Personnel costs are the largest component of most custom builders’ operating expenses. Over the last year or so, I’ve consulted with a number of builders who had to lay off some team members in order to survive. If you’re facing a similar situation, consider these suggestions.

• First (and this step is critical even in good times), make sure your team doesn’t include any “C” players. Start by ranking personnel. “A” players are superstars in their position; they’re extremely efficient, often go above and beyond the call of duty, and are true team players. “B” players are capable of becoming “A” players, with proper training and coaching. They can become superstars in the future. “C” players are average: they come to work each day; they do their jobs, but perhaps not as efficiently as they could; and they may not really be a part of the team. Be sure to rank team members according to how they fulfill their current positions rather than whether they can grow into others. For example, your receptionist may be an “A” player in her position but may not be able to grow into another position. If you determine that anyone isn’t an “A” or “B” player, develop a plan to replace that individual with an “A” or “B” player.
• If you have gone through your team and only have “A” and “B” players, the next step is to evaluate whether they have the skills to become “A” players in other positions within the company that you may have to eliminate. Your team members should be prepared to serve in multiple positions if necessary.

One client of mine, the owner of a custom building company, decided to cut the sales position and assume that function himself. He’s now working out of his spec home and has sold more than his sales agent did.
Another client decided to have his superintendent put on his tool bag and assume the trim carpenter role that in the past was performed by a trade contractor. It didn’t work out, though, because the superintendent wasn’t as efficient as the trade contractor; when examining the time spent on trim carpentry, the job was found to be significantly over budget. The lesson: If one of your team members takes on a task that previously had been performed by a trade contractor, make sure you have a system in place to monitor the costs related to self-performed work.

Before making cuts or personnel changes, you should do the following:

• Develop an organizational chart that’s geared to the positions, not to the people in them. A custom builder may have the following positions: CEO; CFO/controller; bookkeeper; receptionist; production manager; project manager; superintendent; customer service/warranty personnel; field labor (broken out by trade if appropriate); design, purchasing, estimating, and customer care representatives; and sales/marketing personnel. For each position, it’s important to have a written position description. Many of my clients have developed job descriptions that are targeted to specific individuals. I find it more effective to tie your position descriptions to your people. As a result you may have one person with multiple position descriptions.

By having an organizational chart with position descriptions, it’s easier to begin to evaluate which people in your organization are best-suited to take on multiple positions. For example, can your superintendent develop into a superstar in the estimating position? Can your designer be trained to become a superstar at customer care? Can your project manager move back into the field and also fill the superintendent role on your jobs? Can the CEO fill the role of salesperson? Can the controller take on the responsibilities of bookkeeper as well?

• Take the time to review your systems. Challenge every step in your processes to determine what may be eliminated or streamlined. I recently began working with a custom builder/ remodeler whose accounting and administrative team was too large for its current volume. As the company grew, it developed systems with multiple checks and balances. After reviewing its systems, I was able to identify functions that were duplicated and shortcuts that could be taken to get the work done and still maintain the necessary internal controls.
• One client of mine that had built up a strong, cohesive team of superstars saw that its design backlog was dwindling and that its bottom line would benefit if some positions were eliminated. In lieu of laying off employees, the company developed a program in which each team member took a cut in pay. The managers took a 25 percent pay cut and were offered a bonus program based on earning a percentage of the company’s net income. The rest of the team received a 20 percent cut in pay and were cut back to a four-day workweek.

If you need to lay off some of your team members, it’s important to formulate a plan you can stick to. Here are some tips to consider:

• Make sure you understand all of your company’s personnel policies and procedures and adhere to them when eliminating positions.
• Develop a severance package that is fair and consistent if you have multiple layoffs.
• Discuss COBRA options with your health care carrier.

Besides layoffs, here are some other ways to control your personnel costs:

• Consider implementing an incentive compensation program for your superintendent and other field personnel that’s tied to productivity. Especially when times are tight, it’s better to keep base salaries low and give employees the option to earn additional pay by achieving and exceeding goals. Make sure the plan you implement is measurable—and that the activities measured are under the employee’s control (for example, an incentive payment for just completing a house versus one that’s based on items under the super’s control—i.e., no more than five items on the punch list, job on schedule, and job on budget).
• Control overtime. Ask yourself if it’s really necessary. Would you be better off putting an employee who regularly works more than 40 hours a week on a salary instead of paying overtime? (Check your state’s labor laws to confirm if salaried employees are eligible for overtime pay.)
• Challenge your benefits package. You may be offering benefits (i.e., disability and life insurance) employees don’t really care about.
• Implement a cafeteria plan for your health benefits. With the pretax deduction given to employees, you may be able to have employees contribute toward your monthly premiums without reducing their net pay.
• Provide your employees with an accounting of the cost to the company of the benefits package you’re offering. In addition to showing gross pay and taxes withheld on pay stubs, include the amount the company paid on the employee’s behalf for items such as payroll taxes, insurance, and other benefits.

Steve Maltzman, CPA, is president of SMA Consulting in Redlands, Calif. He can be reached at smaltzman@smaconsulting.net.