Maximizing Margin by Full Kitting Your Construction Projects

Full-kitting is a term most often associated with manufacturing. What does it mean and how can we use that concept in construction to maximize our profits? Let’s talk about it.

Topics we cover in this episode include:

  • Full Kitting from a Subcontractor Standpoint
  • Communicate potential problems beforehand
  • Start with project planning and pinpointing common delays
  • How to implement full kitting 

LINKS
Join the conversation on our LinkedIn page: https://www.linkedin.com/company/CarpenterCPAs

FIND US ONLINE
Wade Carpenter, CPA, CGMA | CarpenterCPAs.com
Stephen Brown, Bonding Expert | SuretyAnswers.com

TRANSCRIPT

[00:00:06] Wade Carpenter: Full-kitting is a term most often associated with manufacturing. What does it mean and how can we use that concept in construction to maximize our profits? Come on in. Let’s talk about it. This is the Contractor Success Forum. If you’re new here, I’m Wade Carpenter with Carpenter Company CPAs. With me is my co host, Stephen Brown with McDaniel Whitley Bonding and Insurance. Stephen, any thoughts to start us off?

[00:00:27] Stephen Brown: I’m just thinking about your topic, Wade. Full kitting to maximize your construction workflow. Full kitting to maximize your profit. So do you mean like a surgeon putting all their tools together before an operation? Something like that? What do you mean by that?

[00:00:44] Wade Carpenter: That’s a good analogy. All it simply means is having what you need before you start a project or a task or whatever. And, just in the simplest of terms, and we’re going to get into some of the nuances of this, but, if you’ve ever had to send somebody back to the parts supply house or Home Depot or whatever, and multiple times because you forgot this or that, it’s very inefficient, and it costs a lot of people a lot of time and they sacrifice a lot of margin doing that.

Again, a lot of times people think of this concept more in the manufacturing, and some of it comes from The Theory of Constraints, and the name of the book is The Goal by Eli Goldratt. But just started thinking about that and how that really does apply to construction because construction’s got a lot more moving parts than even manufacturing and, sometimes it’s very hard to figure out what you need.

But when you’re not efficient, you don’t have a standard checklist of these kind of things, you end up going back and doing all these things over and over again and it wastes time and it wastes money.

[00:01:49] Stephen Brown: That’s a good point. It seems like my contractors that used to be in the military, maybe they’re engineers too. They have a certain logical methodology to fully kitting a job. If that’s the phrase we’re using, getting ready. There’s a full kit for just getting the job started properly. And then there’s all the other elements that go into place. And then there’s the communication of how to get that done. And then there’s, I’ll never forget back in the 90s when the flow charts came out, they were all over the construction industry. There were process flow charts for everything, just like I think there would be for manufacturing.

[00:02:25] Wade Carpenter: Absolutely. And again, we’re not talking about manufacturing. It’s what can we do to adapt this for construction? And, sometimes we, we do maybe the same similar job, but we end up with the same problems that end up creeping up because we miss one thing or another, or we end up having to do rework because, we forgot about something or, it delays our project.

So again, it’s a simple concept, but it may be missing in your business. And even though you may think have addressed it, checklists are a great way to do that. We’re going to talk about the differences between, say, approaching this from a subcontractor standpoint versus a general contractor standpoint.

But post COVID, we had all these supply chain issues and disruptions. And I think something like, knowing, hey, this particular material, especially if you’re a general contractor, you may not know this particular part that your sub’s going to provide, it’s not available or it’s going to take, a special order that’s going to take six months to get. So hopefully that makes a little bit of sense and puts that in a little context.

[00:03:34] Stephen Brown: Okay, it does.

Full Kitting from a Subcontractor Standpoint

[00:03:35] Wade Carpenter: Let’s talk about it from a subcontractor standpoint.

I’ve already given the example of plumbing contractor, electrical, any of these subs, they get on the job. And then, hey, we don’t have what we need, so we got to go back and do it again.

Sometimes we’ll create something let’s keep a checklist for this type of job, and that’s the point, but, it’s a balancing act between hey, we can’t afford to keep everything on the truck, versus knowing that you’re going to have something come up, or, if you start taking a look at why you have to either go back or have rework because of a step that was missed, maybe we should think about that before we start a list of these are the things that we Should have on the truck with us or in place before we start that job.

And I don’t know that we’re gonna get into that today.

One of the big misconception is that if you start a project, like let’s start a project early. Let’s go ahead and jump into it. We got a certain deadline and we’re trying to avoid maybe a Late Completion Penalty. And even if we start that project early, most of the time it doesn’t matter, we’re still scrambling at the end to finish that job, right?

 Part of this is, where are we wasting our lead times? A lot of times we think we have all this time to, six months to complete a project, and it ends up the last day before, it’s like everybody’s a scramble to get all these punch list items done. And it’s absolutely true in construction. It’s it’s always a scramble. So that’s one of the approaches that we’re talking about today is what can we do.

[00:05:08] Wade Carpenter: From a Subcontractor standpoint is you know what you’ve got to put in on a job, especially if it’s something that is a part that you’re going to have to order and you know when it’s got to be there, you may either need to get some money up front or make sure it’s there on time, or make sure it’s ordered.

[00:05:26] Stephen Brown: Are you saying there’s a different way that contractors need to think about this planning, for getting these jobs set up, ready to roll? I understand about thinking ahead of time to make sure you have the right equipment, supplies.

I had a particular project where there was a huge pump involved. And the engineer for the owner had spec’d out a specific pump by a specific manufacturer. And they took a year and a half to get it. They had an order for the pump immediately when the contract was awarded. It took them a year and a half to make the pump. Got into a huge fight over liquidated damages and completion, but it ended up costing them a lot of money because of the time involved.

So that’s a common sense thing. My recommendation was that you get a supply bond from the pump supplier. It just gets their attention. When will you provide this pump? I’ll provide it in 60 days. If it’s not provided in 60 days, I’m going to file a claim on your supply bond.

It’s two tenths of a percent is the cost to do that, but that would have given the contractor some leverage other than suing the only manufacturer. You’re saying, okay, I’m holding your feet to the fire to do what you said you were going to do. That’s all.

[00:06:39] Wade Carpenter: Right. And no matter what especially in construction. You’ve got a lot of Moving parts, more so than in manufacturing, and you’re depending on a lot of other people, and there’s absolutely no way to predict every possible scenario that could go wrong, but the idea is let’s take out as many as we possibly can.

And your example is very well taken. Sometimes we don’t have late completion penalty clauses, but even when we don’t, the longer we stay on that job, typically the more it’s costing us. So the faster we can get in and out, that’s the purpose of today. That’s where we’re bleeding margin out on our jobs.

 We talked about it from a subcontractor’s perspective. And a lot of times the subcontractor really should be thinking about what they’ve got to order and when they got to have it.

But from a general contractor’s perspective, that’s also a different planning mechanism because they’re going to know from top level what these things are, but they may not know what their subs have got to supply. Or even if they’re buying the materials themselves, they may not know all these things that we’re having trouble getting this, material.

It’s a different planning perspective. You need to be talking to your vendors, first of all, if you’re buying materials yourself, but, just talking to your subs and communicating when you’re going to need them on the job number two, making sure that they have exactly what they need and they can do the job.

COVID has brought a lot of this stuff to light, but it is just these small little things that cost contractors profit every single day.

Communicate potential problems beforehand

[00:08:14] Stephen Brown: And if you know of potential problems before they occur too, you can sit down in a pre construction meeting and discuss that with the owner.

Your concerns. That’s okay. Talking about clear communication, the worst thing you can do is to keep the owner in the dark. Why are you worried about this? I’m doing what the contract says, so you just need to relax.

Everybody that’s paying for construction service wants to see certain degrees of progress. When you communicate that we expect to have this done by such and such date that’s very comforting. If you want to continue to do work for that owner, you’re going to communicate clearly.

And your pre construction meeting with the owner is equally important as your pre construction meeting with your suppliers and your subs, just making sure that you’ve discussed all the contingencies way ahead of time. Because as a contractor, you’re also worried about the labor to get the work.

You’re thinking, I’m going to take the labor off of this job and I can move them here and I can do this and this will work out nicely. Yeah, I understand that.

[00:09:14] Wade Carpenter: Yeah, I just wanted to walk through some of the pieces of this because it may be a simple concept, but it probably is one where you’re bleeding profits every day.

Start with project planning and pinpointing common delays

[00:09:24] Wade Carpenter: And, it starts with the project planning, it would be somewhat different for a general contractor and having to go to multiple people versus a subcontractor. Typically a lot of the jobs that they are going to do are fairly standard. I probably could give some examples, but once you start in on something, something goes wrong, does that happen enough to where you should be thinking hey, I should have something on the truck to be able to fix that and not have to go back or delay it another week or have to go out there another day because we don’t have what we need.

A lot of it is managing materials. I did have one contractor that finally put in a purchasing manager that just because they needed somebody to stay on top of this. And even though it cost them another salary, that salary was spent, because they sped up their process and were able to get things ordered and in when they needed it.

Again, communicating, as you brought up with the owners or the subs or, having regular meetings and it needs to go back up the line from the subs back to the general because if you don’t want to cause the job to run over, you need to at least tell the general what’s going on, or the owner.

Logistics like getting things here. I had some that were held up they were trying to get cabinets out of China and it was sitting on a boat. And some of that stuff has gotten easier since COVID.

[00:10:52] Stephen Brown: No, I’m thinking about all the elements in place. Sometimes it’s hard to see the forest through the trees. You know what you got to do. You’re getting going. You’re busy. Okay, I’m busy. I’m getting ready for this job. I’m busy. But that doesn’t mean you’re working smartly.

And, one other thing is, you mentioned sending someone out to other supplies or anything. It’s the same thing I tell folks when there’s a worker’s comp injury. someone has to take that injured employee to the doctor or the hospital. So that’s two people working. Then you’ve got the lost productivity of that worker that has to go get the extra part, plus the work that’s not being done, plus what you have to pay someone else. to keep doing that work as your other employee is off getting parts. So it sounds simple, but it’s huge as far as what it can do to your cost.

[00:11:43] Wade Carpenter: Construction project management is not an easy task. There’s a lot more moving pieces, especially if managing the time and, this one thing that can delay it, have a ripple effect down the line.

If all your subs had planned to be here this week, but, maybe they’re not available next week or, maybe you’ve got a excavator that’s on another job, so all these things are a ripple effect.

So managing the time, managing things like the resources and, managing the risk. There’s a lot of things that go into this and, you do have to be flexible and adapt in construction.

But, what I’m trying to get at is taking a look at what has gone wrong in the past and making sure we have a checklist. And a lot of times, project managers do, but, they fail to see all these little things that go wrong and looking at, why did we have to do some rework?

Why did it take extra time to do this? And sometimes it’s materials or whatever, but that’s the concept.

How to implement full kitting

 So what I’d like to talk about now is how do we implement this.

[00:12:47] Wade Carpenter: There’s several steps to this.

And, it would be very different for a general contractor versus a sub, but, planning and preparation stage.

And one of the biggest things I would tell you is if you’re trying to figure out, if we’re going to use the term full kit, or do we have what we need, maybe you got a junior project manager and they’ve never done all these little steps.

Sometimes getting these senior project managers and saying, hey, did you think about this little thing that could go wrong? And keeping a list of those kind of things so that you can have some of these contingencies in place.

The planning and preparation and going to maybe an expert that may be the senior people that really have done these kind of things for a long time, a lot of times can spot some of these issues that are going on.

Again, it’s about coordinating and inventory management. I think it’s self evident what we got to do. But again, taking a look at the materials and equipment that’s involved, and when we need these resources, and then, those pieces also have to do with what we are going to put in what we call a full kit.

Developing that for each phase, maybe you got demo phase, maybe you got, I don’t know, the foundation stage, you got the framing stage or whatever the stage is, sometimes you need a full kit type checklist, for each stage of this. And, it’s a dance of logistics and management. Do we have the quality control in place?

 Communication is key. Knowing what could go wrong and considering what could go wrong can play a big part in making sure that we don’t have Time, you know, where time goes over.

[00:14:24] Wade Carpenter: One of the other things is after a job, especially when the job has gone wrong, just getting feedback after the job, after job review is what went wrong? What could we improve next time? The list of the problems are the things let’s consider for our full kit for next time.

[00:14:43] Stephen Brown: Sure. There’s so much to the history of your bids, the history of your projects that can help you make profit going forward, and just simply closing out a project and having a post project review with all the key players involved, is such a learning experience. You can’t put a price tag on that. And you’ve got it in writing on that project, so you have a new project manager coming in. You can say, hey, here’s a similar job that we did. You might want to read about our notes on our pre construction meetings. And also our post construction review of the project.

[00:15:19] Wade Carpenter: This is not necessarily the sexiest topic, but if you spend some time taking a look at some of these things ahead of time and considering what has gone wrong in the past. Sometimes they’re not obvious and it’s just something that you don’t do every day, but if you think about it and just document it after the job goes wrong. or, you know, took extra time, Right now it’s, it’s fairly decent times for construction, but construction is very cyclical. And there will be down 2008’s anytime soon, but the idea is let’s stop bleeding the profits, and these little things that drip out a little bit of our margin every day are the things that add up.

[00:16:02] Stephen Brown: My only comments are fail to plan, plan to fail. That old saying makes a lot of sense.

[00:16:07] Wade Carpenter: It’s just something that I think a lot of people don’t really think about, and it just takes a few minutes to create that list, improve on it every time, but don’t just take that list and stick it in a drawer and never pay attention to it.

[00:16:20] Stephen Brown: You heard it, folks, right here.

[00:16:22] Wade Carpenter: Let’s go ahead and put this one to bed. Thank you all for listening to Contractor Success Forum.

Check out the show notes at Contractorsuccessforum. com or on the Carpenter CPA’s YouTube channel for more information. We would appreciate it if you consider subscribing and follow us every week as we post a new episode.

And we will look forward to seeing you on our next show.

Leave a Comment