By Sal Alfano Slippage measures the difference between estimated gross profit and produced gross profit. It's a fancy term for losing money. All remodeling companies experience slippage, and while most would be happy to stop the bleeding at 2%, the typical rate is 5% or higher. Instead of establishing a benchmark for slippage--the obvious but unattainable target is zero--it's more useful to explore its causes and cures.
By far the biggest source of slippage is the inability to complete jobs within the hours allotted. The main culprit is an optimistic estimate in the hands of a company owner who misremembers how long the work really took back when he was still in the field. Unit price estimates aren't exempt because they don't always take into account the logistics of having a crew on site all day. "It might be a case where it's a five-hour task, but the carpenter is going to be at the site for eight hours," says Steve Maltzman of Builder Accounting Services in Redlands, Calif.
Poor communication between sales and production is another cause, and again company owners are their own worst enemy. "You have to be suspicious of an owner who's doing sales, because owners don't package well," says consultant Linda Case of Remodelers Advantage in Fulton, Md. "Bringing production into the sales and estimating process can help, but carpenters are reluctant to complain to their boss about it."
Lead carpenters aren't off the hook either. While they provide more realistic hour estimates, they assume ideal conditions. "Typically, he could do it in that amount of time," says Tom Swartz of J.J. Swartz Co. in Bloomington, Ill., "if he wasn't pulled off, if all the materials were there, if nothing was damaged or missing."
In larger companies, there's blood on the hands of commissioned salespeople as well. "A lot of salesmen just include the big deals and not the smaller deals," explains Walt Stoeppelwerth of Hometech Information Systems. "Salespeople don't always understand that some things cost more money or take longer to do." Commission systems based on gross revenue are partly at fault, because there is no accountability. As an incentive to produce more detailed estimates, many companies are switching to commissions based on produced gross profit.
Some carpenters control slippage better than others. "The thing that has affected it more than anything else is who is running the job," says Robert Criner of Criner Construction in Yorktown, Va. "Is the lead carpenter properly matched to the job or are we putting him on a job that is not his forte?" Another factor, particularly for companies with a large backlog of work, is price escalation for subcontracted work. "The job I'm estimating today won't start for six months," says Criner. "Depending on the trade, it may be seven months or more before he does the work. Of course his price goes up." Criner's solution is to bump up his contract price based on how far out the job's start date is.
The Skinny on Slippage
What is it? The difference between estimated profit and profit actually earned.
How is it measured? Track job cost and review variance reports at least monthly (weekly is ideal). Break down costs by task to pinpoint problem areas.
What causes it? Inaccurate or incomplete estimates. The usual suspects are company owners whose labor estimates are overly optimistic and salespeople motivated by commissions and not held accountable. Experienced field people typically estimate more accurately but tend to assume ideal working conditions. Other causes include price escalation from unforeseen delays, change orders, or work backlog.
What cures it? More detailed, comprehensive estimates that account for delays and less than ideal circumstances. Estimators should be held accountable for job outcome. Lead carpenters or production managers who review estimates must have authority to make changes to labor hours. Owners should review job cost reports at least monthly for larger ongoing projects and should use historical job cost reports to adjust future estimates.