Project Overview
A mid-sized construction firm secured an 18-month, $5,000,000 design-build project. The scope includes site preparation, structural work, mechanical systems, interior finish, and commissioning. The project carries the following cost structure:
- Labor: 25% = $1,250,000
- Materials: 22% = $1,100,000
- Indirect Construction Costs (equipment, site overhead, supervision, permits, safety,
rentals): 15% = $750,000
Total baseline cost: $3,100,000
Gross Margin: $1,900,000 (38%)
Risks include labor productivity drift, material price volatility, subcontractor delays, and cash-flow timing.
Case Study Narrative
1. Challenges Identified Early
Within the first 90 days, the PM observed three issues:
- Labor productivity was lagging by 8-10% due to onboarding delays and inefficient sequencing.
- Material procurement lacked early-buy discipline, exposing the project to
commodity price increases. - Indirect costs were trending 5% higher due to extended equipment rentals and
inefficiencies in weekly planning meetings.
Without intervention, projected profitability would fall by $300K-$400K.
2. Actions Taken
A. Labor Productivity Optimization
- Implemented weekly work-face planning (WFP) focused on crew sequencing.
- Introduced foreman-level KPls tied to earned value performance.
- Reduced rework by introducing daily QA/QC checklists.
Result: Productivity improved 12% by month 6, returning the project to budget.
B. Material Procurement & Supply-Chain Controls
- Completed a full early-buy for major materials within first 60 days.
- Negotiated 3-5% volume discounts for steel and MEP components.
- Added a procurement schedule aligned to the master CPM schedule.
Result: Material cost saved: $160K-$200K.
C. Indirect Cost Control
- Renegotiated equipment rentals to monthly rather than weekly rates.
- Consolidated two onsite trailers into one and streamlined on-site utilities.
- Reduced unproductive meetings and reallocated PM hours to field coordination.
Result: Overhead savings: $75K-$100K.
D. Change-Order Strategy
- Implemented a zero-free-work policy.
- Used digital documentation (photo logs, rapid RFI system).
- Submitted owner-approved change orders weekly instead of monthly.
Result: Captured an additional $150K in approved COs.
3. Final Project Outcome
After implementing controls and discipline:
- Original Gross Margin: $1,900,000
- Improvement Factors:
- Labor savings: $175K
- Materials savings: $180K
- Indirect cost savings: $90K
- Additional CO margin: ~$100K
Final Profitability: ~$2,445,000 (49%)
How To Make The Project More Profitable
1. Front-End Planning
- Create a 12-week look-ahead before mobilization.
- Lock in subcontractor commitments with escalation clauses.
- Conduct risk workshops covering labor, weather, supply lines, and owner-driven
changes.
2. Labor Management
- Track earned value (EV) weekly.
- lncentivize foremen using performance-based bonuses tied to labor units installed
per day. - Maintain a stable core crew to avoid retraining inefficiencies.
Target improvement: 3-5% savings (~$40K-$60K).
3. Procurement & Cost Controls
- Secure early buys for any materials representing >5% of total cost.
- Use alternate suppliers and bundled purchasing where possible.
- Apply just-in-time delivery to reduce onsite storage, waste, and theft.
Target improvement: 2-3% material savings (~$60K-$80K).
4. Indirect & Overhead Optimization
Cut or refine:
- Excess equipment rentals
- Over-staffing of PM/PE roles
- Trailer, utilities, and jobsite support costs
Target improvement: $50K-$100K.
5. Change-Order & Scope Management
- Train supers and PMs to recognize scope creep instantly.
- Track RFls daily, not weekly.
- Maintain same-day documentation of changes with photos and sign-offs.
Target improvement: $75K-$1SOK additional margin.
Recommended Progress Payment Structure
You want cash flow to stay positive and cover labor+material front-loading during the first half of the project.
Below is typical construction cash-flow structure for an 18-month, $SM project.
1. Mobilization Payment
10% upfront = $500,000
Covers site prep, mobilization, early purchase of long-lead materials.
2. Monthly Progress Billing (Earned-Value Based)
Case study profitability analysis
Structure the remaining 90% over the 18 months, but front-load the early months:
| Period | Months | % of Contract | Amount |
|---|---|---|---|
| Early phase | 1–6 | 40% | $2,000,000 |
| Middle phase | 7–12 | 30% | $1,500,000 |
| Final phase | 13–18 | 20% | $1,000,000 |
| Completion & Closeout | retainage release | 10% | $500,000 |
3. Retainage
- Standard retainage: 5-10%
- Reduce retainage after 50% completion to improve cash flow:
- 10% retainage through 50% of work
- Drops to 5% after 50% completion.
4.Change-Order Billing
- Bill immediately (within the same month).
- Never allow COs to stack up – they become uncollectable late in the project.
Summary
This $SM project can move from a normal ~38% gross margin to nearly 50% by applying disciplined labor, procurement, overhead, and change-order strategies. Cash-flow stability is supported through a mobilization payment, front-loaded progress billing, and structured retainage.
