# Two Common Mistakes Cost At Least 2-3 Points of Net Profit Every Year

##### By Todd Drummond

Most, if not all, are now caught up in the summer building season to make serious money for their component divisions. However, far too many companies are allowing tens of thousands of dollars to be lost because of commonly accepted bad practices. Practices such as using non-precise labor estimations (e.g., board foot (BF) labor estimation) and establishing project pricing using the common cost markup method result in companies losing at a minimum 2 to 3 net profit points, yet most companies refuse to see the simple logic behind this issue. We should not allow our egos to blind us from using better practices when we can utilize simple math to challenge our long-held beliefs of what we consider are best practices. This can all be verified by using some basic numbers to quantify what I am premising.

In addition, too many take offense at the idea of using something other than BF, which is ridiculous. Unless a company is using man-minutes properly, as derived from motion and time studies that are updated for existing equipment and practices, the labor estimation versus the actual for individual projects are all over the map. The common response for using BF is that the average over time works out. However, every production supervisor knows that BF is truly a poor estimation when comparing high BF projects with low setup times, such as pole barn trusses, to low BF projects, such as a complex hip roof system with multiple setups.

TDC Suggestion #1 - Here is a simple exercise any company can do to prove the validity of my statements for man-minutes versus other units, such as BF. Track the actual labor for each assembly crew in man-minutes and BF. You can track via handwritten timesheets and then record the data in a spreadsheet for simplicity. Then compare which more accurately represents what you expected the time to be. If you are using anything other than properly derived man-minutes, you will find that individual batches of trusses have wide swings compared to proper man-minutes. The so-called “average” that many have been using all these years was more like a shotgun instead of a rifle when estimating labor. For companies that have limited capacity, have competent competition and want to make more net profits, why is verifying the accuracy of labor estimation such a hard sell for so many? The labor accuracy is needed to fix the flawed pricing that most are using.

Note that proper productivity incentive programs trying to use anything other than man-minutes are seriously flawed and will only produce mediocre benefits at best. See https://todd-drummond.com/incentives/.

The fallacy of a cost markup to derive a project’s margin and, therefore, the overall price is costing many companies dearly. Instead, a company should be renting the tables to its customers instead of marking up the cost of the projects.

Many are mistaken if they think a company can make a consistent net profit weekly if it applies a cost markup. A cost markup is undercutting the daily margin earnings when it is processing orders with a high labor time (lots of man-minutes) and yet also have a low material cost project (hip roof versus AG trusses).

Everyone should always use cost markup to generate what they think the competition is charging for a price, but your margin’s baseline should be calculated this way:

Margin Baseline = \$ Rate * Man-Minutes

Man-Minutes = Table + Saw + Support (Shop Only)
Does not include any office, trucking or admin personnel

Sales price = (\$ Rate * Man-Minutes) + Material + Labor + Shipping

TDC Suggestions #2 – Compare the actual labor of the shop labor (at least the table of man-minutes) to that of the gross margin to derive a Margin/Man-Minute for past orders. Then tally the daily gross margin dollars for the day, week, and month. Hopefully, everyone can see what I am driving at for this exercise. If you start paying attention to the margin dollars per man-minute, it will:

• Allow low margin/man-minute projects to go to your competition and therefore not tie up your company’s assets on low margin/man-minute orders.
• Allow low margin/man-minute orders only for spare capacity.
• Make more net profits by focusing on higher margin/man-minute orders!

The combination of properly estimated labor using man-minutes, plus calculating your project based on the same man-minutes instead of a cost markup will make any company more net profit. It happens every time. Now, is your company doing this already or are long-held beliefs and practices going to prevent your group from at least proving which method is best?

Website: www.todd-drummond.com – Phone: (USA) 603-748-1051

### Author: Todd Drummond

##### Todd Drummond Consulting LLC.

You're reading an article from the August 2019 issue.