“Ya Puts Up Ya Money…Ya Takes Yer Cherce”
Thomas C Schleifer, Ph.D.
So says Charles Dickens’ racetrack tout in his native cockney accent. This colorful character in Dickens’ 19th century novel describes construction contracting more accurately and concisely than all the scholars in all the business schools in all the universities in America.
Texas Hold ‘em
Contractors bet our own capital (Ya puts up Ya money) every time we select a project (Ya takes yer cherce) and contract to complete it on time and within budget. We are playing a high stakes game of Texas Hold ‘em. Beginning with a modest ante, the bets get bigger as the quality of our hand begins to emerge with each round of the deal. When contractors think their hand is unbeatable, they go “all in”. The savvy contractor evaluates their company’s ability to prevail with each revelation of risk after each round of the deal. Successful contractors have to be good gamblers.
Ability to Prevail
A low pair rarely wins the hand. A pair of aces, however, puts the player in contention. Three of a kind will often win, but not always. You might go “all-in” when you hold three aces and for sure when you hold four of any card. In other words, as the “capacity” of your hand improves your chances of prevailing improve. We should only go “all-in” when our ability to prevail is almost a sure thing.
I call the ability of a contractor to complete a project and make a reasonable profit the capacity of a company. Capacity is the collection of elements and experience that renders a construction firm competent. Successful electrical contractors never take on plumbing projects. Plumbing contractors have no confidence in their ability to finish concrete, and a New Jersey construction company, expert at building hospitals, never goes “all-in” on a project in California. These organizations would have little confidence in their “ability to prevail”.
When Bigger is Too Big
Rarely does an HVAC firm attempt a carpentry project, but the temptation to go “bigger” haunts every contractor. The question is when is bigger, too big? Is there any such thing? Aren’t all projects in my line of work fair game? Can’t I just expand capacity to match project size rather than limit project size to conform to existing capacity? How should we define capacity when it comes to measuring the appropriate size of a new project?
The smart poker player knows how to assess risk. Knows when to fold or go “all in” by assessing the potential capacity of their hand against the potential capacity of their opponent’s hand. In other words, the key to making a realistic bet is the ability to assess capacity.
When a contractor has successfully completed multiple projects between $5 and $10 million, for example, they have proven their company’s capacity to produce that size work at a profit. In other words, they have proven they have the capacity to go “all in” on similar projects between $5 and $10 million in the future.
What about when a similar type of project drops into their market at $20 or 30 million? Most contractors would see that as a bonanza. However, a savvy Texas Hold ’em player would take a careful look at their capacity to jump up to $20 or 30 million.
- Do I have enough capital and credit to finance slow progress payments and retainage of this size?
- Do my estimators have enough experience to accurately foresee costs on this scale over an extended time period?
- Can my project managers organize crews of this size and maintain efficiency?
- Can we staff up on this scale, or will we be short of skilled labor?
- Can my existing accounting staff handle this volume of transactions and produce accurate and timely project costs that will enable us to manage a monster project at a profit?
- Can I afford the additional equipment required to complete a $20 or 30 million project?
Size is Relative
Contractors take on projects of all sizes – small, medium, and large. However, size designations are relative. A $30 million project is large to a contractor who has only completed $5 million projects. However, a contractor who is used to $100 million projects might see a $30 million project as small. Size designation is relative to existing, proven capacity.
Our racetrack tout tells us, “There ain’t no bad bets – just losing bets.”
I tell contractors, “There are no bad projects – just bad matches of contractors to projects.”
Next week we’ll look at what type of project is too risky for us.
For a deeper look into the project selection, read more here: SELECTION
For a broader view into risk management, read more here: RISK
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