MECHANICAL · MECHANICAL AND LIFE SAFETY · FIXED BY STEP 02

Prefab Spools Spend Money Three Months Before Install

The shop cuts duct and welds spools in month three for work that installs in month six. If that cost goes to overhead, every job reads rich and the shop reads like dead weight.

WHY IT'S A MECHANICAL PROBLEM

Trades without a shop have one simple rule: cost happens on site, on the day the work happens. Mechanical builds a serious chunk of the job indoors, weeks ahead of installation, so unless a shop rate puts that cost onto the job, WIP is measuring installed percent against a cost base with the prefab missing. The more you prefab, which is the whole point of running a shop, the further off the numbers get.

WHAT IT COSTS

The size of it

Gross margin on every prefab heavy job reads 8 to 12 points high until the job closes and the real number hits all at once, usually in the month you were planning to take a distribution.

OVERHEAD AT $1M–$5M

16%

CFOS target 15% for mechanical.

GROSS MARGIN AT $1M–$5M

25%

CFOS target 27.5% for mechanical.

NET PROFIT AT $1M–$5M

CFOS target 12.5% for mechanical.

The coil line and the pipe fab bay spend real money in month three on duct sections and welded spools that go in the building in month six. That's labor, metal, and machine burden gone before the material ever ships to site. When shop labor and shop burden get booked to an overhead department, the job's cost to date is understated and the WIP schedule shows overbilling that doesn't exist. The shop itself then reads like a fixed cost you can't defend at year end. Both readings are wrong at the same time, which is why the numbers never quite explain the bank balance.

WHAT TO DO

Three moves, in order

STEP 01

Build a shop rate: shop labor plus burden plus machine and facility cost, divided by budgeted shop hours. Recalculate it quarterly, not once.

STEP 02

Require a shop ticket on every spool and duct section that charges the job at that rate the week the metal gets cut, so cost posts with the work.

STEP 03

Run the WIP with shop cost included and compare cost to date against installed percent. Treat any spread as prefab waiting in the rack, and go look at the rack to confirm it.

THE FIX

Step 02: Equipment cost basis

A correct internal rate per machine covering ownership, maintenance, fuel, and transport, charged to the projects that used it.

CFOS-02 · CHAPTER 2

What your equipment really costs per hour

What this step changes, what it depends on, and how to tell it's installed.

BENCHMARKS

Mechanical by revenue band

All 7 bands are published. The CFOS target is beside the figure up to $10M to $25M, and the 4 bands above that are labelled modeled.

ACROSS EVERY TRADE

Your equipment is eating the margin

The machine is paid for, so the jobs use it at no charge. Then the transmission goes and the year is gone.

SAME TRADE

What else costs mechanical contractors money

MECHANICAL · CFOS-01

You Pay For The Chillers Six Months Before You Bill Them

The deposit clears in March, the balance clears at shipment, and the first pay app covering any of it goes in around August. Your credit line funds the months between.

MECHANICAL · CFOS-06

Fab Release Is Gated By Two Clocks You Don't Own

The coil line has nothing to cut because the engineer has held your submittals for five weeks and the coordination model is still bouncing. You pay shop payroll either way.

MECHANICAL · CFOS-05

The Retention Waits On A Test Only You Can Pass

Retention releases against the commissioning agent's sign off, and the system being tested is yours. A building accepted in July can't prove its heating until the weather turns.

MECHANICAL · CFOS-06

Nine Trips To The Job, Two Of Them Billable

Your crew makes nine separate trips to that building, from underslab to punch. The schedule of values has one line on it that says rough-in.

SAME MECHANISM, OTHER TRADES

The same mechanism in other trades

CONCRETE

Ten Jobs Used Those Forms, One Job Paid for Them

Your yard is full of panels and shoring, every job report says you made money, and the bank account disagrees. The form buy hit job one and jobs two through ten absorbed none of it.

DEMOLITION

The Scale Wants Cash Today, The GC Pays In Sixty Days

Almost everything a demolition job costs goes out in the first two weeks, and the first pay application hasn't even been submitted yet.

FLOORING

You bankroll the mill six months before you get paid

The mill wants a check before it ships, the GC won't pay for stored material, and your cash is stuck in a warehouse for four months waiting on a space that isn't ready.

QUESTIONS

What mechanical owners ask

Should fab shop labor go to job cost or overhead?

The shop cuts duct and welds spools in month three for work that installs in month six. If that cost goes to overhead, every job reads rich and the shop reads like dead weight.

What does it cost?

Gross margin on every prefab heavy job reads 8 to 12 points high until the job closes and the real number hits all at once, usually in the month you were planning to take a distribution.

What do I do first?

Build a shop rate: shop labor plus burden plus machine and facility cost, divided by budgeted shop hours. Recalculate it quarterly, not once.

What are mechanical contractors supposed to be making?

Mechanical runs 25% gross margin, 16% overhead and 9% net profit before taxes at $1M–$5M. The all-trade average is 7%, so this trade is 2 points above it. The CFOS target is 12.5%.

Which part of the system fixes it?

The step is number 02, equipment cost basis. A correct internal rate per machine covering ownership, maintenance, fuel, and transport, charged to the projects that used it. It comes from chapter 2 of CONTROL: The Construction Financial Operating System.

OR HAVE IT HANDLED

Everything on this page is something you can install yourself, andCONTROL is the order to do it in. If you would rather buy the finished result, SPM The Construction CFO does this work for mechanical contractors as a service. It is a separate firm, Sulphur Prairie Management, LLC, run by the same author.

What a fractional CFO does for mechanical contractors

AUTHOR

JOSH LUEBKER

MASTER ELECTRICIAN · 150+ PROJECTS · $2.1B+ MANAGED

Wrote CONTROL, the 8 step system behind these figures. More about the author.