Cost Cutting: Nothing is Sacred

As segments of the construction market begin to stabilize it’s time for contractors to reevaluate their business models and take a bold approach toward cutting costs.

The most important thing for any business to do during a recession is stay proactive and not become complacent. Constantly revisit the company’s current position and evaluate what it can do more efficiently while keeping an eye on short- and long-term strategies. When the market recovers don’t resort to old habits; make sure the frugal mindset becomes a permanent fixture in the company culture.

Reducing overhead and cutting costs requires making tough choices. Approach this task with the mindset that there are no “sacred cows.” Assess every department and shed any unnecessary expenditures. Turn over every stone to truly determine whether something is needed for the company to generate cash flow. Don’t just look at what’s easy; instead look at the highest cost items first—eliminating these can create the most value.

Revisit the following areas: labor equipment and inventory and sales marketing and overhead. With a little creativity a company can better prepare the business to survive and succeed.

Labor
Even if a company has already laid off a portion of its workforce there still may be room to save. By leasing employees or relying more on subcontractors a company may be able to reduce workers’ compensation rates unemployment rates and insurance rates. However in such a labor intensive industry restructuring the workforce is a delicate matter.

To control labor costs monitor activities by being strict with time reporting and limiting overtime. Make sure employees are safety-conscious to prevent accidents setbacks and unexpected expenses. Eliminate downtime by cross-training crews to perform multiple tasks.

Before making any final decisions ensure the company will see direct cost savings and will not risk a potential loss of future revenue. Don’t sacrifice long-term success simply to achieve short-term budget targets.

Equipment
Equipment is another large expense to scrutinize. Begin by assessing the company’s current fleet of trucks bulldozers and cranes to get a detailed understanding of the value of these assets and the associated costs such as maintenance parts and insurance. Compare leasing versus buying and in-house repairs versus outsourcing. Is technology operating efficiently or is it in desperate need of an upgrade?

Rather than purchasing new try used items or extending the life of current equipment to keep expenses down. Also consider selling or leasing excess equipment that won’t be used in the foreseeable future.

When selling equipment look where demand is high to get maximum value. When buying look to slower markets where owners may be willing to unload equipment at a deep discount. Trading in old machines can provide tax benefits as well.

Inventory
The role of inventory management during tough economic times increases dramatically. Be proactive and anticipate market conditions to maintain only what’s needed. Having too much on hand adds storage and security costs. Having too little could mean missing out on potential revenue or getting hurt by shortages and price fluctuations. Tightly control and monitor inventory levels at all times.

Software programs can help codify and track trends in the consumption purchase and turnover of everything from drywall to nails. Categorize high and low value to prioritize purchases and eliminate obsolete items.

Also determine if inventory is kept in a secure location or stored at the jobsite. Security and protection from the elements are vital issues. If a warehouse is not being used to capacity sublet or rent out unused space to generate cash flow.

Marketing Sales and Overhead
It’s tempting to make deep cuts in marketing sales and overhead but it may not be wise. Review programs and assess what’s working and what isn’t. Cut programs that have no proven short- or long-term benefits and consider increasing spending for programs that achieve real results.

For maximum impact always focus on the higher cost items first and then work down. Make sure the company can gain direct value or revenue from every cut to labor equipment inventory or marketing expenses. Even when the market recovers the discipline gained here will serve the company well.

Steve Demar is an accounting principal at Kaufman Rossin. Miami. For more information call (305) 858-5600 or email sdemar@kaufmanrossin.com