I have hired a contractor to convert a porch into a three-season sunroom. It's not a large project, but certainly a project that is expensive, time-consuming and deserving of close attention, as it is an example for the many contractors working on a fixed-price contract. What was projected to be a "three-week project" is now a nine-week project, and it's not over yet. The price remains the same, but the time allocated extends to triple the time projected. My guess is that the contractor is still thinking he has made money on the project, but the sad truth is, not only has he not made a profit, he has probably generated a loss and does not even know it yet… not a clue.
Here is the problem: Overhead.
It is not just payroll—although that is also a huge factor and likely filled with waste from the time extension—but I will assume his employees worked the prescribed number of hours he computed it would take, and that it just took a few extra weeks to organize and complete. Downtime results from subcontractors not showing up when they said they would, and taking longer than they thought they would waiting for materials to arrive, weather issues, sick days, personal days, whatever days… it simply took too many extra weeks.
Here is the point: Every single day costs money. All the fixed costs, insurance, note payments, utilities, staff, everything the small business owner must pay for—whether or not he is earning—equal a daily overhead burden. This job absorbed at least six extra weeks of overhead burden, probably not computed into the cost of the job as it was only scheduled for three weeks, not the nine it has taken thus far. Not to mention the lost opportunity and the cost of time unable to be used for generating additional profit (now lost irrevocably). But who is counting? Not most small business owners!
That extra one month and two weeks of overhead destroys the profit of this job. Time costs money. If the job completion time is lengthier than the time allocated, productivity goes down and profits go out the window.
Pay attention. Follow your plan—the one you bid—and make it happen, on time, on budget and to spec. This is where your cash and profit disappear: low productivity and not delivering on time. Profits sucked up by overhead and, yes, by payroll.
