How Your 12-Month Rolling Backlog Affects Your Annual Sales Goal
If you have 100 pennies in a piggy bank and you take 80 out, you are left with 20. If you have a $10 million back log of sales and you put $8 million in place without obtaining more work, you are left with $2 million. Whatever you take out of the piggy bank, or from your back log, must be replaced or your cash and sales will diminish.
If you study the current backlog of 20 contractors, along with the duration of their contracts, you can predict what each of their sales volumes will be over the next few months. If you know their annual overhead, the margins at which they bid their projects, and their backlog, you can also predict what their net profit will be.
Sure, backlog and margin statistics may not be perfect science like extracting from your penny bank, but it’s close. However, many in the industry set their yearly targets without considering what their current back log is.
A contractor I recently worked with told me his goal was to do $10 million in sales in 2018. In March, his back log was only $2 million.
We discussed how construction cycles work. With a steady $2 million back log after the first three months of the year, you are starting 2018 at a huge sales deficit, I explained. We agreed that he would need to win a ton of bids soon or he was sure to miss his 2018 sales goal.
The construction cycle starts when work is won. It is the measure of gross sales volume for the contractor for the next few months. Remember, the cycle starts when you obtain the work, not at the beginning of the year in which you set your goals. I call this the rolling 12-month back log.
So, the contractor and I discussed how construction cycle time works for a mason contractor. Let’s say you just landed a $1.2 million contract. By the time the submittal approval process is complete and the general contractor (GC) is ready for you to start the foundations/block work, three months has passed. If it takes two months to do block work, you are now five months into the project. Then, the GC must frame the building, install the windows, finish the roof, and prepare the exterior before you install the brick, which requires another 4 months. You are now 9 months into the project. If you spend three months installing brick, you just ended a 12-month cycle time to complete the project.
With the $1.2 million project taking 12 months to complete, although the billing will not be the same each month, the 12-month rolling back log cycle is $100,000 per month ($1.2 million divided by 12 months). I believe this is a great barometer for contractors to use when predicting future sales compared to their current back log.
Some projects have longer or shorter timelines than others. As for the GC, he may have a 16 month project. If his contract is for $16 million, the monthly rolling sales contribution is $1 million per month ($16 million divided by 16 months). The only difference is that his contract is $16 million instead of yours at $1.2 million.
The GC can also predict his rolling sales volume. Looking at this as a 12-month rolling cycle time, the GC will do $1 million per month or $12 million of the $16 million over the next 12-month period. And, if $16 million is the only work the GC has on his books, until he obtains more work, $1 million per month is his 12-month rolling sales volume.
Study your backlog today, and until you obtain more work, you can predict what your company will be doing in sales the next few months. How does this affect you on smaller projects? If it is a $600,000 project with a six-month duration, your 12-month rolling sales back log will still contribute $100,000 per month ($600,000 divided by six months) towards your yearly sales goal.
So how can my contractor friend get to $10 million for the year when he started with a $2 million back log? Again, he better get a lot of work quickly. If he doesn’t obtain any work for the next couple months, which would put him at the end of May, the construction sales cycle will require him to obtain $16 million in June alone to hit his 2018 goals. This is because sales for the first six months would have been approximately $1 million, with only $1 million of the original $2 million left in his backlog. He would also do $8 million of the $16 million he just obtained for a total of $10 million in recognized sales volume (1+1+8=10). The 12 month-rolling sales cycle will only allow him to do $8 million the last six months.
Our goal at Lang Masonry Contractors (LMC) is to do $21 million in 2018 at a 6% net profit. So, if my 12-month rolling back log theory is correct, and LMC has billed only $7 million by the end of June, I know we must go into July with a $28 million back log so we can do $14 million the last six months of the year or we miss our $21 million sales goal.
Looking ahead to 2019. If our goal is $24 million in sales and we started July 2018 with a $28 million back log, I predict $14 million of that back log will remain at the beginning of 2019. Our estimators must then pick up an additional $10 million in work the last six months of 2018 so we can go into 2019 with a $24 million (14 + 10 = 24) back log. Based on my 12 month rolling backlog theory, a $24 million back log to start 2019 is the first step towards us reaching our 2019 goal of $24 million.
Again, it is not perfect science, but just like taking money out of your piggy bank, and putting more in, by studying your back log and project timelines, you can predict within a reasonable margin of error what is left and will be in the bank at any time.
Although keeping your steady back log to maintain future sales levels is important, it is just as important to make sure you maintain desired margins in the bids you win. If not, all the science about how your back log will affect future sales is for nothing, as missing bids means missing net profit goals. Taking on work without proper margins can be a death wish, putting even the best operators out of business.
Damian Lang is CEO at Lang Masonry Contractors, Wolf Creek Construction, Malta Dynamics, and EZG Manufacturing. To view the products and equipment his companies created to make jobsites more efficient, visit his websites at ezgmfg.com or maltadynamics.com. To receive his free e-newsletters or to speak with Damian on his management systems or products, email:firstname.lastname@example.org or call 740-749-3512.