The Science of Business Management
There seems to be some misconception about what it takes to manage a construction business. Hard-working construction people who make the transition from employee to self-employed usually have an ample dose of common sense combined with initiative and courage but that’s not all it takes to run a business. Our industry appears to have limited respect for or understanding of science of business management.
Industry Profile
There are 1.3 million construction concerns in the U.S. generating annual revenues exceeding $1.36 trillion and employing over 7 million people. But here’s a shocker – there are only 42 publicly traded construction companies. 42 out of 1.3 million! That’s astounding and quite revealing. The public stock exchanges have been a primary source of capital for just about all substantial American industries and require a certain level of reporting and oversight. The fact that construction companies are not public companies tells us why there seems to be as many ways to manage a construction business as there are construction firms. I have heard it said that running a construction company requires nothing more than a lot of experience and a good dose of common sense. This may be the profile of an entrepreneur, but not of a professional businessperson.
Who Are These Builder CEOs?
The typical startup construction contractor is one or more highly skilled tradespersons with the inclination to become their own boss. For startups, success depends solely on the principal’s ability to do the work. These small contractors do not need to know how business works because their interactions are a simple “sales transaction” whereby they trade expertise for money, produce the work, and get paid for it.
However, when small contractors grow, they advance into the “business” of construction where everything changes. The companies move from “sales transactions” to a “business organization”. All that matters from this point forward is a thorough knowledge of how business works because the contractor no longer does the work but now has to “cause” the work to get done by others (employees and subcontractors)—at a profit.
The Science of Business
Because public companies are rarely run by original founders but rather by professional managers, managing a business has become a trained profession. The world’s first business school, ESCP (Ecole Spéciale de Commerce et d’Industrie) was established in Paris in 1819. It’s founder, economist Jean-Baptiste Say, coined the term entrepreneurship. In 1881, Joseph Wharton established America’s first collegiate school of business at The University of Pennsylvania – a radical idea that revolutionized business practice and established the “science” of business management. For 140 years business school scholars have been refining the art and science of business management going far beyond “a range of experience and a dose of common sense”.
Construction Business Management
The ability to form, develop, populate, and direct a large organization in the pursuit of a single objective (profit) requires refined skills that come naturally to only a few geniuses. The rest of us need to be taught how to accomplish this daunting task. When you review a list of the various functions involved in successful management of a construction company, you begin to get a better insight into why business management is a highly complex science. Below is a list of the functions necessary to run a construction enterprise larger than a start-up. The contractor/CEO needs to know enough about each of these topics to make sure they are appropriately addressed and be able to supervise the person or persons responsible.
- Accounting: use of financial information/planning, cash flow management
- Banking and Borrowing: management of financial relationships
- Business Opportunities: evaluation, strategies to enter or get out of
- Change Orders: management, pricing
- Computer: technology, appraisal, selection, acquisition, use
- Contracts: negotiations, administration, contract law
- Crisis: management, avoidance
- Customer Service: client maintenance, customer relations, networking
- Designer/Inspector: managing including appropriate relationships
- Disputes/Claims: avoidance, negotiation, resolution
- Equipment: evaluation, purchase, tool selection, maintenance, management
- Estimating: strategies including adjusting pricing to circumstances
- Labor: management, negotiation, understanding prevailing regulations
- Leadership: including employee selection and management
- Marketing: advertising, and networking, screening potential customers
- Marketplace: understanding, evaluation, and changes – including market cycles
- Motivation: team building, earning loyalty including compensation, benefits/perks
- Organization Structuring: maintenance, and updating
- Overhead: management and control
- Planning: business, short/long-term strategies
- Productivity: management, operating policies, production standards, costs
- Professional Development: self and employees
- Project Selection: screening, market, and competition analysis
- Risk: recognition/management including insurance – evaluate, select, purchase
- Safety: management, administration, OSHA, other prevailing safety regulations
- Subcontractor/Vendor: screening, selection, management
- Surety: use and management of relationships
(I welcome suggested additions to this list.)
It’s Simple Really
The above list of management functions involved in running a profitable construction company highlights the complexity of the science. One hundred forty years of research into business success and failure across all industry has established this maxim: There is a right way and a wrong way to do everything. Every successful manager must know the difference.
We will continue this discussion next week.
For information business management, read more at: https://simplarfoundation.org/?s=business+management
For a broader view on the organizational change, read more here: https://simplarfoundation.org/?s=organizational+change
To receive the free weekly Construction Messages, ask questions, or make comments contact me at research@simplarfoundation.org.
Please circulate this widely. It will benefit your constituents. This research is continuous and includes new information weekly as it becomes available. Thank you
