this a little bit further.

In dollars, just so you know, I'm not tricking you. So gross profit dollars, that means 50% of 100,000 would give you 50 grand in profit, gross profit that is. In project B, 30% times 100 grand would be 30 grand in gross profit.

All right, going back to my question, which one would you rather have, A or B? Now you're probably thinking, Steve, you're gonna trick me here because it can't be that simple. And there's gotta be some type of catch, right? Well, guess what, there is. Because there's one piece of information that I'm not including.

What do you think that is? Okay, drop that down in the comments. What do you think it is? What am I missing here? What am I leaving out? Because this is where a lot of construction companies get into trouble. And I'm gonna show you what that is here in just a minute.

But they will look at their jobs and they'll measure things from a gross profit standpoint. Sometimes they'll do net, but remember you have overhead and that's a little bit more complicated to allocate overhead to your projects when you're doing job costing. So they just stop here at gross profit and they're like, what's the big deal? We're making $50,000, right? We have a 50% profit margin, way better than 30.

What's going on? When I was a CFO of a billion dollar construction company, one of the first things I did is I did this analysis on all of our jobs. And we thought we were losing money on retail jobs when we were building brick and mortar stores. And we thought we're making all this money in healthcare.

But guess what? When we started accounting for this one metric, all of a sudden our entire go-to-market strategy changed, our whole business development efforts changed, everything changed. Our bidding strategies, everything changed. And guess what? So did our bottom line.

Our bottom line went up. So that's what I want you to do in your business. So check this out.

Let's say the number of hours right here are given to you. And in this example, it's gonna take 5,000 labor hours to do this project right here, okay? And then let's say this job right here is going to take us 1,000 labor hours to do. So then if we take our gross profit per hour, and we do the math, $50,000 in gross profit divided by 5,000 labor hours, that gives us $10 in gross profit per hour.

Over here, we have $30,000 in gross profit dollars, and it takes 1,000 hours. So 30 divided by 1,000 gives us $30 per hour. Now, which project would you rather have? Now, some of you, maybe like Steve, profits profit.

And not a CEO say that once to me. He's like, Steve, profits profit. Why does it matter if we earn 10 bucks an hour or 30 bucks an hour? We're still making $50,000.

Isn't that $50,000 to the bottom line? And that's the flawed thinking that exists with construction companies. That's why that one owner who came to me was about to go bust. It's because he wasn't recovering his gross profit fast enough.

In other words, let's say you came to me and I said, tell you what, I'm gonna give you a job in my company. I'm gonna pay you a million dollars in salary. And you're like, wow, where do I sign up? Heck yeah, I'm in.

I said, okay, cool, sign right here. You sign the offer letter. I just locked you in legally to be my employee for a certain timeframe.

I forgot to tell you that it's for the next 50 years. Well, now all of a sudden you're like, well, dang, that's not a good deal. So it does matter.

The time element matters because the time value of money, a dollar today is worth more than a dollar in the future. And we need velocity here because guess what? What if our overhead per hour was, let's just say 20 bucks. And I'm keeping it really simple because you're gonna have multiple jobs going on most likely in your business, right? So it becomes more nuanced, but let's just keep things really high level here so you understand this point.

If you're doing this and you're pursuing project A's and you're only earning 10 bucks per hour and your overhead's 20 bucks, guess what? You're losing $10 per hour. So eventually you will go bust unless you have additional capital to put in the business. Here, you're making net positive 10 bucks an hour, right? Because you have 30 bucks an hour, you're covering your overhead, you have 10 bucks left over.

Velocity matters, folks. Can I call this right here throughput? I wrote an article on this years ago for the Construction Business Owner Magazine. And I've talked about this at multiple conferences across the industry, at the CFMA, the AGC, in other places, in other venues in construction.

And I cannot emphasize this enough because more companies go bust because they're not paying attention to this. Very simple, you can implement this right now with your estimators, right? In your company, you can start tracking how much is your estimated throughput. And then out in the field, you can set targets and communicate what is the target or the minimum threshold throughput per hour.

Now, sometimes I'll just do revenue per hour because when you're job costing, there's a lag, right? You go out there, you do the work, you have to account for all the materials, turn that into accounting, and then it takes them a while to spit that out. So if you wanna keep things really high level, you can look at your revenue per hour and you can just pursue jobs that have a high throughput. And when I did that, like I said, with the construction company where I was the CFO, we realized retail actually had a super high throughput.

So sure, healthcare had higher fees so we could charge more as a GC, but it took forever to close these jobs out. And since the closeout process was so long and the tail was so long, we were burning through cash. And I don't want that to happen to you.

So that's throughput, this is how it works. If you're interested in this and you wanna talk more about how this applies to your business or how to calculate this and put in place the right KPIs for your construction company, go to coltivar.com. We'd love to explore this more. But that's what I have for you.

Until the next video, be sure to take care of yourself. Cheers.