This year, it is my mission to discuss the science of business. When financial transactions are small and simple the commonsense entrepreneur can make artful choices that propel the firm forward. But when construction companies achieve scale, they become the most challenging businesses in the world to manage.
For the most part construction companies are run by a founder who started as the first employee working with the tools. Time passes, and the founder has been so busy building their bigger projects that they don’t even notice that the business has outgrown their ability to manage it.
Governor Mario M. Cuomo Bridge
A construction entrepreneur does not need an MBA to frame a house for newlyweds and get paid for it. But Tappan Zee Constructors, the contractors who tackled the Governor Mario M. Cuomo Bridge in Tarrytown, N.Y., had to know more about business transactions than making correct change.
- The project was one of the largest single transportation design-build contracts in the United States that took years to complete for a total cost of more than $4 billion. While the initial contract was $3.14 billion, the final project cost included almost a million dollars in disputed claims from the builders. The project was a business management marvel.
- The iconic three-mile-long bridge carries eight general traffic lanes (that accommodate 140,000 vehicles a day), emergency shoulders, dedicated bus lanes and space for commuter rail, all suspended between 419-foot cable stayed towers angled at 5 degrees. It has a 1.5% grade compared to 3% on the old Tappan Zee Bridge that allows large trucks to maintain consistent speed and reduce engine and braking noise. The bridge is an engineering marvel.
Managing The Business
- Can you imagine any other industry tackling a single $4 billion financial transaction that took years to complete?
- Can you imagine the complexity of managing the business plan, the staffing, the day-to-day cash flow, materials acquisition, skilled labor supply, and the daunting contract and legal entanglements?
- Can you imagine managing all this without any experience? No one had ever attempted to build a three-mile-long high-tech bridge with a huge number of unfamiliar subcontractors, international material suppliers, an independent labor force, using leading edge technology, and making a profit doing it. As I have often said, “Every new construction project is like going into a new business.”
Having the Right Tools
During the past 40 years consulting with all aspects of the construction industry, I have learned that contractors tend to overlook the tested everyday management tools used to guide most American industry. Because of ubiquitous private ownership across the entire construction industry, contractors are inclined to:
- Rarely utilize the collective wisdom and experience of a Board of Directors.
- Consider Strategic Planning superfluous.
- Underutilize budgets.
- Be more motivated by the top line than the bottom line. They often take on work with limited profit potential.
- Minimize cash flow planning.
- Rarely utilize formal “financial risk management” techniques.
- Often leave the position of Chief Financial Officer ignored. “Accountants don’t know anything about construction” is the refrain I hear most often.
- Fill key management positions with unqualified family members or favored employees. They wouldn’t consider putting an under-educated relative in charge of engineering, but they think nothing of putting a completely untrained relative or friend in charge of managing complicated business transactions.
- Have no experience in financing projects and often don’t even recognize that they are financing the project. And they almost never get paid for it.
- Ignore balance sheet data when managing the business.
- Discount trends revealed from analyzing their 5-year financial history.
- Accept more than their fair share of financial risk when signing a contract.
- Rarely hold owners and their representatives responsible for adhering to the strict payment terms of their construction contract.
Schleifer MBA
The list of omissions above came from my notes while operating my surety consulting firm. I studied contractors large and small who had suddenly lost control of their business. The single question I asked in every case was how did this otherwise competent builder suddenly go out of business?
I began this year’s blog series at the beginning – Management is decision making. The rest of the year will be devoted to identifying and explaining the difference between gut-level/off the top of the head decision making and informed decision making. Business administration is all about informed decision making. Stick around and get your Schleifer MBA in construction.
For more information on construction company management, read more at: MANAGEMENT
For a broader view of management tools, read more at: TOOLS
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.
