It's inevitable--and frustrating. Typical profit slippage -- the difference between estimated and produced gross profit--is 5% or more according to our survey. What are its causes and what can you do to prevent it?
Three major causes of...
Materials Slippage
1 Insufficient quantity of materials delivered to the site
2 Materials price increases
3 Damaged materials delivered to the site
Contracts/Customer Slippage
1 Taking costly steps to please the client
2 Numerous and/or undocumented change orders
3 Unclear contract specifications
Labor/Subcontractors/Sales Slippage
1 Production errors
2 Poor job management by production manager or lead carpenter
| Assuming zero slippage is the goal, but some slippage is inevitable, what percentage is tolerable? | |
| 2% or less | 40% |
| 3% | 22% |
| 4% | 12% |
| 5% | 23% |
| 8% | 2% |
| 10% | 1% |
3 Not asking subs to visit the site to bid and instead estimating with unit prices
What is the slippage problem you find most troubling?
"The biggest problem is disorganization at the beginning of the project and not having things written out in clear order so owners, the contractor, and production staff know exactly what's going on."
John Sylvestre, Sylvestre Construction, Minneapolis
"The estimator or salesperson -- whoever's responsible for putting that proposal and pricing together -- nine out of 10 times they're under pressure. They don't have enough time, and they roll the dice. They can't get the price quoted, they can't meet someone out there, they're under time pressure, and they don't do a thorough job because of those constraints."
Michael Strong, CGR, Brothers Strong, Houston
| What percentage of your revenue do you subcontract out? | |
| 1-10% | 10% |
| 11-20% | 19% |
| 21-30% | 23% |
| 31-40% | 19% |
| 41-50% | 8% |
| 51-60% | 4% |
| 61-70% | 10% |
| 71%+ | 8% |
"The most troublesome yet most understandable cause is that I have wonderful employees who love to please my customers. And they do all kinds of little things at my expense, and I train them to do that, to exceed customer expectations. It's a double-edged sword."
Marty Schirber, CR, Castle Building & Remodeling, Minneapolis
How can your company tolerate a high slippage percentage?
"We build 5% into every estimate for slippage, or for what we call GOK -- 'God Only Knows.' So, if we have 5% built in, 5% is tolerable. If we didn't have anything built in, none would be tolerable. We keep striving to have estimated costs mirror actual costs."
Marty Schirber, CR, Castle Building & Remodeling, Minneapolis
"We inflate our labor costs by 20%, meaning we take the actual hourly pay, plus the burden cost, plus the 20%, to offset wasted time on the jobsites. In other words, for a 40-hour week, we feel we're going to get 32 hours of actual production, so by increasing our costs by 20% on the estimate, we account for the potential slippage."
Ken Jones, Ken Jones Construction, Fairport, N.Y.
| How do you estimate subcontracted work? | |
| 42% | Get a fixed price from a single sub |
| 16% | Get a fixed price from two or more subs |
| 25% | Use subcontractor-provided unit prices |
| 11% | Use unit prices from third-party source |
| 6% | Other |
When you find slippage during a job, what do you do to stop profits from eroding further?
"Control the number of people on the jobsite and hopefully the ability to select who is on the jobsite, depending what the tasks are. If the job is large enough, possibly use more fixed-cost subs to minimize other exposure."
Fred Bueler, Bueler Inc., Desperes, Mo.
"Have the salesperson and/or crew chief go back to the homeowner and discuss any changes that might improve the situation or should be brought to their attention for additional income. Or decrease the amount of commission. One of those two is usually sufficient."
Jerry Rott, Wm. C. Rott & Son, Tonawanda, N.Y.
| What markup do you take on subcontracted work? | |
| 1-10% | 2% |
| 11-20% | 13% |
| 21-30% | 20% |
| 31-40% | 16% |
| 41-50% | 17% |
| 51-60% | 18% |
| 61-70% | 8% |
| 71-80% | 2% |
| 81%+ | 2% |
What actions do you take to prevent slippage on future jobs?
"We review each job. Our production department reviews the job as it comes in and a written explanation is required for overages or underages. There's a discussion with sales, and we go over it with the individual salesperson."
Jerry Meinert, CR, Mid-Western Builders, Kansas City, Mo.
"We update pricing or procedures in estimating future jobs. We do a job costing spreadsheet at the completion of everything. It's almost a reverse bid sheet. We're entering the real numbers vs. the estimated numbers, and it gives us our profit percentage from there."
Michael Birner, Faith Home Remodeling Services, Ellicott City, Md.
| What markup do you take on work done by your own employees? | |
| None | 4% |
| 1-10% | 1% |
| 11-20% | 5% |
| 21-30% | 13% |
| 31-40% | 18% |
| 41-50% | 16% |
| 51-60% | 18% |
| 61-70% | 16% |
| 71-80% | 5% |
| 81%+ | 5% |
