Overhead Costs

Overhead the Silent Killer

Overhead
The Silent Killer

I have rarely had much success talking to construction company management about overhead. Whenever I broach the subject of controlling overhead at one of my seminars, I can see eyes gradually glaze over and the assembled home office people stealing glances at their cell phones or suddenly retiring to the restroom. After years of fruitless discussions, I have figured out why; these corporate managers ARE overhead. They’re not out on the job building the project but back in the office doing what “overhead” does. Their function may be essential to the good running of the business, but they are “overhead.” And unfortunately, the phrase often associated with overhead, “cutting overhead”, is not popular with construction home office personnel. On the contrary, they identify positively with overhead. Comfortable offices, company cars, and bonuses are symbols of their success.

The Silent Killer

I often refer to overhead as “the silent killer” because top management who can do something about overhead seldom want to talk about it. More often the CEOs and founders of mid-size construction companies will consider laying off a couple of clerks in the accounting department (that are usually essential) but wouldn’t think of cutting back company cars or reducing office space.

Growing into The Problem 

Overhead usually expands because of growing revenues out in front of the costs. This causes management to think it’s only logical that a bigger company needs more business if it expects to pay its bills.  To most top management “the company” is a static entity; a given. You can’t change the size and shape of a legacy company that has been around for years. You can’t lay off long term employees every time the market contracts and expect to have them in place when you need them. You can’t reduce the size of the corporate headquarters because business is temporarily in a downturn. This leads to the belief that you can’t cut “overhead costs” in any meaningful way. Instead you must grow “revenues”. This is the traditional, long-standing success formula followed by many of construction concerns. It is, however, a “silent killer”.

Everyone’s Case History

Most start-ups contractors begin their business with no overhead at all. They simply take the gross profits from completed projects and pay themselves, buy a truck, and work out of their basement or garage. As the business grows, they add their first “overhead” when they hire someone to answer the phone. That person needs a computer, a desk, and health insurance. Since they have freed up our contractor to take more business, the birth of overhead goes unnoticed.

Filing cabinets are added, phones ring off the hook, the business needs more space and our contractor’s wife needs more privacy.  Modest office rent seems necessary and insignificant. Now the company’s name is over the door and “the company” begins to emerge as a self-perpetuating entity. As long as our contractor’s business is in the initial stages of growth, “overhead” is added as needed.  In fact, we contractors believe this is what success looks like.

The Dreaded Flexion Point

As contractors grow from a “one-man shop” to small and medium sized firms they inevitably come to a “flexion point” where overhead costs stop servicing revenue growth and become the reason that increased revenue is needed. Too often the growing top line does not provide ownership with increased profits, but rather is needed to pay for perks and bonuses that have become institutionalized in the company’s culture.  That is to say, every construction firm eventually becomes its own worst enemy. It’s not market volatility, stiff competition, or commodity pricing that threatens a firm’s stability. It’s bloated overhead that demands unbridled top-line growth to support the company’s infrastructure. Masquerading as success, overhead that consumes more and more of a company’s available capital is the primary cause of construction company failure. It is the “silent killer”.

Plan Don’t Cut

We will be discussing in great detail how to manage overhead through planning rather than just cutting which is the topic of current research that can be found on this site. Recognizing this “silent killer” is the first step to managing your way out of this danger. Take a close look at your own management decisions and see if you tend to protect overhead rather than try to adjust it to fit the business. Planning overhead in advance is the answer; not cutting it after it becomes a problem.

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