There is no time like the present. 2024 is our year to improve profit margins, increase cash flow, and stabilize our businesses. We will begin at the beginning when we prepare bids and sign contracts. This is the first tentative step we all take into the mine field of profitability. Without careful planning we could ignite the first mine in the field and render the rest of the search for profit a futile exercise. Overly ambitious estimates or a “growth at any cost” management bias can turn the bidding process into a profit death trap. The question for 2024 is how can we improve profitability before we even sign a contract? Which projects have been proven to be under performers for our company most of the time? How can we limit our exposure to losses with a more methodical process of project selection?
Watch Your First Step
Our business is unique in all other industries in that we have no continuing business to fall back on. Ongoing business is only sustained through the signing of new contracts. The next contract always involves a new selling price, new expenses, new participants, and new job-site conditions. Every new project is like going into a new business with risks anticipated and unanticipated. Even successful experience in a particular type of work with the same owner is no guarantee that we will be successful in the next similar project. Before we take the first step into the profit minefield with a newly signed construction project, we need to select only projects that our experience has taught us have the best chance of producing a healthy cash flow and reasonable profitability.
Minefield Beliefs
We too often go after work that we know will be risky and marginally profitable. This self-destructive conduct is common in construction professionals because of the firmly held beliefs we share. I call these beliefs, minefield beliefs because going forward with firmly held preconceived notions that are inaccurate is like venturing blindly into a minefield. Here are the most common profitability mines (beliefs) construction professionals step on before the work even gets under way.
- The scarcity theory is the belief that there is simply not enough work to go around. Most construction professionals begin the bidding process with this belief in the back of their mind. Every project that’s offered must be considered since we never know if another project will come along in the future. This is the construction industry form of the scarcity theory. If we don’t get this contract, we will run out of work. There is simply not enough to go around.
- The belief that “new” is always a positive term implying “fresh”, “better”, or “more”, is not accurate. In contracting, in particular, the term “new” always implies “unknown”. Unknown implies risk. Risk implies potential loss. Therefore, every new construction project is not necessarily a good thing that will solve the cash flow drain already accumulating from past work. In fact, every new construction project comes with an element of financial risk that might well add to the problem.
- “Growth” is always good. This belief is held by just about every construction professional. It is, however, not true. It is the old trick that every magician uses to distract the audience. They first flash “top line” growth because they know that we believe that if sales are abundant, profits will somehow follow. After the magician has the audience fascinated by “top line” they hide the dangers growth presents in the “bottom line”.
- “We can build anything.” This minefield belief can put stars in our eyes taking work we have no business taking. This belief is tricky because it is partially true. Competent construction professionals can build anything given all the money and time necessary. However, taking on an unfamiliar type of construction of a size we have never attempted for a fixed low bid within a limited time frame is a guaranteed profit explosion. The question is not “can we build it”? The question is “can we make a profit building it”?
What Beliefs Do You Start With
Too many construction professionals I have known over my long career in the industry stepped on one of these minefield beliefs and blew up their profit before the work began. Many exploded all four. I did this myself before I learned that I didn’t need to bid every project that came along.
Next week we’ll discuss adopting new beliefs about procurement that will help us avoid stepping on the first mine as we enter the construction profit battlefield.
For a deeper look into construction beliefs, read more here: BELIEFS
For a broader view into managing risk, read more here: PROJECT SELECTION
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.
