The Root of All Evil
It took me 30 years of research to get to the hidden root cause of construction business failures:
- Bad management decisions are caused by firmly held bad beliefs.
In other words, whether we are aware of it or not, every decision we make is colored by our view of reality at any given moment in time. We commonly call such “views of reality”, prejudices. These beliefs color our judgment and distort our perceptions. My research shows that many construction industry professionals commonly hold a collection of unexamined false beliefs about how things work in the industry.
10 False Construction Management Beliefs
(There are many more we will discuss in 2021).
FALSE BELIEF #1
Constant top-line growth and “front-end cash flow” are necessary for success in the construction industry.
FALSE BELIEF #2
Profit calculation is often too hard to determine and too late to matter.
FALSE BELIEF #3
The balance sheet is an accounting report for accountants not an indispensable management tool.
FALSE BELIEF #4
Capital is only a balance sheet metric that takes a backseat to cash flow in the real world.
FALSE BELIEF #5
Accountants know numbers but not construction. They know “what happened” but not “what should happen”
FALSE BELIEF # 6
The tension between marketing and estimating is a good thing and not to be discouraged. (When top management prioritizes marketing, however, this tension often causes estimators to fashion unreasonably modest cost estimates.)
FALSE BELIEF #7
It is the competitive environment of construction that leads to marginally profitable low bids. It cannot be avoided.
FALSE BELIEF #8
The occasional marginally profitable job (that often ends up losing money in the end) can help cover overhead and can be made up with the front-end cash flow generated by the next job.
FALSE BELIEF #9
It is good management to use extras to make up for the ridiculous low bid submitted in order to win the contract.
FALSE BELIEF #10
Construction is a “bare-knuckle” fight to the finish between owners and contractors, management and labor, estimators and marketers, project managers and designers. Often these “fights” can only be settled in court.
Reexamine Your Beliefs
Every construction company could improve its profit-making potential. Let’s take a close look at the things many construction professionals believe about how to manage a construction company. They typically come up with factors over which they have little control, like:
- Shortage of skilled labor
- Unreasonable union labor demands
- Fluctuating markets
- Unreasonable lenders
- Unreliable suppliers
- Contentious owners
- Unforeseen weather delays
- Incompetent subs
- Expensive lawyers
- “Motherhood” government regulations.
Rarely will construction professionals come up with, “I was laboring under a misconception that caused me to make a bad decision”. They seldom admit that they:
- Shouldn’t have entered into certain contracts
- Submitted such low bids
- Taken work they had no experience in
- Expanded too rapidly
- Assumed too much risk
- Miscalculated their firm’s limitations
- Believed future work would cure current problems
The Root of the Problem – A Belief
The belief back in 1910 in the State of New York that all politicians would likely take bribes from contractors led to a life-long acquisition process of self-destructive, low-bid competition among contractors. Most of the profit problems the construction industry struggles with today can be traced back to that 1910 belief.
If the industry had begun with the “best practice” of choosing the most qualified contractor for each project, the unreasonable low-bid fixed pricing that has become an axiom of the construction industry could have been avoided. What a wonderful world that would have been.