Better Roads Staff
If we are looking for a single metric for success in current and future projects it may well be cost efficiency. This applies both to the cost of the work itself and the actual cost of the funding, both overhead and capital.
“If you look at the cost structure for [heavy highway] contractors there’s really three areas where they can probably have some impact in terms of control and cost,” says Scott Kimpland of Raleigh, N.C.-based construction management consultants FMI. “Clearly, for these guys, equipment management and utilization is a huge percentage of their direct cost, and so just becoming a lot more proficient in terms of how they manage their equipment costs and utilization is a big factor for these kind of contractors right now. And the other side to that is the labor productivity – just how productive are they with labor and equipment?”
Kimpland points out that this industry relies a lot on overhead, and “we truly believe you need to manage overhead and be in control of that and be mindful of it. But when you look at the bottom line opportunity, if you’re just focusing on managing overhead you’re stepping over dollars to pick up pennies because the equipment costs and labor costs are a significant portion. Contractors have to be much more focused on improving productivity.” Today, he says, “where margins are tight, jobs are not forgiving, so the ability to manage at or better than your estimated cost for equipment and labor, that’s really the key to these businesses and if they can manage the labor cost and equipment cost on each job then they tend to do pretty well.”
If contractors can increase their productivity 10 percent – “which we’re finding is very doable” – the bottom line impact of that … is a game changer.
Safety, says Kimpland, is something roadbuilding companies have managed very proactively, “but what’s interesting is very few of them put the same emphasis and focus on managing productivity and equipment cost and utilization, and there’s a huge economic impact if they do that.” In many cases, Kimpland cases, if contractors can increase their productivity by 10 percent – “which we’re finding is very doable” – the bottom line impact of that, or just the initial competitiveness it gives them on bid day, is a game-changer. The amount of labor and equipment cost these companies incur is substantial, he says, “and so when you start to tweak that by 5 or 10 percent it adds huge economic advantage to [their] business.”
George Reddin, managing director of investment banking at FMI, says in the current economic environment, company financial strategists may have to deal with fewer options for movement. “As times got tougher in the early years of the recession,” he says, “the first step was we had backlog from the good days and so that covered us through maybe the first twelve-plus months of the so-called recession. Then we may have gotten a little bump with a little bit of the stimulus work – not much because it really substituted for projects that from the state level were shelved. But you got through the first year or two with those things. Then you had some cushion in your balance sheet from the good years and you ran through that. Then you divested some excess equipment because you didn’t have the same volume, and you propped yourself up. Then you renegotiated your debt and you sat down with your bonding company to get some relief and now you’re out of options. If this continues I think we’re going to see some problems that we haven’t yet really seen.”
Both Kimpland and Reddin say a vital factor for companies in today’s economy is a really accurate understanding of the cost of doing work.
As the recession dragged on, they say, a lot of companies, under pressure to get work and to keep their equipment busy, took on unprofitable work and were well into such projects before they realized that the price they were getting for it was lower than they had estimated. Knowing your actual cost, knowing all the numbers, they say, is critical for companies, whatever their bid strategies. And, equally, they suggest, agencies must be just as confident of their own estimations and completely understand funding mechanisms lest they too find, midway into a project, that the numbers are wrong.
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