Managing Backlog Is a Must
It’s easy to assume
as a contractor that the more backlog you have, the better off you are. You
may think that a large backlog of projects is a sign of continuing financial
health and a vote of confidence in your company by property owners and
developers. In fact, you may believe that a large backlog is as good as
money in the bank. However, that’s not always the case. What’s more
important than the size of the backlog is your ability to manage it
effectively.
Filling the Jobs Pipeline
Obviously, no contracting firm wants to find itself with an empty jobs
pipeline. You may have been in that position in the past and felt pressured
to take on any kind of project simply to cover your overhead. As a long-term
strategy, however, taking on jobs just to cover your expenses is not a
recipe for financial health.
While a sizeable backlog of projects is certainly a testament to both your
reputation, as reflected through referrals, and to your staff’s sales
skills, too many jobs in the pipeline can create its own set of problems.
For example, you risk alienating your customers with delays when you take on
more jobs than you can handle in a timely manner. What’s more, there’s a
real danger that your crews and your finances will be stretched too thin if
you overestimate your capacity for additional work. Growing too quickly
without the systems and personnel in place to handle the increased workload
can actually threaten the solvency of your business.
Finding a Balance
Determining the level of backlog your business can comfortably handle is a
key to keeping your customers satisfied
— and it’s critically important to
your business’s financial health. In general, you’ll be within industry
norms if you have a backlog of six to twelve months.
You’ll be better able to reach and maintain an optimal level of backlog if
you pay attention to the following issues:
Analyze the Risks Before You Bid
Before you submit a bid on a job, analyze how each project will affect your
financial resources, liability exposure, personnel levels and scheduling
needs. These factors need to be weighed against anticipated profitability.
Pay particular attention to cash flow. Do projections to identify the jobs
that will strain your firm’s liquidity
— even if they appear profitable on
paper. If you anticipate cash flow problems, take steps to negotiate
favorable terms with your suppliers and lenders in advance.
Don’t forget to take a close look at your current staffing levels. Are they
sufficient to handle all the jobs that you are bidding on? The success of
any project will depend largely on the ability of your project manager to
deal with personnel constraints.
Meet with Customers Regularly
Once a customer accepts your bid, it’s important to maintain regular contact
with that customer, especially in the pre-construction stage. It’s an
opportunity to make sure that you are both very clear about what the project
entails. It gives you a chance to clarify design, material, cost and
scheduling issues and to prevent potential problems or delays from
materializing. Regular meetings reassure the customer of your company’s
professionalism and help manage expectations. The meetings also make it more
likely that you’ll start and complete the project according to the
agreed-upon schedule.
Keep an Eye on the Bottom Line
Always monitor the progress and the projected profit of an ongoing job. When
you identify under-billed jobs, bill them quickly, as provided under the
terms of your contract.
Work-In-Process is provided by
Somerset for our clients and other interested persons upon request.
Since technical information is presented in generalized fashion, no
final conclusion on these topics should be made without further review.
For additional information on the issues discussed, please contact
Ken
Hedlund,
Jay Feller,
Steve George,
Chris
Mayfield or
Rebecca Ogle
of our
Construction & A/E Team.
This document is not intended or written to be used, and cannot be used,
for the purpose of avoiding tax penalties that may be imposed on the
taxpayer.
Somerset CPAs,
P.C.
3925 River Crossing Parkway, Third Floor
Indianapolis, Indiana 46240
317.472.2200 • 800.469.7206 • FAX 317.208.1200
www.somersetcpas.com
