The client owns an environmental remediation company with annual revenue of over 2 million. The owner started the business in 1994 with two other partners. Each initially invested $5,000. Originally, the company’s primary focus was asbestos removal. Within a few years, the business expanded to include lead paint and mold removal. At the five-year mark, the company added an insulation division for the industrial chemical plants in the area. The company had 43 union employees due to the demand of the owner’s clients. For more than ten years, the revenues and net profits grew consistently. However, by year 17, many of the area’s largest chemical plants were downsizing. Other chemical plants were consolidating their facilities and moving to other parts of the country. This change was the first of several warning signs the company failed to observe.
At this point, the wage burden was at $63.25 per hour, but the basing bids on $56.47 per hour were for the union employees. The company was not considering the labor burden, resulting in false bids amounting to 11% of total project costs. Additionally, the company suffered a $141,000 loss on a project due to a long-term client’s bankruptcy. Instead of assessing the financial status of his company, the owner began using his personal funding, which he pulled from savings, home equity, and loans from friends, but with no thought to due diligence. He hired an acquaintance to be his Operations Manager. His responsibilities included heading up the bid process, supervising the operations, and developing new business opportunities. The Operations Manager was able to secure new markets and, by year 20, boasted 300 yearly clients, including the state government, the coal industry, and the remaining chemical plants in the area. However, profits continued to dwindle, and the owner did not take notice of job overruns, overtime costs, tool inventory/security, and the bidding process (which was far too low). After years of continued downturn, the owner finally recognized his dilemma.
- Paid time off (PTO) was averaging 64.5 hours per week. If you multiply this amount by the total number of weeks in a year (52), then outstanding time equates to 3,354 hours. If you consider an average rate of $63.25 per hour, then annual costs would exceed $200,000. Employees often finished their work early, even though they were still paid for all eight hours. This inefficiency disregarded the fact that none of the three union contracts stated guaranteed hours of work either daily or weekly.
- Poorly supervised projects often resulted in overtime. These projects did not meet the scheduled project closing timeline, and overtime was averaging four hours per week, or 208 hours per year, resulting in a $94.88 overtime burden rate. The grand total costs amounted to $19,734.
- Moreover, annual tool loss was determined to be $50,000 per year due to zero control.
- The company’s fleet of vehicles did not have GPS tracking to confirm an employee’s activities. Fuel costs averaged at around $63,000 per year.
- The project bidding process was bringing winning bids with only an 18% margin when the industry standard was 35%, leaving the company with little room for error. Although the Operations Manager appeared to understand the bidding process (from removal to disposal), the owner was not corroborating his calculations. The average job bid was $3,522.46 for the company’s annual revenue of $2,300,000.
It was 2016, and the business was losing $550,000. The company had borrowed to its limit, and the owner was anxious and had not taken a vacation in five years. His health had deteriorated due to stress, lack of sleep, and a suffering marriage.
- The first priority was to stop paying for unworked hours immediately. This decision was announced to the hourly employees. They were told the company would no longer pay beyond the number of hours allowed for the contract. A live streaming platform was installed to help monitor the jobs, and it was accessible using a smartphone, tablet, or a desktop computer. GoPro cameras now gave the subject-matter experts live, interactive, real-time communication with a specific work crew. The owner can now live-stream any project, interact with the employees, document changes, and store the feed for the length of a project or longer. Using these products meant the owner did not need to be on-site, which allowed the owner to eliminate excess payroll, including overtime, and make critical changes on the job if required. Projects are now completed before the projected timelines, resulting in a savings of $231,874 per year: a combination of unworked time and overtime, as stated above.
- Additionally, cost savings from reducing the project timeline was averaged on 32% of the 650 projects. For 208 projects at an estimated 8 hours, the total hours would equal 1,664 hours. If you take the total hours and multiply it by $63.25, the rate of unworked time, then you would have a lower amount of $105,248. This total returned a savings of $337,122 on all projects.
- A simple sign-in/out procedure was put in place for the warehouse manager to keep track of the tools signed out on projects and returned. We had employees sign a document of understanding which stated their responsibility for the tools and actions to be taken if not met. The live streaming platform discouraged theft or poor behavior of the employees as well. The tool loss dropped to $2,500 in the first year.
- We installed GPS tracking on all vehicles to track vehicle routing and idling time, utilizing a 10-second delay. This tracking method was communicated to the hourly employees, along with our reasoning. Fuel consumption has decreased 30% every year due to GPS monitoring and corrective action, which has put mileage at 44,100. This measure has resulted in a savings of 1,600 gallons of fuel. At $2.80 per gallon, savings would equal $4,4480.
- The previous bidding process included a labor rate of $56.47 per hour. We immediately implemented the burden rate of $63.25 per hour on all contracts. We also used the new streaming platform to view the potential projects with the Operations Manager and determine if the time needed to complete a project was accurate. We could also use the platform to determine what tools were required, whether disposal waste was calculated properly, and if there was any additional work that was not reported by the client. With the owner now viewing all bids as they are measured, he is getting more accurate results. On the bidding process, we increased the desired margins from 18% to the industry standard of 35%. The owner’s initial fear of losing bids was quickly assuaged when the insulation division produced the first net profit in the first quarter of the company’s 25-year history. The revenue per job rose from $3,522 to $4,120 or $2,690,999 in annual revenue.
KPIs for the company included:
- A/R (Accounts Receivable) current %
- A/R over 30 days %
- A/R over 60 days %
- A/P (Accounts Payable) current %
- A/P over 30 days %
- A/P over 60 days %
- Hours Planned vs. Actual
- MPG Planned vs. Actual
- On-time project
- % rework
- Last week’s sales to goal
- Winning bid ratio
- The backlog of sales > 30 days
- Revenue of backlog
A future opportunity is to gradually move from a union to a non-union environment, possibly reducing the hourly burden from $63.25 to $32.00 per hour on selected projects.
A summary of the company’s savings:
- $337,132 on employee payroll
- $47,500 on tool security
- $4480 on fuel savings
- $389,112 total annual savings
The revenue increased $390,000 due to pricing model changes and the owner’s closer inspection of projects. With full implementation of the changes above, the owner is predicting a profit of $275,000. In 2016, they experienced a loss of only $550,000.