Bid Deflation: How Untracked Labor and Materials Costs Eat Into Your Profits

Trade contractors worry their businesses are hemorrhaging money. In general, they have a sense of where that money is going: Labor and materials. But the untracked costs and “Why?” aspect of it escapes them. 

“Our crew shows up on time, ready to work, and they work efficiently. Where’s the extra money going?”

Or: “We know costs are high right now, and we figure that into our estimates. Why does it still feel like we’re short-changing ourselves?”

Here’s what those businesses can do to answer those questions for themselves.

Why Labor Costs Creep Upward

Timesheets alone won’t give you the perspective you need to understand and rein in your labor costs. 

Sure, they help you track the hours each person works, but then what? There are more layers of analyses to perform.

So, first of all, managing labor costs starts with organizing your construction project documentation. If those documents are disorganized or inaccessible because they’re locked away in a file cabinet, you’ll be limited in what you can do. 

But if you have your dailies, your timesheets, your proposals, your change orders, and all of the other important documents stored in a single, central location, then you have something to analyze against your timesheet data. More on that in a moment.

Next, it’s likely that rework costs are eating into your profits. As Peter Ukstins and Russell Klapperich at SDI Construction Risk Engineering note, rework accounts for 4 to 6 percent of most projects’ budgets, and the average person spends around four hours each week “dealing with rework-related activities.”

Rework tends to be a bigger issue for firms that struggle to hire qualified people. “We’re in the midst of a labor shortage, so the price of labor is high, but we have found the best way to reduce rework and save on labor costs is to hire qualified people,” Vicano Construction Ltd. Project Manager Marc Vicano says. 

“We pay more on an hourly basis, but it is worth it to get superior production rates. Using qualified people also makes predicting time to complete work more accurate, because we can depend on them to provide regular production rates.”

And finally, we see many trade contracting companies lose money because of the way they handle their change orders. Rather than building sturdy processes for intaking those orders, estimating the costs of the additional work, then assigning teams accordingly, they opt to get the work done as quickly as possible. 

We’ve written about this before: “If the change order is a small one, you may be tempted to just complete the work without a change order or charging extra for it. At the time, it may seem easier and more productive to focus on the job and keep on working. But this strategy can come back to haunt you later on down the road when you’re calculating the job’s profitability.”

What to Do When Materials Costs Go Up

There’s nothing any of us can do about rising materials costs. Those are driven by things like inflation, supply chain disruptions and limited access to raw materials.

Trades businesses can only control how they react to price changes. As with change orders, the problems begin when you try to push through rather than stop and strategize.

“It’s common for contractors to think, ‘I have some cost spikes, but I can make up for them somewhere else — I’ve been able to in the past,’” says Tim Lynch, construction advisory services manager at Grant Thornton. “This mindset can be dangerous in today’s economic environment, as the movement of future raw materials prices is unknown and could delay an important conversation with the owner on additional, unforeseen costs.”

Instead, it’s important you have a way to get up-to-date pricing data for the materials you buy. When prices get volatile, have a Plan A, B and C for managing that change. 

Otherwise, you’ll have money walking out the door and won’t be able to identify where it’s going or why.

Use Your Construction Project Data to Keep Costs Down

There’s been a theme throughout this blog post.

Companies that have a way to look at their data, stop to think carefully and then create processes for handling work are more likely to retain their profit margins. Companies that try to push through because it feels more productive to do so end up regretting that decision.

Olivia Elsher, senior writer at Renovated, recommends having a regular schedule for reporting costs, especially your material orders, site maintenance and labor costs. 

“This strategy holds your crew accountable and helps you monitor the project’s financial stability. Frequent cost reports will show you if any tasks are costing more than necessary, enabling you to make swift adjustments without delaying the project.”

Below are three more things you can do to support your cost reporting and shore up your profits.

Centralize Your Construction Project Data

Maybe your documentation is in a file cabinet. Maybe it’s on a computer in your office. Maybe it’s scattered across the dashboards of your work trucks.

Wherever it is, digitize it and store it in the cloud. This gives your whole team immediate, real-time access to crucial information whenever and wherever they need it.

Create Processes for Capturing and Storing Cost Data

This is one of the big reasons to build your centralized cloud storage.

Whenever you have recurring construction project documents — e.g., dailies or timesheets — those get stored in the cloud. Just a few weeks of data from those documents will help you track where your money is going.

Take materials, for example. You would record how much of each material you used on the job that day, mark it up with a cost code, then send that report to your cloud database. That becomes your real-time view into materials costs. “Through constant monitoring, you will reduce the chances of nasty surprises when it comes time to review your budget at the end of the project,” says DP Taylor at The Ascent.

Timesheets work the same way. If you record all of your labor hours accurately day after day, you’ll soon be able to spot trends in productivity when, say, a change order comes through. But this only works if you digitize that data. 

“65% of construction companies still use paper or spreadsheets to manage employees, despite paper being expensive, awkward and easy to make mistakes,” Jenny Snook at GoContractor wrote in 2017. Anecdotally, we can confirm that her 65-percent figure hasn’t dropped significantly since then. 

“Using online software makes it easier to manage your workers, the tasks they’re doing, the hours they are working and how much they are being paid.”

Ensure Your Contracts Have Provisions for Materials Cost Escalation

Contracts exist to protect all parties in a business deal. Use them as such.

In many construction projects, parties will include material price escalation clauses in their contracts to give the construction teams room to raise their prices if materials costs go up, too. 

“Let your customer know that without an escalation clause, your pricing, and your competitors’ pricing, will likely be inflated to protect against the risk of future increases,” attorneys Lori Wisniewski Azzara, Anthony L. Byler, Daniel E. Fierstein and Matthew Gioffre at the firm Cohen Seglias Pallas Greenhall & Furman write.

“Explain that it will be cheaper for you to bid using current material costs, knowing you have the protection of an escalation clause, rather than using significantly higher costs you might see in the coming months and years.”

Your old construction project data can help with those conversations. If you see that, historically, you tend to adjust your material costs by about 10 percent over your initial estimate, then you can show this to a GC who balks at the idea of an escalation clause.

Learn More

By having all of your construction project data in cloud storage, and by making it easier for teams to access that data, you lay a foundation for minimizing costs across the board. 

To learn more about how eSUB Cloud can help you get your data organized and your costs under control, schedule a demo today.

Images used under license from Shutterstock.com.