Over my career as a contractor, educator, and consultant to the construction industry I have worked with hundreds of different contractors that were as dissimilar as chalk and cheese. They were short or tall, large or trim, but they were all self-confident.
No one has the daring to become a contractor without an ample dose of courage. Contracting is like venturing into unfamiliar terrain where you’re not sure how you’re going to get where you need to go and with hidden dangers along the way. What makes a rational well-paid tradesperson or construction graduate decide to “go out on their own” and become a contractor? Courage.
Self-Confidence
As with so many powerful people throughout history, the virtue of self-confidence often turns into the vice of over-confidence. In contemplating a job several times bigger than anything their firm has ever tackled; overconfidence looks like this; “Sure we can take that job. We can build anything.”
Overconfidence is the belief driving “We can build anything”. And while it’s nice to have confidence in your team, it is folly to believe they can build anything (at a profit).
Capacity
In deciding what project to go after, capacity is what matters, not self-confidence. Whether your organization can profit from the next contract has nothing to do with self-confidence, but everything to do with capacity.
Capacity is the measurement of an organization’s ability to complete a proposed project on time and budget for a reasonable profit. There are two primary elements to capacity:
1. Management 2. Capital
Management Capacity
Management capacity is the collective ability of an organization’s management organization to complete a proposed project on time, within quality standards, for a reasonable profit. The yardstick used to measure management capacity is the accumulated experience of the team to profitably produce past projects similar in size and type.
1. Have our estimators ever accurately priced a project this size?
2. Have our project managers ever built a multi-story round tower?
3. Can our team organize a project of this type, complexity, and size?
4. Has our field supervision ever organized a labor force of this size?
Research data reveals the following yardsticks:
1. A construction company can only grow at a rate of 15% a year without overtaxing their ability to prosper. More than that, increases risk at an unsustainable rate.
2. Don’t expect to complete a project for a profit that you have no experience building, and avoid new types of construction. Expand expertise in your specialty.
3. One underperforming project can impair a company’s “going concern” status by affecting its ability to secure future bonding.
Capital Capacity
Capital capacity is the ability to provide sufficient working capital to see a project through to a successful completion.
The four primary sources of working capital are:
1. Cash and equivalents on hand
2. Available working capital line of credit at the bank.
3. Collecting accounts receivable
4. Delaying accounts payable
The five primary uses of working capital are:
1. Increase in accounts receivable
2. Decrease in accounts payable
3. Reduction of long-term debt
4. Capital expenditures
5. Increase in owner’s cash draw.
This list is limited by the space available in this brief message. I think you get the idea. Your CFO or accounting manager can accurately estimate the amounts above and measure the impact on working capital capacity available to support new work.
The Capacity Belief
Most of the failing firms I worked with in the completion business tended to seriously overestimate working capital sources and underestimate the uses of working capital. They believed that they could complete “any” project in the future because they had completed “some” projects in the past. They were over-confident—not bothering to carefully measure their management and capital capacities. Had they made their decision to take on the losing project with a capacity belief rather than a self-confident belief they would never have taken it on in the first place.
More on how our most cherished beliefs can trip us up next week.
For a deeper look into capital capacity, read more here: CAPITAL CAPACITY
For a broader view into growth, read more here: GROWTH
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.
