The U. S. construction industry is made up of over a million closely held or family-owned businesses. Only 24 or .000024 % of them are owned by the public and traded on an exchange. That is an astonishing but revealing statistic. Only 24 construction companies match the American industrial growth profile. What is going on here?
Founder/Owner Profile
Most contractors start out working with the tools or in the office and through hard work and a double dose of energy and common sense often build themselves a substantial business. They usually exhibit the AAA personalities of “doers” and “risk takers” that lead the troops into battle. They are rarely “joiners” or followers. They are team leaders not team members. They founded the company – built the company – ran the company – owned the company, and they are reluctant to take in partners or turn any control over to professional managers who they believe don’t really understand construction.
When Building Becomes Business
While working with sureties completing interrupted construction projects I had occasion to study hundreds of failed contracting firms. My associates and I would examine a five-year history of the construction company whose projects we had been brought in to complete. There were, of course, many circumstances that led to sudden contractor failure, but in the top five was what we came to call “managerial maturity”. Many of the failed firms had grown too big and complicated for a single or a few owner(s) with no formal business training to manage without professional assistance. Too many details had slipped through the cracks. The management had not “matured” along with the business.
Closely Held Business
Successful entrepreneurs exhibit similar traits. Their belief system is based on the concept of the “sole practitioner” who functions most efficiently when uninhibited by “partners” or “associates” who drain energy and focus from the leader’s intentions and directions. These sole practitioners instinctively resist sharing either management or financial control with anyone. Even as contracting businesses grow in size and complexity beyond the founders’ expectations, “sole practitioners” tend to remain tightly in control of all the complex functions that must be synchronized to perform like a well-tuned business engine. This is the point where our research discovered that most “sole practitioner” contractors begin to lose control of details in the three main functional areas of a contracting business 1) Estimating & Sales, 2) Construction Operations, and 3) Administration & Accounting.
Managerial Maturity
As a construction company reaches “medium size” (beyond the founder’s capacity to personally manage, control, and regulate), the company can only continue to thrive if the “sole practitioner founder” begins to share management responsibility in any, or all, of the three main functional areas mentioned above. This “sharing” is accomplished in four successive steps:
- The first step is to identify candidates the founder trusts and respects. The “closely held” impulse usually motivates contractors to trust family members (or friends) first and to promote them to functional management positions they are often not qualified to fill. When the business was small, it was sensible to hire your cousin to keep the books because you trusted him or her to keep an eye on your money. However, when the business picks up and the company is engaged in multiple projects for millions of dollars, your cousin quickly finds his or herself in water over their head and nickels and dimes that add up quickly begin to fall through the cracks. Usually, your cousin sees this before you do and becomes frightened and unhappy in their position causing even more money to slip through the cracks. It is time to hire a professional CFO who is trained to manage the accounting and finance function. It is time to respect the functions of professional accounting controls.
- The second step is to take the time to train the candidate for the responsibility they are about to take on. It is unnecessary for the contractor who has no formal accounting training to train a professional accountant in functional accounting skills, but it is necessary to school every new functional manager in the complexity of construction services as well as the unique success culture the founder has imbued their company with.
- The third step is to truly delegate authority to the new manager(s) by letting him/her make management decisions the founder was used to making. This step in managerial maturity is tricky for sole practitioner contractors. Usually, they put a family member in charge of one or more of the three functions (estimating – operations – accounting) and look over their shoulders to ensure that all major functional decisions are cleared with them. This retention of authority negates all the leverage that true delegation would have created and leaves the founder still responsible for every functional management decision.
- The fourth step is to hold the new managers accountable. This step requires the successful completion of the first three steps in managerial maturity. Once the first three requirements have been met, the contractor, with expert assistance, should establish a clear set of performance standards for each function and hold each functional manager accountable for meeting those standards. This is often accomplished through a bonus program or discipline. The important element is to truly hold each functional manager accountable for performance.
Next week we’ll talk further about performance standards and accountability.
For a deeper look into managerial maturity, read more here: MATURITY
For a broader view into organizational change management, read more here: MANAGEMENT
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