Note: This is the fourth in a five-part series of blogs on Flexible Overhead, a business model pioneered by Thomas C. Schleifer, Ph.D. This blog features insights from Lou Colagrossi, Vice President/Producer at Dawson Insurance, and an expert in the placement of surety bonds for the construction industry.
You can read part 1 of our Flexible Overhead blog series here.
To read part 2, click here.
To read part 3, click here.
Construction firms need financing and bonding to pursue projects, so banks and bonding companies are key constituents in a contractor’s sphere of operation. When the time comes to evaluate a contractor’s financing request, many factors – both quantitative and qualitative – come into play. Among them is overhead—specifically, the contractor’s current capacity, as well as its ability to adjust that capacity as needed to satisfy the requirements of the project it seeks to secure.
In this regard, Flexible Overhead is a potentially useful concept, according to Lou Colagrossi, Vice President/Producer at Dawson Insurance, and an expert in the placement of surety bonds for the construction industry.
“Overhead flexibility is certainly important, and from a bonding perspective, it would be considered a strength of a contracting organization if it had it,” he says. “From where we stand, overhead by itself isn’t necessarily seen as an asset.”
For example, Colagrossi says, one contractor may show a five percent gross profit, but its overhead is one percent. Conversely, another contractor may show a 30 percent gross profit, but its overhead exceeds 25 percent. While the latter’s gross profit is higher, so too is its overhead burden. That, says Colagrossi, represents undesirable risk.
A Flexible Overhead model similar to what Schleifer recommends in his writings would actually provide welcome reassurance to a bonding company, says Colagrossi—provided the contractor had the ability to adjust capacity as needed. “Contractors are not quick to cut overhead. They’re always expecting to get that next job at any time—and that doesn’t always happen,” he says. “I think it would be a huge positive for a contractor to approach a bank or bonding company and say, “We can reduce our over- head 15 to 20 percent within a 14-day period. If we do get that big new job, we could ramp back up, bring on temporary people and/or rent equipment to do the work.” From our standpoint, that would not be a point of concern at all.”
In theory, Colagrossi sees lots of potential upside in Flexible Overhead. Yet adopting and implementing it, he says, is best suited to larger, established firms. “This seems more practical for larger contracting firms, as opposed to smaller ones,” he asserts. “It’s a change not only in culture, but in structure and operation, so that’s difficult. I think it would take a top-down corporate initiative to really make it happen.”
Considering Flexible Overhead for Your Business
At Skoda Minotti, we embrace new ideas, new technologies, new ways of thinking, and business approaches that create positive outcomes. From our perspective, Flexible Overhead is an intriguing concept with sizeable benefits—and some equally sizeable risks. We see value in presenting it to you, and we encourage you to think about ways in which it could potentially help your enterprise grow intelligently. You may or may not choose to dive head-first into Flexible Overhead. Alternatively, you may find some of Flexible Overhead’s strategic tenets or tactical ideas potentially useful, and perhaps you integrate them into your business over time. In this spirit, we hope you approach the topic with an open mind and judge it objectively on its merits.
Do you have questions about Flexible Overhead or other real estate / construction matters? Contact Roger T. Gingerich, CPA/ABV, CVA, CCA, the partner-in-charge of the Skoda Minotti Real Estate and Construction Group, at 440-449-6800 or email Roger. For questions about management consulting issues, contact David Mustin, MBA, partner and head of Skoda Minotti’s Management Consulting Services Group at 440-449-6800 or email Dave.
To download the full Flexible Overhead e-book, click here.