Watch Staffing to Control G&A

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Fast-growing builders often throw additional staff into overburdened systems and processes, driving up general and administrative expenses with little impact on the core problems.

March 01, 2004

 

Chuck Shinn, President, Lee Evans Group

cshinn@

leeevansgroup.com

 

Fast-growing builders often throw additional staff into overburdened systems and processes, driving up general and administrative expenses with little impact on the core problems.

We target general and administrative expenses at 4.5 % of sales revenue. The category includes salaries, payroll taxes and benefits, office expenses, computers, vehicles for administrative staff, travel and entertainment costs, taxes, insurance, professional services, depreciation and miscellaneous expenses.

Historically, builders have had few problems staying in the target range, generally 4% to 6%. But during the past several years, rapid growth has pushed many builders outside the range.

Much of the increase often can be traced to increased staffing, especially in clerical and middle-management categories. As growth overburdens people and processes, management systems fail. Builders must hire additional staff to regain control. With sales soaring, it’s easy to overlook the fact that the systems remain broken — and the additional staffing can never be more than a patchwork solution.

 

 
Target
Typical
Sale price
100.0%
100.0%
Cost of sales
70.0%
78.0-85.0%
Gross margin
30.0%
15.0-22.0%
Indirect construction costs
3.5%
5.0-6.0%
Financing expense
4.0%
3.0-7.0%
Marketing expense
6.0%
5.0-10.0%
General & administrative expense
4.5%
4.0-7.0%
Total operating expense
18.0%
16.0-22.0%
Net profit
12.0%
3.5-5.0%

Address the core problems as soon as they arise — or better yet, before they arise. Analyze all of your management systems to see what’s needed to make them efficient and effective today and into the future as the company continues to grow. In particular, review management information systems and flowchart approval processes, workloads and the number of handoffs required.

The processes that tend to become cumbersome in fast-growing companies are invoice approval, contract approval, estimating and purchasing, change orders and start releases.

Instead of becoming top-heavy with administrative staff, invest in technology and systems to improve your processes to match the new production levels.

Target salaries at 2% of sales. These include the owner’s salary as well as the salaries of officers, management, and office and clerical personnel.

Owners of small and midsize home building companies often fail to declare a salary. Instead, they mingle their salary and company profits. An owner who doubles as a manager needs to declare a salary. Profit is the result of company operations, a reward for ownership and taking risks. It should never be confused with a salary for performing a management function.

Computer expenses include equipment, supplies, depreciation and leases, software purchases or leases, equipment repair and maintenance. They should be targeted at 0.5% of revenue. This is low compared with what other industries spend on computers — often 3% to 5% of revenue.

Other G&A expenses should be targeted at 2% of revenue. These include payroll taxes, workers’ compensation insurance, health and accident insurance, retirement, pension and profit-sharing plans, and other employee benefits. Administrative office expenses also fall here, including rent, equipment rentals, building repairs and maintenance, utilities and office supplies.

Insurance costs, which have soared recently, include premiums for general liability, property damage and hazard insurance. Professional services include accounting and legal, recruiting and hiring, training and education, and management consultants. The “other” category also includes charitable contributions, bad debts on receivables, and dues and subscriptions.

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