Those ever-increasing costs

As good as business is in the AEC world – and believe me, it’s really good for most everyone right now – we are seeing a lot of companies developing profitability problems. It’s pretty simple: their costs are going up faster than their revenues.

Don’t be one of these companies. Costs rise easily but are much harder to reduce. It’s kind of like my tendency to buy lots of old cars and motorcycles. They are a lot easier to acquire than they are to get rid of!

Here are some places where we see AEC firms letting their costs get out of control:

  1. Existing labor. This is always the biggie. We’ve got multiple issues here. First, we’re giving away too many raises. Maybe it is fear of losing someone who’s good – or it’s guilt over the bad times when we couldn’t pay more. But no matter what, pay is going up faster than fees are in many companies. And then on top of it we’re compounding our problems with too-generous bonus schemes that reduce both our profitability and our working capital position too quickly. We need to pull back some here before we ostensibly “need” to.
  2. New labor. Everyone’s busy. And we don’t have good systems in place to predict what’s coming down the road. Plus, we hate to say “no” to people we have charged with running a profit center. So when a manager of a unit comes to us and says he or she wants to hire, the answer is usually “go for it.” But this could be a huge mistake. We need to be a lot more careful about hiring than we’re being. It could sink us later if we don’t change our ways!
  3. Benefits. Company-paid 401K matches that went away during the hard times are back. And healthcare premiums are up while employee portions paid for them are not. It’s a recipe for profit-reducing disaster. Once you give a benefit it’s nearly impossible to take it away without damaging staff morale and motivation. Think hard before increasing these things!
  4. Meals and entertainment. Along with good times often comes a relaxation of the company’s policies and practices on meals and entertainment. Everyone goes to a slightly better place than they did during the hard times and now they get the optional cold-water lobster tail to accompany their steaks along with the more expensive bottle(s) of wine. You have to rein this in now before everyone gets so spoiled they forget how they used to live.
  5. Office space. Do you really need 3,500 square feet for that new satellite office start-up? And does it have to be in the location where it costs $60/SF per year to rent? Or how about having 50,000 square feet when 25,000 would do just fine if we packed people in a little tighter. Too much space actually hurts morale as the place can lose its “buzz.” We, as a group of companies, keep repeating this mistake from the past. Instead of getting more space than you need why not go into a multi-tenant building with options to expand – or not – if your business performs like you think it will.

These are some of the biggies. There are many others to keep an eye on. Company cars. Sports tickets. Nepotism. I could go on but nothing will change. If you are smart you will need to watch those costs!

Mark Zweig is Zweig Group’s founder and CEO. Contact him at mzweig@zweiggroup.com.

Posted in Articles | September 9th, 2016 by