A new client bet me that he could increase his gross profit margin from 24% to 28% in six months. Laughing, I told him that it couldn't be done — in 15 years of working with remodeling companies around the country, I'd never seen anyone capable of increasing their field efficiencies to that degree in that short of a time. Six months later, after pouring through his financials and job cost reports with a fine-toothed comb, I paid up.
He did it by using the “1% solution”: He made small but consistent changes in threeimportant areas over time.
The chart below shows the effects of a 1% change in income, direct job costs, and overhead expenses. ( You can download this spreadsheet here.) Notice that net profit differs dramatically based on where the change is applied. A 1% increase in income creates a 7% increase in net profit, while a 1% decrease in overhead only increases net profit by 1%. But applying that 1% across all three variables boosts the bottom line by 13%.
So where do you start? Increasing the contract price on future jobs by 1% should be a “no-brainer.” Decreasing job costs might be another matter. Look to greater control on materials purchases and charging for every change order. Manage labor productivity through the use of one-and two-week look-ahead schedules that are specific to each job and that define materials and subs needed to complete the planned work. Reducing overhead costs by 1% requires a focused look at current overhead expenses. Give your office manager the task of finding that 1% over the next month and updating the annual budget to reflect those changes.
The lesson is clear: Apply the 1% solution consistently and watch the bottom line climb. — Judith Miller is a Bay Area construction business consultant and trainer specializing in accounting, finance, and computerization.