Revenue growth and constriction are natural parts of the construction industry’s annual cycle. Each year, CFMs consider the current workload, backlog, and budget to determine if they can hire more workers or need to let staff go.
It’s important to be able to gauge how well a contractor’s staff is managing its workload. Are employees overworked and making consistent errors in performance? Are there grumblings of being underpaid and unappreciated? Or worse, are they underworked and overpaid? Finding the right balance requires an engagement on a personal level that is often not afforded and typically difficult to measure.
Managing Fixed Personnel Costs
The costs associated with professional staff are typically connected to the fixed portion of general and administrative (G&A) and overhead costs. These costs are set regardless of revenues and direct costs and also impact net profits dollar for dollar.1 In order to maintain (or increase) net profits, CFMs must balance the appropriate workload with the fixed costs associated with personnel.
Problem 1: Waiting Too Long to Scale Back
One of the hardest management tasks is to let go of good people, particularly those in whom you’ve invested and especially those who bring the right attitude and work ethic to the team. Discharging good people not only means that they likely won’t return, but also that they will face some personal hardship as a result.2 However, if the process of scaling back is delayed, then profits can suffer, which can be dangerous in times when every dollar counts.
During downward times, the construction industry often uses a step-down method to adjust fixed costs. (See Exhibit 1.) Unfortunately, this step-down process is often delayed to the point of exhausting reserves and decreasing liquid assets, which makes it more difficult to recover when revenues trend upward.
In an effort to recover some of those lost profits, CFMs might let some staff go – a move that may not have been necessary at first, but eventually becomes imperative. The result is a depleted staff that may be overworked and feeling stretched thin. The danger now is losing more staff because of the perception of a downward spiral and concern for lack of resources for merit increases, year-end bonuses, or cost of living compensation.