Every contractor’s goal is to have enough backlog to fully utilize all resources without overextending manpower, cash or time. There’s no question that this can be a tricky balancing act.
Taking a Closer Look
When you look closer to why construction businesses fail, an excessive backlog is one of the most common reasons. The lack of qualified manpower can significantly impact production, as well as profitability. When schedules are not met profits will generally decline. Adding to this snowball effect, a profit decline can create financial concern to banks and bonding companies when they evaluate your business. Contractors sometimes assume they will be able to borrow the necessary funds once they obtain additional backlog, but that’s often not the case. Lending institutions generally base lending decisions on past performance not future needs. And winning more work than a contractor can presently fund is really an indicator of a poor management performance rather than wise business strategy.
Knowing Your Backlog
So how do you make sure to keep your finger on the pulse? Tracking workflow is the key and the principal tool for managing your workflow is a backlog report. It’s an important and often overlooked means for monitoring a company’s ability to maintain volume, balance resources and project working capital needs. Of course, garbage in equals garbage out. A backlog report must be complete, identifying all jobs awarded and in progress including anticipated start dates and projected durations. The backlog report should communicate the actual scheduled start dates of ALL work including jobs with intended start dates in the distant future that have no impact on their near term cash flow because they eventually will.
A complete backlog report is the foundation for your bidding strategy as it is used to determine if you have sufficient resources in manpower and money to take on more work. And to make sure the necessary resources are available to self-perform work, the rate for runoff of self-performed work must be determined. Only with this information can a prudent decision be made as to whether to bid work as self-performed or to subcontract it out. With a backlog report in hand you have the necessary tool to determine what jobs to bid and how competitive to bid them. Yes, maintaining volume is a balancing act and it is always better to error on having more jobs rather than less. But more should never be too much and only by maintaining a backlog report will you clearly see the way.