Our search for “Best-in-Class” management of construction businesses has led us to the CFO’s door.
Experience completing failed projects for sureties led me into extensive research about why so many construction companies unexpectedly failed, leaving their unfinished work to the surety. The common belief in the industry was (and still is) that the contractors that suddenly fail simply “got in over their head” and that is probably true as far as it goes. But the curiosity lurking under my academic hat wouldn’t let me accept that vague answer for such a serious industry problem. Most of the thousands of jobs my workout firm was called in to complete were not started by greenhorns who “got in over their head.” Quite the contrary. Most of the failed jobs were started by experienced well-respected contracting firms who didn’t see the catastrophic failure coming. It was necessary to dig deeper into the causes of contractor failure to uncover the subtle management mistakes that these contractors were making without realizing it.
No Corporate Planning
If you want to be that guy at a construction industry gathering that causes everyone to get a faraway look in their eye as you start talking, begin encounters with these two deadly words – 1.) strategic -2.) planning. Suddenly everyone either has to go to the restroom or gets a call on their cellphone. When talking about strategic planning at my seminars, even the most alert CEOs lose interest.
“In a past study of several thousand contractors of all sizes and types throughout the country, less than 40% claimed to do any type of formal corporate planning at all, and some that did neglected to formalize their planning process with anything in writing. That percentage has dramatically improved in more recent years, but it demonstrates that a lot of companies have not gotten the message: “Long-term business planning is essential to the continuing success of a construction enterprise. Planning is the ultimate risk control.” (Managing the Profitable Construction Business; Schleifer, Sullivan, and Murdough; Wiley, 2014).
The primary reasons given by contractors for not utilizing strategic planning, a management practice that has been standard across all large industrial companies for 50 years, are: They don’t see the value of vague “wish lists” that never actually pan out. They can’t justify the cost in time and effort. They believe that smaller companies can’t afford the exercise and larger firms can’t nail down the variables in our ever-changing construction marketplace. In other words, since “wish-lists” never come true why go to the trouble and expense of creating one? Many claim that planning beyond the next job is only a “guestimate”.
Your CFO Is A “Financial Engineer”
No professional contractor would begin a project without a detailed plan, and no responsible contractor would plan a project without the input of his field or engineering people. The very notion is absurd.
By the same token, I contend that if contractors truly understood their CFO’s professional skills, they wouldn’t consider going forward in business without his/her scientific review and analysis of the economic impact on the company. Functioning exactly like an engineer, the CFO applies the science of accounting measurement to all business activity, past, present, and future. Ignoring their input would be as irresponsible as ignoring the engineer’s stress tests before proceeding to build a bridge.
The Financial Stress Test
“The process of planning may be defined as deciding in advance what is to be done, when it is to be done, how it is to be done and who is to do it…Without some forecasting and planning, business can be driven in the wrong direction…Once the company is committed in a certain direction, changing that direction drastically can be difficult, expensive, and may be too late…” (Managing The Profitable Construction Business…)
Accounting “before the fact” is an essential function of the CFO. As a financial engineer they apply their financial stress test by:
- Using financial metrics to accurately measure the company’s planned business activity.
- Quantifying the financial impact of the planned activity measured.
- Evaluating the efficacy of the planned activity through historic and prototypical comparisons.
- Modeling the most efficient choices that lead to the best financial outcomes.
Understanding Leads to Respect
Sounds a lot like your “financial engineer’s” work to me. Respecting your CFO’s scientific skills as a member of your top management team is key to protecting your company’s financial performance.
BREAKING NEWS – INFLATION
Construction insurance premiums escalating
Insurance premiums rising +/-25%
Excess and umbrella coverage worse
Renewals no longer a sure thing
Stricter coverage – Lower policy limits
For more information on the importance of CFOs, read more at: https://simplarfoundation.org/?s=cfo
For a broader view on Leadership, read more here: https://simplarfoundation.org/category/business-of-construction/leadership-business-construction/
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