Accurately Calculate and Fix Profit Bleed

Profit bleed or profit fade often is hard to detect. It can go unnoticed both during growth periods and also during times where businesses are dealing with a declining market. 

It has been said that attempting to ascertain the exact percentage of completion of a construction work-in-progress (WIP) is like pinpointing the exact location of a moving train. But what if a contractor knew the historic profit level associated with a particular manager or customer? And what if a contractor was able to anticipate or periodically correct the anticipated results based on its knowledge of this history?

The key, according to turnaround expert Thomas Schleifer, is to create a system that can refine your profit expectations to automatically adjust for profit bleed, where profit is lower, or sandbagging, where profit is underestimated.

After studying thousands of construction financial statements, Schleifer believes that profit bleed—sometimes called profit fade—is hard to detect. It goes unnoticed during growth periods because a greater amount of profitable WIP obscures the evaporation of profits on other projects. During a declining market this goes unnoticed because underperformance is blamed on the business slowdown.

Schleifer’s solution to this issue is to adjust the reported WIP field information closer to reality based on the historic performance of your staff members who are doing the reporting. By studying the available data from one large construction firm for the prior five years, he learned that some project managers were continually optimistic and the profits they foresaw had by the completion of their projects fallen off. Other project managers did the opposite, under-reporting profits early in the work that regularly resulted in profit improvement at project’s end.

Read the entire article from Engineering News-Record to see how Schleifer calculated the average bleed or sandbag for each project manager over this time period and came up with an easy to implement solution that established what average best represented the present rate of bleed or sandbagging based on each project managers’ WIP reporting.