Overhead
This economic slowdown caused by the coronavirus pandemic presents an opportunity for senior construction management to reevaluate and renew their companies, preparing to participate fully in the growth market cycle that will surely follow the downturn.
As I have said many times, construction activity lags the US economy by about 12 to 18 months. This unusual market slump will last for quite a while yet but the market will eventually cycle back to growth.
This delay presents an opportunity for our industry to take a closer look at itself and answer two important management questions:
- What measures should we take to prosper during these continuous construction market cycles?
- What changes do we need to make in how we operate our company in order to take full advantage of the growth cycle that will follow this contraction?
Both these questions involve how we manage the cost of doing business (overhead) in both expanding and contracting markets.
Two New Concepts
- Flexible Overhead
“Flexible overhead” is a new concept I introduced some years ago and have been preaching it since my book, Managing the Profitable Construction Business, came out in 2014.
“The marketplace is predictable in that it will grow and shrink on an irregular cycle that averages 10 Years apart. (Nothing could be more to the point than this pandemic economic downturn.)
“If construction enterprises cannot be sure of a stable or growing market while causing or allowing the businesses to grow, they can control the risk by putting on overhead that can easily be removed when the market turns down. With some of their overhead flexible, the company does not become a slave to their volume and can fall back if necessary, always concentrating on profit.This is particularly significant advice during the pandemic in that most construction companies will be forced to downsize and after a while will expand again.
“The method is to use temporary employee services for some clerical administrative and accounting functions. Use short-term rentals for some office and field equipment and short-term office leases, even temporary trailers, during growth stages until a new plateau of volume can be reasonably assured.” (There is additional information on Flexible Overhead on this website)
- Functional Analysis
“Functional Analysis” is another new management concept borrowed from engineering theory that enables a contractor to “reimagine” his or her entire overhead organization from a functional point-of-view. Let me explain.
The concept of “functional analysis” starts with this question: “Is there a way to manage overhead in lean years without dismantling an organization?”
Rather than viewing a company as an organization of people who occupy certain positions, what if we view a company as a desired outcome that is produced by an arrangement of inputs? This does not mean a lack of care and concern for our people. It is simply a method of understanding our business more thoroughly and how and why it functions in order to recognize where and how we might improve performance and profitability.
Ultimate Outcome
A functional analysis begins by identifying the ultimate outcome the company is trying to achieve. The ultimate outcome is not only “what” the company produces. It is also “why” the company produces the “what”. Here is a quote from some of my earlier work on the topic:
“The obvious purpose of a construction contractor is to contract to do something. If that were all, the contractor would need only a salesman and a lawyer, and he would be in business. However, the contract calls for a job [quantity] -of-work that the contractor must perform. In other words, they must complete the contract. When they do, they will have satisfied the customer’s purpose for entering into the contract. They may not however have satisfied their purpose for entering into the contract. They need to make a living. They intend to have some money left over after paying all the expenses required to complete the contract. Their purpose is to make a profit. The ultimate desired outcome for all contractors, therefore, is: COMPLETED PROFITABLE CONTRACTS
Functions Not Positions
After identifying the ultimate desired outcome of a company, a functional analysis goes on to identify the functions, or the well thought out collection of inputs that produces a completed profitable contract.
A functional analysis creates a dynamic representation of what each position in the organization actually does to contribute to the corporation’s ultimate outcome-profit. It traces the workflow from the initial project concept to the ultimate outcome and evaluates the efficiency and cost of each contributing function.
A Closer Look
There is additional materials on these two management concepts available on this website. If you have questions direct them to me at this site.
