Overhead Cost Management

MISMANAGED OVERHEAD IS THE SILENT PROFIT KILLER IN CONSTRUCTION In construction, poorly managed overhead can quietly erode your profits. Many think hiring more people solves problems, but often, it’s the systems and processes that need fixing. Adding more staff can actually inflate your overhead, hurting your bottom line more than you realize. Let’s break it down with a simple real example: A million-dollar project where you aim for a 20% profit. That’s $200,000 in profit and $800,000 in costs. If you start with your costs and add a 10% markup for profit and 10% for overhead, you end up with $160,000, not $200,000. Your bid now totals $960,000. Subtract your $800,000 costs from the $960,000 bid. You get $160,000. Divide that by $960,000, and your margin drops to roughly 17%. So, you’re not making 20% anymore; you’re making 17%. In construction, understanding the difference between margin and markup is crucial. This is especially true with retainage. If they hold back 10% of your $960,000 contract, you’re left with only $64,000 in free cash flow, not the $200,000 you planned for. To achieve your desired profit, calculate correctly. KNOW YOUR NUMBERS. For a 20% margin, your costs must be 80% of your bid. If you want a 15% margin, your costs should be 85% of your bid. Many companies mistakenly think they’re making 20% by adding 10% for profit and overhead. 𝗧𝗵𝗲𝘆’𝗿𝗲 𝗻𝗼𝘁 𝗮𝗰𝗰𝗼𝘂𝗻𝘁𝗶𝗻𝗴 𝗰𝗼𝗿𝗿𝗲𝗰𝘁𝗹𝘆. In the construction industry, everything is calculated from the contract value DOWN. Missteps in these calculations can cost you significantly, as shown in our example where you lose over 3% or $40,000. To accurately factor in your overhead, add that to your job costs – for example if your overhead is 10% and your job costs $900,000, add 10% to that – now $990,000 are your total costs for the job. Then, add your margin to that number in order to get a real profit number. Worried about winning bids with these calculations? It’s about efficiency and cost management. If the market operates at a 17% margin, you must be realistic about your ability to work within that margin. Sometimes, you need to bid on more projects to cover your costs, sometimes you need to analyze your costs – the project costs and your internal costs – overhead being one of them. Regularly evaluate your costs. Do this annually or semi-annually to stay competitive. Improve your systems and processes instead of just hiring more people. Effective systems and processes often reduce overhead more than adding staff. 𝗛𝗶𝗿𝗶𝗻𝗴 𝘄𝗶𝘁𝗵𝗼𝘂𝘁 𝗮𝗱𝗱𝗿𝗲𝘀𝘀𝗶𝗻𝗴 𝘁𝗵𝗲 𝗿𝗼𝗼𝘁 𝗽𝗿𝗼𝗯𝗹𝗲𝗺𝘀 𝗰𝗮𝗻 𝗶𝗻𝗰𝗿𝗲𝗮𝘀𝗲 𝗼𝘃𝗲𝗿𝗵𝗲𝗮𝗱 𝗮𝗻𝗱 𝗵𝘂𝗿𝘁 𝗽𝗿𝗼𝗳𝗶𝘁𝗮𝗯𝗶𝗹𝗶𝘁𝘆. 𝗨𝗻𝗱𝗲𝗿𝘀𝘁𝗮𝗻𝗱𝗶𝗻𝗴 𝘁𝗵𝗲𝘀𝗲 𝗳𝗶𝗻𝗮𝗻𝗰𝗶𝗮𝗹 𝗽𝗿𝗶𝗻𝗰𝗶𝗽𝗹𝗲𝘀 𝗶𝘀 𝗲𝘀𝘀𝗲𝗻𝘁𝗶𝗮𝗹 𝗳𝗼𝗿 𝗺𝗮𝗻𝗮𝗴𝗶𝗻𝗴 𝗮 𝘀𝘂𝗰𝗰𝗲𝘀𝘀𝗳𝘂𝗹 𝗰𝗼𝗻𝘀𝘁𝗿𝘂𝗰𝘁𝗶𝗼𝗻 𝗯𝘂𝘀𝗶𝗻𝗲𝘀𝘀. Scrutinize your costs and refine your processes to stay profitable and competitive.

The #1 Expense Dragging Down Your Profits (and How to Fix It) Profitability often feels like a moving target, especially in today’s dynamic dental landscape. One of the biggest, often overlooked drains on profits is inefficient overhead management. These silent profit killers can pile up over time, quietly chipping away at your bottom line. Common culprits include: 🔸 Excess inventory due to lack of tracking systems. 🔸 Underutilized staff hours that inflate payroll costs. 🔸 Unaddressed accounts receivable balances that stall cash flow. The good news? Small, focused changes can yield big results. Here are three practical ways to take control of your overhead: 1️⃣ Implement Inventory Tracking Systems: Use technology to monitor stock levels and reduce waste, ensuring you’re not over-ordering supplies. 2️⃣ Schedule Staff More Effectively: Lean on data to align staffing levels with patient demand, optimizing your team’s productivity. 3️⃣ Prioritize AR Collections: Designate a team or individual to follow up on outstanding payments consistently and empathetically. By addressing these hidden expenses, you can enhance profitability without needing to increase patient volume. Success often lies in operational discipline and strategic tweaks that lead to compounding benefits. What strategies has your DSO implemented to manage costs effectively? Let’s share ideas and elevate profitability together! #DSOProfitability #FinancialEfficiency #GrowthStrategies

𝐓𝐡𝐞 𝐒𝐢𝐥𝐞𝐧𝐭 𝐊𝐢𝐥𝐥𝐞𝐫 𝐢𝐧 𝐏𝐫𝐨𝐣𝐞𝐜𝐭 𝐁𝐮𝐝𝐠𝐞𝐭𝐬: 𝐈𝐧𝐝𝐢𝐫𝐞𝐜𝐭 𝐂𝐨𝐬𝐭𝐬 & 𝐎𝐯𝐞𝐫𝐡𝐞𝐚𝐝𝐬 🤫 We all focus on direct costs—the materials, the labor, the equipment—because that's what makes up the bulk of a project. But in a competitive market where direct costs are often similar between companies, it's your 𝐢𝐧𝐝𝐢𝐫𝐞𝐜𝐭 𝐜𝐨𝐬𝐭𝐬 𝐚𝐧𝐝 𝐜𝐨𝐦𝐩𝐚𝐧𝐲 𝐨𝐯𝐞𝐫𝐡𝐞𝐚𝐝𝐬 that can make or break profitability. 𝐂𝐨𝐧𝐬𝐢𝐝𝐞𝐫 𝐭𝐡𝐢𝐬: In a straightforward, low-complexity project, most companies will estimate and execute the direct works at roughly the same cost. The real difference, and the key to a healthy profit margin, lies in the ratio between your direct costs, indirect costs, and company overheads. Mastering indirect cost management is not just a tactical skill; it's a strategic advantage for your company. It’s about more than just numbers on a spreadsheet; it’s about making your projects more efficient, your bids more competitive, and your bottom line stronger. How do we gain control? By breaking them down. 1️⃣ 𝐓𝐢𝐦𝐞-𝐑𝐞𝐥𝐚𝐭𝐞𝐝 𝐈𝐧𝐝𝐢𝐫𝐞𝐜𝐭 𝐂𝐨𝐬𝐭𝐬:  These are costs that directly scale with project delays. A one-week delay can have a domino effect on your budget. 2️⃣ 𝐅𝐢𝐱𝐞𝐝 𝐈𝐧𝐝𝐢𝐫𝐞𝐜𝐭 𝐂𝐨𝐬𝐭𝐬:  These are one-time hits, regardless of project length. They are essential for a robust estimate but must be managed with extreme care. 3️⃣ 𝐕𝐚𝐫𝐢𝐚𝐛𝐥𝐞 𝐈𝐧𝐝𝐢𝐫𝐞𝐜𝐭 𝐂𝐨𝐬𝐭𝐬:  These are costs that fluctuate based on the amount of work performed. They can be a key component of an Extension of Time (EOT) claim, especially if the delay requires additional work or rework. 4️⃣ 𝐂𝐨𝐦𝐩𝐚𝐧𝐲 𝐎𝐯𝐞𝐫𝐡𝐞𝐚𝐝𝐬:  This is the most critical element. These are the fixed costs of doing business—salaries for non-project staff, office rent, and insurance. The project is only responsible for covering its share of these costs, but if the project runs over its planned time, it may not be able to cover the extra overheads, which can lead to a direct loss for the company. By meticulously managing each category, a cost engineer can provide management with the tools to make smarter decisions, ensuring the company stays profitable and competitive.

When overhead costs spiral out of control, the financial cracks in your business can start to widen. Take a Florida-based logistics company seeing their rent and utility costs skyrocket after expanding too quickly into new warehouses. Their cash flow dried up, and soon they were on the brink of insolvency. Similarly, a family-owned café chain in Springfield struggled to keep up with rising property taxes and unchecked administrative expenses. Both businesses faced the very real threat of long-term financial instability. Without a thoughtful operations strategy, overhead costs can quietly drain your resources, leaving your business vulnerable. It’s essential to have a clear view of all admin and ops expenses, identifying what’s truly necessary and what’s not. While every business will face its financial challenges, reacting with short-term fixes or desperate cost-cutting can create deeper issues down the road. By bringing in the right team—led by an experienced fractional/full time COO, or ops advisor—you can take a strategic, measured approach to manage overhead. This ensures your business remains financially stable, with operational expenses aligned to support sustainable growth—without the stress and disruption unmanaged costs can cause. #BusinessStrategy #FinancialManagement #OverheadReduction #SustainableGrowth