Every year you start with a target bottom line and build a plan to achieve it. And every year tens of unexpected twists and turns – both in your control and outside of it – put that plan (and your bottom line) at risk. So how do subcontracting executives build a plan that is flexible enough to handle the bumps in the road?
Kyle Follett, VP of Finance and Administration at SPAAR, has developed his own strategy to maintain a pristine bottom line, and it hinges on something he calls “trigger points.” He uses them to monitor the key variables of his business so that he can act before something hurts the bottom line. Billd asked him to unpack how trigger points work and how you can use this strategy yourself.
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What Are Trigger Points?
A trigger point tells you when a variable in your business – like the number of projects per PM, or the cost of materials per job – is crossing into the “danger zone.” It’s a bit like monitoring cholesterol or blood sugar. Up to a certain number, everything is fine. Past that number, you’ve entered dangerous territory and need to start making changes.
For Example: Let’s say you have a PM who manages projects totaling to $2M in revenue every month. Easy. But then you land another project, then another, and now they’re shouldering $4M in revenue. Already strained, the PM pipes up and says there’s no way I could add to my workload without sacrificing work quality. You should confirm this anecdotal evidence by asking them to support their feedback with data like timecards and struggling KPIs. If you confirm it, at that moment, you could set a trigger point. $2.5M in revenue is the max you want any PM to take on at a time. This ensures you’re never compromising quality, and that you’re respecting your employee’s limits. If you don’t have enough PMs for the work you want to take on, then by the logic of the trigger point, you hire more or don’t proceed.
Trigger points require predictability. You have to be able to reliably predict how much something usually costs, how often something needs maintenance, how much time something is supposed to take. Your trigger points must be based on objective, quantitative metrics that you have pulled from historical data. By defining those standards, you can establish when a variable is deviating from them. Whenever the deviation gets intense enough to cause trouble, it becomes a trigger point. It’s a way to flag when something is costing or taking or consuming more than it’s supposed to.
3 Real-World Examples of the Trigger Point Strategy
There is no hard and fast list of triggers every sub should monitor, especially with the variation between trades. Each subcontracting business should define its own key metrics based on business needs.
However, these are the KPIs, trigger points, and example responses that Kyle Follett uses at SPAAR construction. You can take this framework and apply it to your own KPIs.
Revenue per Employee:
How you get it: Divide total revenue by the number of employees, or divide department revenue by the number of employees in that department, if applicable.
Example: If you find that your company operates well when revenue per employee sits at $1.5M, then a figure like $2M may be your RPE trigger point. Although more revenue sounds good in theory, in this context, it means your team is operating over capacity. However, if you find that your RPE dips toward $1M, this could mean the exact opposite – you’re under-capacity and can take on more work.
Why it matters: RPE can tell you whether you need to increase or downsize your team, or increase the amount of work they do. As your business grows and you seek out new contracts, keeping an eye on RPE ensures you’re not overburdening your team with a workload they can’t handle, while also ensuring you’re not overstaffed and/or underworked on projects.
How Follett responds when the trigger point is hit: After the example $2M trigger point is hit, Follett could justify hiring more people. However, that doesn’t mean you should just throw new hires at the problem or sign new contracts until the KPI evens out again.
You want to consider:
- The capacity of each employee, new and old
- Increases in capacity per employee as your team gains new skills, equipment, or experience
- Whether new employees can truly handle the workload or will just burden your payroll
- Whether you need to work with other subcontractors instead of new employees
Overhead % of Revenue
How you get it: Divide overhead by revenue to get the overhead percentage of revenue.
Example: Follett tries to keep his company’s overhead percentage in the ballpark of 10% or lower. Anything over this amount is a trigger point, alerting him that he needs to change something to increase the efficiency of his business. Under this amount, the company is healthy and may even be able to shoulder more overhead expenses (or investments) if need be.
Why it matters: Overhead is of course a catch-all for a million different expenses, but what they have in common is their predictability. Compared to the variable, direct costs of a project, overhead is more or less fixed. This makes it easier to control. If the percentage compared to revenue gets too high, you can take it as a sign that there’s either been a change to your fixed expenses – maybe your building rent has gone up 15%, maybe you’ve approved several simultaneous salary bumps in your C-suite – and all of a sudden, the overhead percentage is getting unmanageable. If you don’t monitor overhead this way, you risk it eating into your gross profit.
How Follett responds when the trigger point is hit: If the overhead percentage is higher than where you want it to be, you can look for any areas where fixed costs, like rent or salaries, have increased, and weigh the option of downsizing some of your fixed expenses. Because these costs are predictable, you’ll have a better idea of where you can afford to trim down.
On the other hand, you can also increase your project load to offset the increase in overhead, which will also help you get that overhead percentage down.
If the percentage is lower than expected and the company is still healthy and performing well, it may be a sign to adjust your trigger point. This needs to be continuously monitored, because the variables that affect overhead are always changing.
% Material Cost per Project
How you get it: Divide the material cost by the total budget of the project.
Example: Past projects can help you set a benchmark for how much materials should cost on particular types of project. Historical data may tell you that materials should cost roughly 30% of your budget on a project. Therefore, anything greater than 30% would be your trigger point.
Why it matters: Follett believes that subs should establish a maximum percentage that materials cost within the budget. Using the 30% trigger point, if you notice a project went as high as, say, 60% for materials, you’ll know you either greatly undercharged for your services, or more material than necessary was used. A bloated % cost of materials will cut into your gross profit, so you’ll want to get to the bottom of why you chewed through that extra material.
How Follett responds when the trigger point is hit:
To get the material percentage down:
- Use the past to predict the future. If there are patterns in the market you can anticipate, then increase your estimates to compensate for the growing material cost
- Leverage your supplier relationships and share your business goals with them as a way to encourage them to offer you better deals
- Shop out your material needs to different suppliers
- Train up your employees on how not to be wasteful with material
- Revisit historical data and market conditions to reevaluate the accuracy of your KPIs
According to Follett, every department in your company should set their own trigger points.
How Do You Set and Monitor Trigger Points for Construction KPIs?
Collaborate with your team to:
- Define what business variables should be monitored with trigger points.
- Decide what the trigger point numbers will be for each variable you want to monitor. This should be a long, involved process, because different people will have different opinions. For example, for trigger points that relate to the amount of work that the company can feasibly take on, the estimator may have a different idea than the foreman. Poll a wide range of employees to get a rich picture of your trigger point ranges.
- Build a dashboard, likely in Excel or your chosen software, where you can view this information, and ideally have some information auto-populate from different sources.
- Set your ideal meeting cadence to discuss trigger points. If you meet to discuss it too infrequently, it may mean missing the point at which something gets triggered. But you always want to avoid death by meeting. Weekly is a good starting point.
Many trigger points are only as good as the flow of information from the field to the office. Make sure you’re always finding ways to strengthen this flow of information, to maintain the integrity of your trigger points.
Can Trigger Points Change?
It depends on the trigger point, but yes, it wouldn’t hurt to revisit your triggers periodically to make sure they still make sense for your business and growth stage.
For Example: If you did $15M last year, and have $15M anticipated for just the first 6 months of this year, you can probably immediately flag that as a project load trigger point. However, other factors may affect whether or not it truly is. Maybe your PMs were new last year, and this year they have a better grasp of how to do their job. Their capacity to do work has evolved. The same goes for your crews. It doesn’t mean the $15M is feasible, but you still may have stronger capabilities than you did last year. This is just one example, but it illustrates how the variables that affect a trigger point can change over time, and should be revisited to make sure they reflect those changes.
Should You Use a Specific Software to Manage Trigger Points?
If you already have software on deck that would be great for monitoring your trigger points, then go right ahead. However, Follett offered a recommendation. Power BI is a Microsoft Data Visualization tool that he characterized as “extremely powerful.” It allows you to pick information running through your system and create detailed reports. The dashboards are updated every 2 hours and everything can be assembled at the click of a button.
Pro Tip: Beyond using the right software for your business, “the best thing your finance person can do is be a jack of all trades, to not only understand the numbers, but how we got to the numbers. To employ a serviceable, top-level understanding of how projects are completed.” Follett says. “Work with your team to build something meaningful to position the info they need.” Follett says.
The financial health of your company depends on being careful, deliberate and using strong internal processes. Trigger points are an excellent way to maintain good financial and operational hygiene, and ultimately protect your bottom line.