Zombies are bad. They eat your flesh and brains. Who wants THAT?!
Same goes for your construction business. There are zombies that can ruin your bonding and eat up your business – destroy profits and your credit rating. But the worst part is… it’s preventable!
Does the zombie have a name? Yes, accountants call it “Fixed Overhead.” This is a controllable expense that, if left unattended, can eat your flesh and brains (figuratively.) Let’s define the monster:
Fixed Overhead – Construction companies incur common fixed overhead costs. These are costs that do not vary with the level of the company’s output such as: accounting fees, advertising, insurance, interest, legal fees, labor burden, rent, office expenses, salaries, repairs, supplies, taxes, telephone bills, travel expenditures, and utilities.
Now consider Variable Overhead – These costs vary in proportion to the amount of production. Variable overhead mostly relates to hourly indirect labor costs, supplies and utilities such as electricity, gas and telecommunications expenses.
The danger of fixed overhead is that, during times of reduced volume / revenues, the expense does not automatically go down. This means when sales are weak, your expenses do not diminish proportionately. These bills keep rolling in relentlessly. They just don’t care!
The only hope construction managers have is to be cautious when incurring such expenses, and always work to reduce them so the company can survive the inevitable troughs that come between the peaks of activity.
Here are 40 ideas that may help reduce / eliminate fixed overhead:
- Lease-purchase options for vehicles and equipment
- Employ part-time mechanics and administrative staff
- Pay employees for use of their vehicles
- Keep equipment longer
- In unprofitable years, slow down depreciation schedule
- Overhaul facilities and equipment instead of purchasing new
- Review / quote insurance annually. Consider self-insurance or association captives.
- Eliminate overlapping insurance coverages
- Improve safety program
- Examine Workers Compensation classifications
- Consider increasing deductibles
- Eliminate over insurance, such as reducing inventories
- Deactivate, de-register and uninsure unused vehicles
- Challenge property valuations (taxes)
- Avoid the expense of audited financial statements if possible
- Reduce accounting fees by assisting your CPA
- Consider using a local CPA rather than a national firm
- Lease unused space
- Consider a smaller building
- Consider high density stacking and storage systems
- Renegotiate rent or move
- Get indefinite lease with 6-month cancellation rather than fixed term
- Pay moderate salaries with bonuses for exceptional performance
- Reduce number of management staff
- Reward managers with stock instead of cash
- Trim fringe benefits (deferred compensation, automobiles, club memberships, etc.)
- Cut managers first
- Pay bonuses to field staff first
- Pay raises based on merit, not cost of living
- Cross train office staff to eliminate temporary employees
- No vacations during “busy season”
- When hiring, seek individuals whose employment qualifies for tax credits
- Four day work week
- Charge employees for replacement tools
- Put company ID on tools, keep records
- Centralize tool storage with check in / out system
- Close dormant companies
- Consider solar panels and solar water heat
- Monitor unemployment claims
- Consider an office maintenance service instead of employing a janitor, or use a part-time after hours person
Companies can achieve better financial performance, support their bonding and banking and survive the weak years by controlling these relentless expenses.
Remember: You can’t kill a zombie because technically they’re already dead. And you can’t entirely eliminate fixed overhead either – but good managers work to control it.
KIS Surety is the national contract bond underwriting department for Great Midwest Insurance Company, a national, corporate surety with an A-8 rating. We throw all this underwriting talent at your bond opportunities and support contracts up to $10,000,000.
If you have a contract surety case that needs a fast, creative response, call us: 856-304-7348
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