Profit fade occurs when a company’s profits are less than expected due to the dynamic nature of the roofing business. A company’s initial calculations for extraordinarily complex and time-consuming projects may not match up in the end, leading to profit fade.
Sometimes profit fade is linked to external factors; like many businesses are currently experiencing, such as price increases in materials. Other factors can be wrong estimates, poor subcontractor performance or unbillable changes. Even unpredictable weather can cause profit fade if there is not a good contingency plan in place.
Monitor profits and costs during the length of a project. Work with your project managers and accountants collaboratively and adapt to issues as they arise.
■ Early downward cost estimate adjustments. Take time to review project costs to gain more control and achieve greater consistency in construction costs.
■ Aggressive upfront bidding can lead to underestimates of costs, job delays and poor execution.
■ Change orders can be costly if a client decides to delay or change some aspects of a project. Avoid this by allowing the client to select all features of their project upfront.
First, know the common causes of profit fade, especially those that can affect your revenue-earning operations. Recall past experiences and previous projects. This can give you a list of ideas. Knowing and understanding common incidences can help you
prioritize pressing threats to maximize your return on investment.
Examine the most pressing threats to estimate how they can impact your revenue-earning operations. Estimate the impact of potential threats by using a combination of your previous experiences coupled with an understanding of the business environment.
This allows you to devise numerical estimates to identify the amount of time and effort you will need to mitigate such threats.
Establish a thorough review process to accomplish, detect and manage profit fade. This will help you assess your finances and
improve your business process moving forward.
Evaluate your estimating procedures and have another management-level employee review bids to ensure all costs are covered. Review your projection methods on a regular basis to ensure you are getting the best results.
Review various types of projects representing a cross-section of your business and review estimates by comparing figures to actual costs. This will help you determine if your proposed gross profit is attainable.
When reviewing estimates, be sure you have included man-hours and materials and make allowances for inclement weather.
Consider these questions before going out to bid and eliminate profit fade:
1. What methods are you using to allocate overhead to jobs?
2. What situations could cause job delays?
3. Are you accurately assigning job costs?
4. Are you spending an appropriate amount of time reviewing bids?
5. Are there recurring problems with jobs?
6. How will change orders affect your overall profitability?
7. Are you analyzing why your profits are less than anticipated?
Seek help from a third party if you are unsure about how to assess the current environment and the perils it may present.
Due to the complexities of so many construction projects, you need general contractors and project managers with the experience and expertise to oversee your operations and produce accurate estimates. You need leaders who can put their estimates and your
plans into action, who know well the expenses and costs of each project. It is pertinent that your team be able to forecast where you may experience profit fade and find ways to compensate for those losses or increase revenue elsewhere.
Be sure to keep an open dialogue with your project managers and their team, as this will be beneficial when it comes time to look for ways to cut costs. Work closely with your accounting team during each project to make sure you are on budget and funds are used in the most optimal way.
A good project manager will manage costs and people on the job efficiently to avoid profit fade. Your estimator can also be a source of profit fade if their bids are too optimistic or too aggressive. Look at whether low bids are the reason for any lack of acceptable profits.
A gain-fade analysis is an excellent tool for specialty trade contractors to analyze job performance. Most companies prepare work-in-progress schedules to determine where a project stands on profitability. Conduct a gain-fade analysis to evaluate gross profit
trends on your projects over multiple periods for a more in-depth look. The analysis focuses on the year-to-year differences in total estimated and actual costs for each job. It helps you determine if there are any substantial patterns. Seeing the differences in your gross margin from year to year helps avoid profit fade.
Remember, a high-profit fade can diminish confidence with lenders in your ability to estimate and manage jobs, so it is essential to analyze your potential for profit fade by ensuring your estimating process is in great shape and all costs and risks are assessed
before you submit bids. If you need help, reach out to a third party with the expertise to analyze your risk and potential threats that can drag you down.
John Kenney has over 45 years of experience in the roofing industry. He started his career by working as a roofing apprentice at a family business in the Northeast and worked his way up to operating multiple Top 100 Roofing Contractors. As CEO, John is
intimately familiar with all aspects of roofing production, estimating and operations. During his tenure in the industry, John ran business units associated with delivering excellent workmanship and unparalleled customer service while ensuring his company’s
strong net profits before joining Cotney Consulting Group. If you would like any further information on this or another subject, you can contact John at jkenney@cotneyconsulting.com.
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