Should Gross Profit Be Used for Pay for Performance
A common way of tracking Pay-for-Performance in contracting industries is by tracking Gross Profit. For example, If a Crew Leader is better than a Gross Profit goal, they are said to be successful. If they are worse, then unsuccessful. Often Sales Reps and Estimators are also evaluated using a Gross Profit goal. However, in taking a second look at Gross Profit, there are a few things to consider. Crew Leaders (and Sales Reps) do not have total control of Gross Profit.
Here’s a small list of some of the factors that influence GP and who controls them or has an impact
- The price of the job. (Estimator)
- The hours estimated. (Estimator)
- Actual hours on the job. (Crew Leader)
- Material costs. (Estimator & Crew Leader)
While there may be other factors not listed here, you can see that a Crew Leader or a Sales Rep’s influence is limited in the overall impact on GP. This is why we measure the productivity of each crew leader based on hours – not dollars. Specifically, the actual hours compared to the estimated hours. We give the crew leaders an opportunity to request more hours (push back on the estimator) in the early stages of a job so that they have a fair chance to complete the project on time. It’s important to give the crew leader a fighting chance. If they feel that there is no chance to bring the job in on time. If they feel it’s a losing battle, they will have little incentive to work hard and might just throw their hands up and say, “It’s not my fault.”
We measure the sales rate of the estimator (price divided by estimated hours) and reward estimators for maintaining an average above a specified rate. We measure the sales rate monthly. If an estimator does not estimate the correct amount of hours based on our production rates, they can expect to receive a push back sheet approved by a Supervisor. These “push back” hours will add to the estimated hours and lower the estimator’s sales rate.
As a result, you can expect to have some “butting of heads” between Operations and Sales. This is OK, in fact, it’s good to have some of this as long as it leads to healthy discussions about production rates (used by estimators to price the job correctly) and painting procedures (used by crew leaders to get the job done on time).
I hope you find this helpful!
All the Best,
Steve Nafranowicz, CFO
Nolan Painting, Inc.