Improving Pricing and Cost Control for Electrical Sub-Contractor
A micro-sized electrical subcontractor (pseudo-named ABC Electrical) that engaged with the Innovation Driven Procurement (IDP) project recognised that the business was struggling with profitability challenges. Following a mentoring meeting as part of the innovation challenge phase of the IDP project, it was established that ABC Electrical was not pricing work properly during the tendering stage and did not have any cost monitoring system in place to track profitability during the delivery of their works. ABC Electrical allocated a consultant to provide coaching support by reviewing their current systems, producing templates and guides to assist them with pricing and tendering and providing the training required to help them in pricing for profitability during tendering and implement a cost-value reconciliation system for monitoring profitability during contract delivery.
Prior to the innovation challenge support, the director of ABC Electricals would just add a percentage for overheads and profit (OHP), say 20%, but never calculate his overhead as a director who also worked ‘on the tools’. Thus, all along, they had never captured the overhead expenses of running the business into the pricing for their works in addition to the anticipated profit. Following the support provided, ABC Electricals’ biggest change in terms of tendering was understanding how to price overheads and separating this from profit. Since the director also works on the tools as an electrician alongside all the administrative duties to secure new contracts and run the business, he was coached to calculate his overhead cost and to include himself in it at 50% with a view to increasing this over time to 100% when he has worked his way away from the tools to grow his company. He could then apply his profit percentage on top of the overhead percentage. The director was also coached on how to vary the profit percentage to win work whilst being a sustainable company, all of which have now been implemented.
The support provided on pricing work properly has resulted in increased profit. The Director for ABC Electrical explained on a recent job quoted at £6,700, he had now made £1,700 profit as against the £500 he would have made previously. This is a 240% increase in profit resulting from adequate pricing.
A set of standard templates, with assumptions for the electrical trade, was produced to enhance ABC Electricals’ tender presentation, with training on how to amend these to fit individual tender submissions. This has now been implemented by ABC Electrical with the impact of reducing the time taken to tender for work whilst improving the chances of winning.
ABC Electrical was also coached on cashflow analysis and Cost Value Reconciliation (CVR), with all the standard templates produced for implementing these in Microsoft Excel. These were to help them manage the cashflow requirements for existing contracts whilst keeping track of profitability. Once these are set up for every active contract, could easily be updated on an ongoing basis until the works are complete. However, the director of ABC Electricals has yet to fully implement these two systems due to time commitments since he still works ‘on the tools’ as well as runs the company with partners that work on the accounts and admin. The support provided has enabled the director of ABC Electricals to understand the commercial requirements of running a sustainable business and is now working towards a point where he can free up time to manage and grow the company in a profitable and sustainable manner.
This case study illustrates that an innovative process is not only that which is new to the construction industry but can be a process that is new to the firm implementing it for the first time to generate productivity benefits. This is particularly the case for micro, small and medium-sized firms in the construction sector. Since ABC Electricals had never implemented any pricing and cost control process in the business, this was a new process and new learning for them as an organisation.