Jacob Austin 00:00:17 Hello. Hello Jacob Austin here of QS.Zone. And welcome to episode 55 of The Subcontractors Blueprint, the show where subcontractors will learn how to ensure profitability, improve cash flow and grow their business. Today's episode is going to be about cost reporting and why it's important for your business to carry out cost reporting on a regular basis, and I'll cover the reasons why in just a moment. But if you're new to the show, please do subscribe for more user friendly advice on all things subcontracting. So the reason for this episode it's prompted by a conversation with somebody that I used to work with quite a lot. And this guy runs a multi-million pound company, and in spite of that turnover, he never seemed to really get very far. Now he'd had a couple of companies that actually went into liquidation, and thankfully he was able to re-set up and start trading again and provide himself his necessary income. And I recall him telling me a long while ago about the business that he first started with and how successful that business was for him, to the point where he's driving the flash car, he's living in the nice house.
Jacob Austin 00:01:26 He's providing well for his family, his wife and kids, as well as his dad, who actually worked for the business. And things had gone rather swimmingly for him. He negotiated his first few jobs and he carried on working for one particular contractor doing project after project over a period of over a decade. And at that point things started to go downhill, not because of his own fault, but because the company that he'd had that long standing relationship with was bought out by another company, and that company sucked much of the cash out of the business. And over a period of what was about two years, they basically ran it into the ground to the point where it went under, and that had a colossal effect on his company. He lost hundreds of thousands of pounds worth of retentions that had built up over quite a long period. And not only that, but he was working on three current jobs for them and the payments that he would have been due from those jobs never landed. So overnight he couldn't carry on paying for most of his staff, and he basically had to write off that business and start again.
Jacob Austin 00:02:29 Now, luckily, he was shrewd enough to have set up a separate plant hire company. Yes, you're guessing it's the growing worker which thankfully owned a lot of his assets. So a very short time later he was able to start trading again, and he built that business itself into something reasonably profitable. But he never quite reached the same heights that he had done before. And ultimately that next business was involved in what was a bad job for him, where he ended up causing some delays to the main contractor running the site, and they basically held him accountable. And country charged him for quite a significant sum of money, which really rocked his business. And a short time later that one folded as well. And before you start asking me, what does that got to do with cost reporting? We will get to that in just a second. So roll on a period of a couple of months. And a third iteration of his company is now set up and trading, and he's going about running his business in the same way that he'd always known how to.
Jacob Austin 00:03:27 He's negotiating jobs with 1 or 2 organisations, and those organisations keep him in a steady stream of work. The issue with that, though, and why he's only recently seemed to turn a corner in his business, is because when he was negotiating his projects, he would be using the same stock set of rates to build up his prices. From that, he'd been used to any set up, his first business, and you can imagine the period of time in between those two companies running is quite significant, and all of the inflation that has happened in between just wasn't being factored in. And so gradually over time, he's eroding his margins. He's working really, really hard, but then never really making any progress. And just to add to the comment about the rates. He would go out and get current rates for the likes of his concrete, his kerbs, his manholes. But it was more his labor and plant rates, which he hadn't altered since he first started trading back in the mid 2000. And slowly over a period of years, he's ended up in a position where not only is his margin eroding away to nothing, he's actually struggling to make his projects pay just to cover their own costs.
Jacob Austin 00:04:37 And now I covered cost reporting back in episode 12, right near the start of the show. And what I primarily focused on in that episode was reviewing the costs that you'd had in a given period, or perhaps the cost to date, marrying up that cost against the amounts that you are being paid for the same period, or by that same time to work out whether you're making your project pay or not. And had he been carrying out that simple exercise that I outlined, which involved assessing what you'd paid for to date and taking into account that some of what you've bought might be sitting in stock on site or stock in your yard, contrasting that against the value that you've earned to see how much profit you'd made, and at the core of any kind of cost report, that is what you are doing. You're comparing what you pay out against what you're being paid. Now, I had my friend carried out that simple exercise, even just for a couple of his gangs on site, where he knew precisely what he would have, quite quickly being able to answer whether he was making enough money or not.
Jacob Austin 00:05:40 And he would have used that information to then tailor his rates for his next project. And that perhaps would have prevented him maybe even from going bust the second time around. But certainly it would have set him on a better track to being more profitable and being able to sustain the lifestyle that he had previously enjoyed. And for today's episode, I'm not going to rehash that exercise. It's still there on episode 12. It is quite a powerful and simple tool for you to be able to check your profitability, but rather today I want to talk about forecasting, because the process that I spoke about in episode 12 is more about assessing your cost so far, and using that as a means to try and identify issues that you've got on a particular project. But you could say that that is more of an accounting procedure than a forecasting procedure. And if we think about that for a second and what it means to actually account for something, we're talking of past events, we're talking of Mr. Bobby turning up at your front door and saying, Mr. Austin, could you account for your whereabouts on the 27th of March? And just as an aside, if that ever happened to me and I had to come up with my whereabouts on a particular day and time on the spot, I think I'd shit my pants because in spite of having quite a good memory, I can recall conversations, meetings and actions.
Jacob Austin 00:06:59 I can't correlate those memories back to a particular date. Certainly without looking in the diary. I wouldn't even know if that was a weekday or not. A trusty Google search tells me that that was actually a Wednesday, and in fact not any Wednesday, but Manatee Appreciation Day. Who knew that was a fucking thing? So the chances are I could account for that fairly easily by reference to my diary and perhaps a quick trawl of my emails to prompt the grey stuff into action. But getting back to the point, cost reporting is very much more than just a simple accounting procedure, because we're not just interested in what has gone before us and how much money we've made or lost. To date, we're interested in the forecast. We want to know what's going to happen next. So then we're looking at why do people do forecasts and going back to that good old British favourite of the weather that nobody seems to be happy with, whether it's hot, cold or otherwise. We tune in daily to weather forecasts because we want to know whether we need to pack the umbrella, or whether we need to put the suntan lotion on.
Jacob Austin 00:08:04 Yes, if it's one of those 2 or 3 days in the year where the sun stays out for the whole day. But think about that in the context of your business. We're trying to forecast whether it's going to rain tomorrow so that we can plan what we need to do about it. It's about informing mitigation and helping you to prepare for what's going to come. It helps you to develop a strategy to move your business forward through a particular project, to hopefully meet your financial target for that project come the end of the job. And I mention an analogy in episode 12, which I'll repeat here, and that is a quote from Stephen Covey's book, The Seven Habits of Highly Successful People. Now, he states in that book that during a typical flight, the plane is actually off course for 90% of the time. And what he's meaning by that is there is a planned route that you're going to take, and all the while the plane is encountering different issues, so it's got different temperature of air to fly through.
Jacob Austin 00:09:02 It's got crosswinds, headwinds, bits of cloud and turbulence, which regularly will knock the plane off its given course. Now, if the plane was just accounting for its own whereabouts and that's all it had to do, then there would never be a problem because it would always know where it is by a simple look out of the window. Alright, you might have to be some kind of navigation guru to identify exactly where you are thousands of feet in the air. But the important thing is that that flight has a destination, much like your project has a destination of the financial goal that you want to achieve by the end of it. If the plane didn't have a forecast, a destination, then you might set off from Birmingham Airport and find yourself landing in Switzerland instead of Spain. And all right, you might enjoy the view of the Alps, but you're going to miss those warm sandy beaches and cocktails with little straw hats. And for your business, you're potentially going to miss out on making that target margin.
Jacob Austin 00:09:57 And who knows where you might end up instead, hopefully not Switzerland. And so all along the way, the plane is making these micro adjustments veering a little bit further north to fight the wind, veering a little bit further south to keep it heading in the right direction. And that is precisely what we need to achieve by forecasting how our jobs are performing. We need to be able to identify when something has had a bad effect on our job, and if it carries on happening where we're going to end up. And without doing that, you're then losing out on understanding the big picture so you're not able to effectively mitigate any issues. You're not able to effectively prepare for what's coming next. And that is the key difference between accounting and forecasting. The accounting is there to tell you where you are today, and it is a vital part of putting your forecast together, because if you don't know where you are, you don't know what you need to do to get to where you want to be. But forecasting is all about where you want to end up tomorrow.
Jacob Austin 00:10:56 And what you're trying to do is to create a clear picture of where that is. So you want to factor in your labor rate. Once you've got a bit of learning about how long things are taking you. Is it matching up with the production that you expected when you put your tenure together? And if you continue to use the same labor rate that you're using at the moment, what does that do to your end outcome? Does it earn you an extra percent? Does it lose you an extra percent or two? And the same for your materials? You need to factor in all of your procurement results from your materials purchasing, and then monitor your usage so that you're clear on what your final cost for your materials is going to be by the time you get to the back end of the job, and by the time you get to certain points of the job, you should be able to pick out trends if you're wasting a high amount of a particular material, is that because one of your gangs on site is being particularly wasteful with it, throwing away bits of cut material that could then be reused for something smaller? Have you got lots of repetition across the project? So if you're working on a housing project, you've obviously got multiples of plots that have got the same layout and are likely to encounter the same issue, but the same often happens in a lot of commercial buildings.
Jacob Austin 00:12:07 You'll get a same particular room type that repeats itself multiple times across a project, but a particular kind of classroom, meeting room, changing room, or whatever. If you're encountering issues in one of those, it's costing you more money. Can you avoid that future costs from happening, or are you going to have to replicate exactly the same thing, in which case you need to factor that into your forecast. Have you got fixed price arrangements with your products and when those fixed prices expire? Do you have a handle on how much your price is going to go up by? And if you don't have a handle on it, then perhaps you can include an inflation allowance, even if it's just an arbitrary number or percentage, it's helping you to build up a picture of where your account is going to go. You need to factor in an accurate representation of your progress, and how long it's going to take for you to finish the job, because all of your time related costs, unless you find a way to reduce them at a point in time, are going to run on likely until you finish the job.
Jacob Austin 00:13:06 And this can sometimes be a tricky one, because you don't want to be overly pessimistic, because then it just shows that you've lost a load of money, but you don't want to be too optimistic either, because that might prevent you from seeing the real picture. And if you create that blurry vision of where you're going, then you're going to miss out on the potential opportunity to do something about it. And that is what the forecast is for. Going back to that plane analogy, it's helping us to identify where we're off our route so that we can try and do something about it. And so then the next point is to start looking at where you can take those corrections and how big those corrections need to be. So that means starting to look at your options. So what might they be. You might realize that you're overrunning time wise, and your time related costs are going to hurt you. And you can use this as a pointer. The fact that you're overrunning now bears some investigation, so you can start looking into what has changed.
Jacob Austin 00:14:02 What are the things that are causing me to lose time on the job? Am I being disrupted? Am I being asked to do a lot of variations on my recovering the right time for variations within the build up to those changes? Is it that I've just underestimated how much time it's going to take, or not allocated enough resource to get the job done as quickly as I needed to? Have I got a more substantial site set up than I need? And when you've got that understanding of where things might be going wrong is when you can start making adjustments for it so you can make sure that your variations are including that element of prelims cost to cover your extra time on site. You can try and see if your labor allocation can be increased so that you can finish earlier. You can look at when you need to taper off certain prelims items, or when you can do without them to mitigate the loss. Maybe you're flagging up, you're losing too much money on materials, and so that might prompt you to assess how much material is being wasted to see if there's a problem with that.
Jacob Austin 00:15:02 Or you might be using more material because you're doing variations that you haven't been told about, and then you're identifying an opportunity to charge more money. And you can hopefully use that to set the scales straight. And sometimes when you're looking into your costs alongside your forecast, the thing that's causing you the pain is just something that you can't do anything about. But then you may be able to look at other areas to say, maybe I can get hold of a better performing laborer, or maybe I can renegotiate my materials. Maybe I can save a couple of pounds per square meter by switching suppliers. Maybe a new supplier might be willing to forgo the upcoming percentage increase on materials costs in return for securing your business for the next year or two. And it's up to you how far you go with this. Sometimes it's a matter of you've just got to turn over all of the stones to see which one is hiding the treasure. And sometimes you might just decide that nothing can be done about the situation, but by doing the exercise, you can start learning from it.
Jacob Austin 00:16:03 You can start improving tomorrow's tender because of the information that you've gathered today. By understanding what has gone before, you can set yourself on the path towards a more profitable future. So I hope you've taken something away from today's episode. I'd love it if you'd share the show and pass that value on to somebody else who could benefit from hearing it. My mission is to help the million SME contractors working out there in our industry, and I'd love your help in getting my message out to the most amount of people possible. And thanks for tuning in. If you like what you've heard and you want to learn more, please do find us at QS.Zone where you can subscribe to our training and support system for like minded subcontractors. In there you'll find templates, how to videos, interviews, and more. It's less than the price of a cup of coffee per day, and you can cancel any time. We're also on all your favourite socials at @QS.Zone. Feel free to drop me a message, drop me some abuse or give me your feedback on today's episode.
Jacob Austin 00:17:01 And thanks again. I've been Jacob Austin and you've been awesome.
