Are You Monitoring Your “Overhead Inventory?”
Savvy remodelers monitor ongoing design contracts for a clue to future work. But monitoring backlog—a sure thing—is also crucial. Backlog is simply work under contract but not yet done.
It may be the as-yet-not-produced fraction of a job in construction or it may be a job you haven’t started yet. Don’t count a job as backlog unless and until it is under construction contract.
Here’s what backlog means to you. It means gross profit not yet tapped. If you figure out how much gross profit is anticipated for work under contract but not yet produced and you divide the resulting number by your monthly overhead (including your owner’s salary), you will know how many months of overhead you have “in stock.” It’s a good feeling, for instance, to know that if a downturn arrives tomorrow, you have 5 months of overhead covered in the work you have under contract and not yet produced.
Backlog also means secure work for your employees. If you look at how your crews will be scheduled on the backlogged work (and this may be fewer months than the gross profit will cover), you have a sense of how secure employees would be if a downturn occurred. Knowing that your three crews have 11 weeks of work contracted is a security measure.
Sometimes owners unwittingly defeat this backlog security. They typically do it in two ways. The first is by “selling on demand.” Owners don’t worry about the next sale until they see work drying up. The owners keep a number of prospects waiting and feel they can get those contracts signed when necessary. However, when the stock market takes a dive or the next war erupts, those prospective contracts will dry up overnight.
Another way owners sometimes destroy a comfortable level of backlog is by adding crews whenever work begins to build up. I understand there is a point beyond which buyers do not want to wait and won’t buy because of the length of time before their job can start; however, you must find that tipping point and build to it.
If you’re not actively monitoring your backlog, start today. Determine an ideal dollar volume for backlog and monitor current levels so you know when it is dropping or increasing.
What about you?
Are you monitoring your backlog? How has it helped your business? Are you seeing trends? I look forward to reading your comments below!