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Creating a Results-Oriented Construction Team

January 26th, 2012 by

Use these guidelines to develop winning bonus and incentive programs.

Every year, business owners face the decision of what to do about year-end bonuses. Some have an incentive compensation formula they attempt to calculate. Others use simple bonus plans. Many just do not know how to keep their employees happy and reward those who contributed to the overall company success.Surveys show that as many as 50 percent of all construction and manufacturing companies offer some form of bonus plan, and another 33 percent have a pay-for-performance incentive program. Company owners always ask which structure works the best and how to implement a program to get the biggest bang for their buck.

What Kind of Bonus Program Works?

There are four basic kinds of employee recognition, bonus and incentive compensation programs for employees. They include thank-you awards, gifts, incentive compensation and profit-sharing. The one you choose for your company is dependent on your overall goals. Many business owners are overly generous, think they have to give bonus checks at year-end and want to give their employees extra money whether the company does well or not. But without an incentive compensation program that everyone understands, does handing out bonus checks motivate employees to work harder, build teamwork and result in the extra bottom-line profit?

You can set targets and goals for each project or key employee, and if the goal is met, attach an extra cash reward. Or you can attach bonuses to a percentage of the net profit your company makes. This requires you to show all profit-sharing participants your financials. Giving out money based on an arbitrary formula that employees do not fully comprehend is nothing more than a gift. For example, if you arbitrarily decide to give all of your project managers $5,000; foreman $2,500; field workers $1,000; and office workers $500 as their year-end bonuses, will you get them to work harder next year? No! Will they appreciate the bonus? Some might, while others will think it isn’t enough and complain to their peers. To make matters worse, they will expect the same or more next year, whether or not your company makes any money or achieved better results than the previous year.

Bonuses without a required performance level are nothing more than gifts, which deliver goodwill and/or frustration. Profit-sharing tied to performance makes everyone in your company focused on hitting the targets you want to achieve: growing your customer base, increasing productivity and  profit, acquiring more referrals, improving customer service or safety and producing on-time delivery.

Consider these questions when deciding which bonus program to implement. What happens if your company has a great year? What about a bad year? What if all of your employees worked hard to achieve spectacular results, but one of your customers went broke, did not pay and caused your company to lose money for the year? What if some foremen always finish their jobs under budget, while others continually go over budget? How do you reward your best foremen and project managers who are assigned the most difficult projects and do an incredible job that only breaks even? What about a field superintendent who can get a project going quickly but takes forever to get the punch-list completed? Or what about a field operator who does a good overall job but has an accident and destroys a large piece of company equipment?

Thank-You Awards

The No. 1 employee motivator is recognition and praise. People want to know they are doing a good job and want to be shown on a regular basis that they are appreciated. I recommend you set up an ongoing company program that recognizes everyone frequently for doing a good job. Many companies use a “do it right” awards program in which managers and supervisors are encouraged to give out weekly awards when their employees are caught doing something right or going beyond the call of duty.

This program works well when supervisors recognize a few of the team players at weekly meetings. During the meetings, the supervisor acknowledges and recognizes people who did something commendable, helped the team achieve their weekly goals or accomplished tasks ahead of schedule or under budget. After the person is recognized, the supervisor gives him/her a “do it right” award, and everyone cheers for the winners. These small recognition awards can include gift certificates to restaurants or hardware stores, cash, company hats or shirts, tools, lunch dates with the boss or even an hour off with pay. The key is to make these awards fun and a part of your exceptional work environment to motivate everyone.

Gifts

Creating a comprehensive incentive compensation program takes a lot of work and is hard to implement. The easiest bonus program to implement is a gift program in which the award is arbitrary and based on simple formulas or no formulas at all. Many companies successfully use this system until they grow and can begin properly administering an incentive program.

Some gift bonus programs can be arbitrary. At the end of the year, the owners decide how much money they want to distribute to employees as year-end bonuses and split it up based on what they think about each employee’s contribution to the overall company results. Some companies pay out amounts such as one-, two- or three-weeks pay per employee. This system is simple and easy to manage. You can reward some or all of your employees under this program. As these bonuses are arbitrary gifts, they are not expected, and the amount should not be anticipated by employees. However, if this system is used over many years, employees become accustomed to the extra money and count it as a part of their entitled compensation.

You can also tie this gift system to performance by creating personal, project or company targets or goals. For example, if the company achieves certain revenue or profit targets, the employee bonuses can jump from one- to two- or three-weeks pay accordingly. Other bonus triggers for project performance can include an additional week’s pay if the project is completed on-time or under-budget. Conversely, if the project finishes late or over-budget, the pay bonus can be deducted from the annual bonus amount for that employee. Other ways to boost performance can include a week’s pay to reward customer satisfaction, quality workmanship, safety achievements or overall company improvement.

If the economy or company performance does not warrant or allow for an extra bonus gift compensation, make sure you fully explain the situation to all of your employees in a company meeting. Open up the discussion to explore ways to improve results.

Incentive Compensation

Over one-third of companies use some form of earned incentive compensation. When employees know what is expected, participate in achieving these goals and are rewarded for hitting their targets, everyone wins.

At the project level, I encourage you to create incentive compensation programs based on the area of responsibility the manager or supervisor controls. For example, the project manager of a general contractor controls the contract, customer communications, contract awards and the overall project profit. Project managers can receive a percentage of the overall project profit earned or the extra profit gained by their tight job management. Field superintendents control the schedule, workmanship quality, field manpower labor productivity and equipment usage. Therefore, their incentive compensation can be based on factors they control. For example, if they finish a project ahead of schedule, they can receive a percentage of the costs they saved.

Many subcontractors reward foremen based on hitting their job labor/manpower budget. The foreman reviews the bid estimate for labor hours and agrees to bring the project in at a targeted number of man hours. If the foreman achieves this goal, he can receive from 1 to 5 percent of the total man hours as an incentive compensation bonus for bringing the project in on budget. If the foreman brings the project in under the man-hour goal, he can receive an incentive compensation bonus from 10 to 25 percent of the hours saved. These percentages vary by company, trade and project difficulty. In some programs, the foreman splits the incentive compensation with the crew members as well. The key to making these field incentive programs work is to meet with your foreman every week for an in-depth review of the man hours expended by work task versus the project goal or target as the job progresses.

Profit-sharing

Many companies are moving toward “open-book management” that allows every employee to see and understand the company financial results and participate in the overall company profits. Some companies include only upper management in this form of profit-sharing and financial disclosure. For smaller companies or family-owned businesses with fewer than 50 to 100 employees, only the owner, division managers and key management team members see the financials. The management team receives a profit-sharing bonus based on the overall company performance.

A simple profit-sharing program that works starts by setting an overall annual target for revenue and net profit. In a construction company, for example, the management team can include the owner, president, vice presidents, business development manager, CFO or controller, chief estimator and senior project managers. You can add or reduce your executive management team depending on your company’s structure. These management team members receive their incentive compensation based solely on how well the company performs. Each team member receives one equal share of the total net profit-sharing pool available for distribution. This way each person is equally responsible for achieving the desired results for the company, and everyone works together as a team.

Some companies set their minimum net-profit goal at a 10- to 15-percent return on the company equity. Other companies set their annual net-profit goal at 20- to 30-percent return on the annual overhead budget. When the minimum annual net profit targets are hit, each management team member receives an equal share of the net-profit incentive pool earned. For example, if the company’s equity is $1 million, the minimum annual net profit goal might be a 15-percent return on equity, which equals $150,000. For hitting this net profit goal, the management team will receive a percentage (such as 25 percent) of the $150,000 net profit (or $37,500 total) to be split among the team members. If the company net profits are larger than the minimum goal, the management team can receive a larger percentage of the additional net profit earned.

As your company grows, you will need to reinvest most of the profits back into the company. This allows for expansion and increases bonding capacity and reinvestment into people, tools, equipment and technology. Be sure that the profit-sharing programs leave enough profit in your company to allow for steady growth.

How to Eliminate Turnover in your Construction Company

January 23rd, 2012 by

Did you know that turnover is the most expensive invisible cost contractors suffer?

How does turnover cost you money? Let us count the ways:

1. Lower productivity
2. Lower quality
3. Missed deadlines
4. Time wasted interviewing
5. Time wasted processing the paperwork
6. Time wasted training new employees
7. Poor customer service

Now, I am not referring to the type of turnover you create when you jettison a bad worker. That’s pruning, and it should be done. I am talking about the turnover created when your good employees walk out the door never to return.

Think about how hard it is to find good workers, union or non-union. If finding good workers is so difficult, how can you afford to lose the ones you’ve got?

Every time a good worker walks out your door, you should imagine dollar bills on fire. When one of your good workers leaves, a little bit of your profit walks right out the door with him.

To solve the problem, become an employer of choice. An employer of choice is a company that employees are eager to work for. An employer of choice gets his pick of the litter when it comes to hiring workers. Rarely do good employees walk away from an employer of choice.

What makes a company an employer-of-choice?

  • -Management respects the employees.
  • -Management has realistic expectations of employee performance.
  • -Management sets employees up for success.
  • -Management holds non-performers accountable.
  • -Management pays employees fairly.
  • -The sales staff keeps the backlog full of good work.

Since turnover is a sign of extremely unhappy employees, have you ever considered where there is high turnover, there probably remains several unmotivated employees. These employees are picking up paychecks without producing any significant work.

Solving the turnover problem often solves the low productivity problem. The two go hand-in-hand. For that reason, employers-of-choice usually end up with highly motivated and highly productive crews.

Here’s another interesting tidbit: Employers-of-choice almost never pay above market wages. Recent studies have shown that employees will join and stay with companies viewed as employee-friendly even though they could get 10 percent more working for another company. There’s a deal that’s hard to pass up. Imagine having crews that are more productive yet work for lower wage rates than your competitors.

Turnover is a cancerous problem. Unfortunately, most contractors choose to live with the problem instead of investigating and solving the problem. That’s a very expensive mistake to make.

How to Encourage Your Employees to Consistently Improve

January 19th, 2012 by

What incentives encourage employees to continue improving?

Have you ever felt like you are the only person in your company who cares about bottom-line results, pleasing customers, and making a fair profit? Damian Lang, owner of Lang Masonry Contractors, Inc., had those exact thoughts the first few years he was in business. However, Lang later realized he needed to change this way of thinking to continue growing his business.

Lang founded his company by laying brick and block throughout central Ohio. In a decade, he grew his company into one of the largest masonry contractors in the United States. His company grew to more than $20 million in sales through the boom years and continues to maintain a steady flow of business.

Lang accomplished this growth by establishing systems that hold employees accountable for achieving their expected job results. Lang Masonry is now building some of the largest, most prestigious masonry projects throughout Ohio and beyond.

CONDUCT TACTICAL MEETINGS

Lang’s management style includes daily tactical morning meetings to discuss immediate job issues, weekly manager meetings to review every job’s performance, and monthly crew meetings with the foremen and field workers to talk about safety, quality and job productivity.

CREATE OPEN-BOOK FINANCIAL SYSTEMS

Lang Masonry uses an open-book financial system to involve everyone in achieving company goals. To keep the company successful in a tough economy, Lang updates every company manager’s future total sales and markup goals to accomplish gross and net profit margins. Each manager has to understand what it takes at the job and company level to be profitable and keep the company growing.

INCREASE PRODUCTIVITY

“People do not work for your company, you or their boss – they work for themselves,” Lang says.  When workers say, “No problem, I get paid by the hour,” it means the time it takes to do the job does not matter to them because they know they will get paid regardless. Is this the attitude you want from your employees?

When people get paid for what they produce, they produce more. And when they produce more, your company can continue doing more with less.

It is also discouraging to employees if the owner retains all the profits. If your productivity goes down, your job costs will go up, plus your estimating labor rates per work unit will increase as well. This causes your field job costs to increase, making your company less competitive. The only way to win any new work under this scenario is to lower your markup and make less money than you need to prosper.

To increase profitability, unit-based pay is the best approach. You simply take your bidding rates for labor, and break them down into the hours it takes to do the work.

MEASURE WORK PERFORMED

When workers know exactly how many units must be installed each day, they will do anything necessary to get the work done. For example, Lang Masonry employees know exactly how many blocks need to be installed every day. The estimator counts the number of blocks or bricks in the job. Then, he assigns a labor rate on top of the material costs to calculate the final bid. When the job starts, the foreman knows how many days it will take to finish the job. Converted to blocks per day per crew size, each crew member then works together to complete the job at or under budget. The crew gets paid based on a dollar-per-block-rate, which means the more blocks installed, the larger their paychecks become.

This system requires the foreman to count actual installed results at the end of each day and keep the project manager, superintendent and crew informed of daily progress until the job is finished. This keeps the field crew and individual workers accountable for achieving results. Workers get paid only for what they install, which also keeps jobs on budget with very few labor overruns. Plus, the overall labor bid rate becomes more competitive over time as crews learn more efficient ways to build projects.

This method also keeps workers focused on results. Most company incentive plans are based on work completed several months ago. But workers cannot relate a year-end bonus check to work they did nine months ago. By knowing daily results, the crew can make adjustments and keep jobs on track. If the job goal is to install 1,000 blocks per day, and the crew only installs 800, their pay is reduced accordingly.

MAINTAIN SAFETY AND QUALITY

Successful contractors maintain a safe working environment and produce quality work. A pay-for-performance system is not complete without including provisions for maintaining safety and quality. Each of Lang’s jobs has a designated safety person responsible for maintaining the safety program on every jobsite. An effective safety program results in no lost-time accidents or safety violations. Lang’s crew is compensated accordingly for these expected results. The entire crew’s daily pay is reduced to cover any issues that occur – accidents, violations or costs associated with safety problems. This encourages the crew to work together.

Lang’s incentive pay programs also reward crews for no callbacks, no punch-list items, and no closed-job repairs. When employees care about these details, it generates big returns, lowers field costs and makes your company more competitive. If quality issues arise at Lang Masonry, the same crew that built the project is required to fix the problem. These repair costs are then deducted from the crew’s pay. This keeps the entire crew focused on doing excellent work and reduces closed-job costs.

LEARN FROM OTHERS

In addition to installing systems to motivate his employees, Lang continues learning himself. Learning from other successful companies allows you to grow and build a better company. Lang is involved in a contractor peer group that meets several times per year. Talking about business operations and challenges with other contractors allows him to learn from their successes and failures. Now we can all learn from Lang’s success.

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