Secrets To Success
Thomas C Schleifer, Ph.D.
Last week we posted the final blog in our series on managing a construction company in disorderly markets. Today we begin a series on the secrets to construction business success. Much attention has been paid to contractor failures because we can learn a lot from them. However, this next series of blogs will focus on how construction businesses succeed in this highly complex Industry.
A Business Like No Other
Construction is a highly competitive, complex business transaction. Let’s look at ten unusual features of the construction business transaction to get a feel for the management challenges presented by the unique transactional nature of contracting.
- Low-Bid Acquisition – Construction’s selling price is largely arrived at through a low-bid competition sometimes referred to as a Dutch auction.
- Slow Motion Transaction – Construction’s business transactions are played out over an extended period of time.
- Dynamic Cost Structure – This extended period of time allows for material and labor costs to inflate while still being charged against a fixed selling price.
- Commodity Priced – Construction services have been viewed as commodities by buyers where one contractor is considered the same as the next resulting in buyers devaluing construction services.
- Downward Pressure on Margins – The Dutch auction, slow motion transaction, dynamic cost structure, and commodity pricing all conspire to put unmanageable downward pressure on margins.
- Coordinated Collective Effort – Projects are built by a loose collection of individual trades and cooperative but independent business entities doing a coordinated dance over an extended period of time.
- Uneven Cash Flow – The slow-motion nature of the construction business transaction is funded by conditional progress payments that rarely match incurred expenses.
- Undercapitalized Actors – The construction industry is largely populated by closely held or family-owned businesses that rarely have access to substantial outside capital while a need for large amounts of working capital is imposed by the uneven cash flow mentioned above.
- No Established Sales Foundation – Unlike all other large industrial concerns, construction organizations do not build their business on a foundation of established ongoing activities. All ongoing business activity is acquired by capturing new business one project at a time.
- Highly Regulated – Many trades are regulated and inspected for compliance throughout the length of the project. The intermittent nature of inspection and compliance is both costly and time consuming.
Secrets to Success
The title of this blog message is taken from the title of my latest book, The Secrets to Construction Business Success. I contend that the management of the unique construction business transactions described above requires management techniques that go well beyond classic management theory. That’s why I call them “Secrets”.
Managing a Construction Business
This series of blogs will discuss the management techniques required to mitigate the ten unique risk factors described above.
- Project Selection – we will discuss how to identify the best projects by size, type, and location for a given contractor to tackle.
- Corporate Self-analysis – a do-it-yourself diagnostic tool that provides the equivalent of an independent expert evaluation of every aspect of your business.
- Indicators of Financial Distress – how CFOs can accurately and continuously identify the financial health of a construction company going forward.
- Subcontractor Management – identifies techniques for managing the complex relationship between a general contractor or CM and their subcontractors and the coordination and cooperation of subcontractors with one another.
- Liquidity Management – covers the critical topic of managing elusive contractor liquidity in an industry with the second highest failure rate in the nation.
- Getting Paid on Time – deals with the contractor’s responsibility for getting paid on time–and how to accomplish that.
- How to Manage Customer Relations – emphasizes the paramount importance of a reputation for honesty, cooperation, quality, dignity, and completing projects on time and on budget.
- Mitigating Hidden Risks – risk identification and evaluation are the foundation of mitigation.
- Flexible Overhead – learning how to respond to market cycles without dismantling your organization.
- Succession planning – How to protect your company’s legacy when you turn over the helm.
Only Found Here
For fifty years of describing and discussing construction strictly as a business I feel like a “voice crying in the wilderness”. Because contracting is such a unique business transaction most management academics have avoided the topic. Although construction is one of the oldest and largest industrial activities in the world, few construction companies are publicly held, professionally capitalized, managed by business school graduates, or are financially transparent. In other words, few management professionals have ever dealt with the business side of construction. I searched the net and couldn’t find any other purely “construction business” blog sites or podcasts so this is your choice for the business side of the business of construction. See you next week.
For a deeper look into leadership and success, read more here: LEADERSHIP
For a broader view into construction business success, read more here: SUCCESS
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