By Jeff Gendreau and Russell Fleming
Overhead: It’s a term sometimes so fraught with complexity that it almost can seem like a dirty word. But for many construction companies, it doesn’t have to be muttered under the breath anymore, if outsourcing is in the staffing mix.
According to a recent Deloitte Consulting report, many organizations in the corporate real estate industry, which includes construction, have realized that the most effective service delivery model combines in-house and contracted services.
Outsourcing has succeeded because of its ability to reduce risk, drive standardization, increase productivity and improve reliability, noted a recent Accenture report. It also noted that where outsourcing has been successful, it has been because of its ability to industrialize assets, capabilities, functions and tasks.
A large part of that shift toward more outsourcing comes from a need to reduce overhead, and outsourcing definitely has an effect on the bottom line if it’s properly managed. In addition to keeping the accountants happy, outsourcing can yield benefits in other areas, too, such as giving a company a wider pool of talent and specific skills than it might have had otherwise.
When should a construction business consider outsourcing? The answer usually depends on a specific project situation, but in general, the strategy often comes in handy when specialized expertise is required and a company might not be able to obtain it unless there’s an outsourcing arrangement.
For example, hiring an engineer with extensive experience in building large-scale data centers might be expensive and time-consuming when it comes to recruiting workers, and unnecessary unless the construction business is building many data centers instead of just one. Having that very specific expertise is crucial, though, for understanding power and cooling issues, cabling concerns, heat exchange placement and other data center design factors. By outsourcing, a business can get all the required knowledge without the overhead and HR effort.
Numerous types of functions in a construction project can be outsourced, and subcontractors have been used for everything from creation of digital models for 3-D renderings to background checks on prospective hires to employee training for safety and health issues. As long as an outsourcing relationship can be managed in such a way that it reduces overhead rather than increases management headaches, it can be beneficial.
Finding the right relationship
When thinking about an outsourcing arrangement, an organization needs to look at considerations such as quality and service, information security and access to data, and proper management and monitoring of the contract.
Before creating a request for proposals to solicit outsourcing agreements, a company should have a clear idea of how the relationship is going to work and what vendors might fit with a project, according to Deloitte. Factors to consider include: geographic scope, so time isn’t spent juggling vendors in different areas; how fees and expenses will be determined, and what level and types of risk will be shared; how both parties will manage the relationship; and what level of information sharing and technology infrastructure will be put into place.
An organization needs to understand the reputation, quality of work, bonding capacity and quality of personnel of an outsource business. In addition to nuts-and-bolts basics such as proper insurance, there should also be conversations around how well the company’s employees take direction.
When working on a municipal project, there’s nearly always a bond required, and bonds come into play with larger-scale commercial and industrial projects as well. When that’s a factor, the economic health and reputation of the bonding organization are important in case it needs to be called upon to perform on the bond.
Borrowing capacity and an outsource company’s banking relationship also are critical. During tough economic times, an organization must have a bank that is able to finance or provide the contractor with access to working capital. The bank is a key partner to assist in securing work in order to pay for the projects at the beginning, until the projects themselves begin to see cash flow. Banking and bonding go hand-in-hand, since bonding companies want to ensure that a company has access to capital, and banks want to ensure that there’s a strong equity position.
With a thorough selection process and a firm grasp on how an outsource provider will work with a business, project managers might just be able to use the word “overhead” without flinching.
Jeff Gendreau, CPA, is a partner in the Minneapolis office of the accounting firm Baker Tilly Virchow Krause LLP. Russell Fleming, CPA, is a partner in the firm’s Detroit office.