Many business leaders in construction worry about winning jobs, but sometimes a lost bid is a bullet dodged. How do you know which projects will generate profits and which ones are better avoided? According to Hal Macomber, Executive Vice President at Touchplan and expert Lean consultant, asking a few simple questions before taking on a project can make a big difference on your balance sheet. The key is to take a project’s profit rate into account, in addition to its duration and size. Read on for seven tips for more profitable projects.
Profit at the Project Level
The first step is to identify the rate at which a project will make money (also called the profit velocity). Macomber illustrates the concept with an example scenario. “If you have a ten-month project that is going to make $200,000, your profit velocity per month is $20,000. And if you’re looking at two projects you might realize that you only have the staff to do one of them. One of them is a $200,000 job and the other is a $250,000 job. You might immediately think that you should take the $250,000 job. But wait a minute. What’s the profit velocity? The first project is ten months, so that profit velocity is $20,000/month. The second project is twenty months, so that profit velocity is $12,500/month. In this case, it’s actually a worse deal to take the job with the higher profit.”
In addition to profit velocity, there is another key factor to consider: the resources required to deliver a project. Larger and more complex projects will require more senior staff, whereas junior staff can gain experience on smaller, more straightforward projects. While the smaller project may have a lower total profit, it might end up costing the company less to execute, depending on the resources available.
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