Situation: The CEO of a company is wrestling with issues concerning change orders and high labor and materials cost. To get back into good financial shape, they are considering options including reduction in estimator time and selling equipment; however, either of these could gut the business. How do you manage through a difficult period?
Advice from the CEOs:
- It is critical to get on top of change orders. This is potentially a big profit-loss swing for the business.
- Does everyone understand what’s happening?
- If the answer is yes, teach them more about the business nuts and bolts so that they can help develop solutions? Share a portion of the savings in the form of spot bonuses for those who develop solutions.
- Take a lesson from The Great Game of Business. Let employees know about the challenges and challenge them to help develop solutions.
- As an example, look at change orders and the percent of change orders that are not correctly completed, approved and invoiced as a critical number. Let’s say that 50% of change orders are not completed, approved and/or invoiced correctly. The objective for the year is to reduce this to 25%. Calculate the value of lost billings from the past year. If this can be reduced by half, the value will be $X. If the company can meet this objective, consider making half of $X available for distribution as gifts or prizes.
- To support this, allow each new project to design its own minigame to reduce the number of incomplete and uninvoiced change orders.
- The idea is to have the project and inside teams design the minigames and come up with ways to reduce incomplete and uninvoiced change orders. They will learn new ways of being more efficient from this process. This is the long-term benefit to the company.
- If it is necessary to reduce staff, cut early instead of later. This is painful but laid-off employees can be hired back on a contract basis as necessary.
- A common solution during a difficult period is to cut back to core, reducing overhead as a survival strategy, and focus on winning as may bids as possible to rebuild the business.
- Look at all departments and the gross margin that each produces minus the overhead that each requires. Focus cutbacks on those that are not positive.
- Increase annuity contracts – contracts with major companies that are growing and frequently require the company’s services.
- Transfer equipment to a separate corporation. Lease it back as business requires. This increases cash flow flexibility – for example, don’t make lease payments when cash is tight.