Looking at Labor Productivity to Increase Profits on Jobs

by Tim Ayler, CPA
Partner, Director of the Construction Services Group

How did this happen? Average Builder, Inc. just wrapped up a $1,000,000 construction job, and realized that their job netted a profit of just $10,000, or 1%! While this may seem out of the ordinary, we have seen far too many real situations like this during reviews of various client job schedules for the year ended 2010.

Assuming Average Builder’s labor costs were 40 cents of every dollar of revenue on the job mentioned above, did you know that if they could have found a way to increase their employees’ labor productivity by just 5% (to 38%), thus lowering the labor costs, the profit for the job would have tripled to $30,000? Not all factors impacting job productivity can be controlled, such as weather, but the following are just a few ideas you may consider to improve the productivity on your jobs.

1. Determine what factors you can control to improve productivity. Some of the factors that lower productivity are employees waiting around for materials or instructions, employees taking extended lunches, employees showing up late or leaving early, material waste, safety accidents, time spent resolving punch list items or re-doing work and the double-handling of materials. Focus on just one or two factors that may be affecting your jobs and determine how you can track their occurrences and reduce them. Some methods of eliminating these problems may include increasing your training or better monitoring of your field employees. It could be better planning of jobs, or better workmanship. You will have to identify your company’s weakest areas.

2. Keeping up-to-date job cost schedules is important in measuring job profitability, but you should also determine a practical way to calculate job productivity, such as feet of pipe placed per person hour, concrete blocks per person hour or revenue dollar per person/equipment hour and compare this amount to your budgeted amounts on a weekly or even daily basis. Tracking the productivity of your labor force and equipment per job on an on-going basis will enable you to spot variances from your actual to budgeted production output. Reviewing the variations will help you determine whether there is a problem so that it can hopefully be fixed in order to help salvage some of the job profitability. Communication between the project managers and the accounting department, such as in weekly meetings, is vital to performing this analysis and resolving any problems that may be discovered.

3. Once you have determined how best to measure productivity, create written procedures for the project managers and accounting staff to track and communicate productivity for each job as it is in process.

Positive change does not happen overnight, but a continuous slight increase in job productivity can lead to large increases in job profitability. Please let us know if you have any questions and how we can be of assistance to you.