How to Become an Operationally Superior Subcontractor

A study from FMI Corporation found that 32% of time in the field is recoverable lost time.

Read that again – 32% of time in the field is wasted.

For subcontracting executives, wasted time is poisonous to a project. It means lost productivity, and that erodes your bottom line. Construction productivity consultant Luke Matelan has built a playbook on how to actively combat poor productivity. He maintains that productivity, unlike so many other factors, is squarely within a subcontractor’s control. By zeroing in on productivity, subs stand to double, that’s right, double, their bottom line (if not by more). Billd hosted a Subcontractor Meetup and invited Matelan to share that process with a group of over 150 subcontracting executives from across the country.

How Labor Productivity Impacts Your Bottom Line

The typical sub’s profit & loss statement includes a massive labor expenditure, which, unlike material and equipment costs, is more within the subcontractor’s control. Below, you’ll see an example P&L sheet from a subcontractor with $50M in revenue each year who spends $20M on labor. This sheet shows a gross profit of $7M, with $2M left after overheard is taken out. That amounts to a 4% net profit, which isn’t uncommon for most subs. According to Matelan, the average trade makes 3-4% net profit before taxes, but he stresses that “operationally superior” firms make 2-3X this amount.

Now, let’s play around with some of these factors and see how the profit is affected. Matelan set the stage for 2 different scenarios:

Scenario One: Double your net profit 

• Labor productivity improves by 10%
• Revenue is maintained at $50M
• Overhead is maintained at $5M

In Scenario One, a 10% improvement in labor productivity amounts to $2M saved, bringing total labor expenses down to $18M. That $2M goes straight into the net profit, doubling it from its original figure to $4M, or 8%

Scenario Two: End the year with 0 profit

• Labor productivity slips by 10%
• Revenue is maintained at $50M
• Overhead is maintained at $5M

In Scenario 2, a productivity slip by the same amount of 10% does the exact opposite. It adds $2M to your labor expenditure, which wipes out your $2M profit in its entirety. Matelan knew one sub who this happened to a lot. He broke even each year, and hadn’t paid out employee bonuses in 3 years. That dampens morale, and is a great example of how inefficient productivity practices can strain your entire culture and organization. It’s not uncommon for subs to break even like this, but that doesn’t mean it has to stay this way.

How to Improve Labor Productivity by 10% and Double Your Profit

So what does a 10% improvement in labor productivity look like?

It looks like 48 minutes a day saved. That means just 6 minutes per hour, per crew, company wide. If you can commit to that, you can double your bottom line.

Below, you can see what small improvements in productivity do to the bottom line in different amounts:

The next most important question: How do we save 6 minutes per hour?

It starts with breaking down what goes on within that hour. Matelan’s employer, FMI Corp, has gathered thousands of data points on job site productivity, and they’ve found that for the average crew, their time looks something like this.

• 40% is “Primary Time” – Installing units correctly, and doing it right the first time.
• 28% is “Secondary Time” – Planning, strategizing, and otherwise coordinating how they’re going to handle their next move, which is just as important.
• 32% is “Recoverable Lost Time” – Waiting for any number of things, like tools, materials, or just general downtime spent not working.

Recoverable Lost Time usually amounts to 2 ½ hours each day. In other words, there’s plenty of room for improvement. Saving just 6 minutes of that per hour will have a tremendous effect on your bottom line.

The 5 Key Drivers of Productivity and Project Performance

Matelan maintains that there are 5 key drivers of productivity and project performance, and when they’re working in conjunction, they help you control risk, manage resources, and save those 6 minutes, if not more.

They are:

1. Pre-Job Planning

Matelan can’t stress enough how critical this phase is. “It’s where all the money is made,” he says. If you are going to focus on any of the six processes, start here. Most jobs experience profit erosion within the first 20% of the project, so it’s vital that you prime the field and project for success with solid pre-job planning.

• The Objective: Get the project out of the hands of the estimating department and over to the people who have to do the job. You want this to be a robust handoff meeting where you communicate to the field all the little deals that were cut, and agreements that were made in the leadup to the project.
• Who’s Involved: The Foreman, Project Manager, Estimating Team and the Field
• What You Are Doing: Have the foreman and PM work together to create a budget, and not just assume that the estimate will serve as a built-in budget. Matelan believes that isn’t a best practice. “Take the estimate and actually break it down into usable cost codes based on how the job is actually going to get built – allocating different hours to each cost code,” he advises. This is best when the foreman and the PM can do it together.

A good goal to set for this meeting is to identify any write ups and write downs on the budget. If your estimating and operations teams find opportunities to work smarter and make more money, great. If you find that the estimate is broken in some capacity, still great – you found the problem early and have plenty of time to recover.

• Pro Tip: This shouldn’t be a box checking meeting. Matelan once sat in on a prejob planning meeting, only to find that they were doing little more than going over phone numbers and points of contact. It needs to center on the foreman and the PM thinking through how they’re going to blow that estimate out of the water. That means thinking strategically on everything from budget to your change order process/philosophy.

2. Short Interval Planning

A short interval plan is a plan of attack for the next three weeks of work, updated every single week, and submitted to the PM and superintendent. This forces the project team to think ahead and be proactive instead of rolling with the punches. From there, the office can get them what they need and eliminate any roadblocks. 

• The foreman’s plan should include: 

• • Expected Production:
    • Schedule milestones
    • Tasks that need to be done, in order of operations
      • Duration of those tasks
      • Expected productivity built into those tasks
    • Resources needed:
      • Labor
      • Crew
      • Materials
      • Equipment
  • Location
  • Expected Challenges
  • Current Issues
  • Other Notes to the PM
  • Plan B work
    • The best laid plans can change. It pays to have a Plan B for what the crews can work on if something happens that prevents them from doing the work the foremen initially set out to do. This way, it doesn’t just become recoverable lost time. Keep the job productive.

3. Daily Huddles

In this huddle, there are three different attitudes most foremen adopt, and Matelan has given them some creative names:

• • The 500-pound Gorilla – The foreman has key things they need to communicate to the crew, but he or she drags their feet, is passive and doesn’t address the issues at hand.
  • The Drill Sergeant – The foreman is straightforward in how they issue the plan and fire off orders. The problem here is that it creates doers, not thinkers. It’s straightforward to a fault. There’s not enough collaboration or ingenuity.
  • Hall-of-Famer – The foreman not only lays out the plan to the crew, but takes a collaborative approach and gets the crew’s ideas. This gets buy-in from the crew, and creates thinkers, not just doers.

• Your foreman can start with these questions:

• • How did we do relative to yesterday’s goals?
  • What are the goals today?
  • Do we have what we need for tomorrow and the remainder of the week?
  • What do we need to think about today to keep everyone safe?

If you run daily huddles like a hall of famer, every person, on every crew, will know the plan every day and start thinking like a foreman.

4. Exit Strategy

The last 10% of a job can make or break your margin. When AIA analyzed over 890,000 construction contracts, they found that change orders increase 4-5x at the end of projects, which is representative of how much more chaotic the back-end of work can be. However, it’s important not to lose steam, and rediscover that same push toward planning and organization that you had at the beginning of the project.

What Not to Do:

Below, you’ll see a typical project graph showing a project’s percent completion over time. The dotted lines show where the project is 100% complete, and where the project date ends. In theory, the project should end where the 2 dotted lines intersect, that way you finish 100% complete and on time. But what happens too often is that projects look more like what you see below that, where they overrun the time and hover just below 100% complete. In doing that, they lose time and erode margin. Not to mention, they’re dealing with a ticked off owner or customer.

What to Do Instead: The Kick Finish:

What Matelan wants to see you do is the “Kick Finish.”

That means: 

1. Call a timeout as you near the end of the project.
2. Get the foreman, super and PM to go out with the owner and inspectors and figure out everything you still need to button up so that you can get the project done.

The progress then shifts, looking like a miniature version of the curve at the beginning of the project. That proactive focus on regrouping with the project owners about how to close out will make a huge difference in your ability to get the job done and dusted. The goal is to punch out just once, not 3 times. You want to get off the job and onto the next one.

The graph will look something like this:

5. Post-Job Review

This is the art of revisiting the job you just did and reflecting on what you learned. Matelan describes it as the most skipped step. Most people have a “Phew, glad that’s over” mentality, preventing them from going back and taking a long, hard look at what they learned. He likens the post job review to football players watching game film on Monday so they can see what they did well and what they did wrong.

A post-job review consists of the following steps:

• It might be tempting to skip reviews on really bad jobs and write it off as one-time mistakes, or even really good jobs, because there were limited errors to reflect on – but don’t do that. Conduct a review for all projects.
• Take the time to capture important cost information. Specifically – did you hit your budget? Why or why not?
• Share the best practices you gather in future trainings and lunch and learns.
• Focus on the controllable and influenceable. If it’s fully out of your control, don’t spend much time or brainpower on it.

If you don’t fix the mistakes you made on one project, they’ll resurface and bite you on the next one. That said, mistakes are learning opportunities. They provide information on what to avoid to have a better, sharper process in the future. In this industry, there are going to be costly, tough mistakes, but the post-job review is where you turn those mistakes into something valuable and become a learning organization. This is also the best time for the estimating team to get feedback on how they did, so that they can refine their numbers and rates for the next project.

What Is Your Role in This as a Construction CEO?

Higher productivity and increased profits start with you. The processes above will only be as effective as your ability to shepherd them and sell them to your team.

Here’s what you need to know:

• This requires a significant investment of time and money.
• It’s not something to mention to your PM in passing and throw on top of their work pile. It means taking hours off their plate to allow them to focus on this initiative.
• Buy-in from the field is critical. Some of these initiatives involve more documentation and effort, so they have to understand why it’s not just a paper-pushing waste of time.
• It’s on you to provide consistent, frequent updates to your team as you implement this process. If they’re being asked to change, they may resist, but if you’re consistent, it shows you’re serious about truly making this change.
• Your margins won’t lie on whether or not you’re executing this process successfully.
• Embrace new technology and software to amplify this process.

Remember that you work for the field. It’s where the money is made or lost. As a leader, your job is to put the field in the best position to have a successful project. When you do, the results will be undeniable.