What a Crazy Business
Thomas C Schleifer, Ph.D.
In this year’s opening blog series, we have been discussing the elevated risk level caused by COVID induced cost inflation, labor shortages, supply chain snags, and a potential recession that may result from the Fed’s battle against inflation. The positive feedback to this series of blogs from contractors, sureties, and accounting professionals has been reassuring but also a little puzzling. Everyone agrees that the risks we have been analyzing so far this year are real, but no one seems inordinately concerned. When I asked some of my readers why they seemed almost blasé about this combination of pitfalls to profitability, they all said, in one form or another, that risk was nothing new to them. They had seen this all before, and they had survived. “Tough times never last, but tough people do.” That seems to be the collective mantra.
Are We All Crazy?
In other words, the construction business by its very nature is so fraught with risk that most practitioners don’t see risk as anything unusual or particularly concerning. If you’ll bear with me, I believe it’s time to step back and look at the construction industry from a slight remove. Are we engaged in an activity that is so convoluted that no sane business professional would attempt to make a profit continuously from such transactional complexity? Have we let our industry evolve out of control and find ourselves scampering around plugging holes to stop the profit leaks? In other words, have we all gone crazy?
Stop The Craziness
I was recently asked this question by a thoughtful construction professional that I often confer with: “If you could imagine a construction industry that was positioned for reasonable profitability and risk but didn’t necessarily look anything like the current industry, what would you imagine?”
My response was the result of decades of research and analysis of our industry—ideas that I have shared before, but few industry practitioners seem to want to hear. I answered:
Keep in mind that contractors do not just build things. Primarily we sell construction services. That is a far cry from how most contractors see their business. In other words, we supply the owners of future buildings, roads, etc.; the highly sophisticated expertise it takes to construct THEIR needs. We do not build an edifice and then sell it to the owner for a profit. Since we never own the asset, we should not share in the risk of ownership. But we do. That is bad a business model from the start. Most of our problems stem from that initial inappropriate belief.
In A Perfect World
What would profitable contracting look like if it flowed from the more accurate self-image that we are simply experts selling a service in the marketplace? (I like to refer to this imaginary business model as construction in Heaven.)
- The proper transaction begins with the owner searching the construction marketplace for the best contractor even if the one with the best reputation is the most expensive. This would make the initial transaction businesslike rather than counterproductive like traditional low-bid contracting.
- The contract would be a “fee for services” contract (e.g., cost-plus).
- The contractor would take no pseudo-ownership risk position in the transaction by acquiring and reselling materials, for example.
- The contractor’s liability would be confined to performance and quality issues.
- Owners would be responsible for all construction costs.
- Contractors would focus on quality performance, reputation, and identifying and partnering with sub-contractors and suppliers who have the best reputation for quality service.
- The transactional financial risk would be accepted by the owner of the asset.
I believe that throughout the 20th century the construction industry has been swindled by certain public and private agencies who see themselves as heroes of the public good and contractors as the financial enemy of the people. Once contractors let this image take hold we will realize that we are being saddled with most, if not all, of the financial risk from an asset we do not own and could not profit from. If we ever want to begin to seriously address risk mitigation it will begin with questioning these counterproductive beliefs and reconstructing our self-image.
Outside The Box
My optimistic imaginations are almost a complete rethinking of the construction industry as it has evolved over the 20th century. My construction “nirvana” will probably never come to pass, but it does inspire me to rethink industry risk and craft some new approaches. I recount these thoughts here to awaken construction professionals to the magnitude of the risks we take on in the normal course of the contracting business, often without realizing it. The risks that have been continuously and deliberately push down the construction process chain to those who actually produce the work (as opposed to those who own and benefit from the projects) are huge and defy logic. When wrestling with a sticky problem it is always helpful to step back and look at it from a distance. Many would call this, “thinking outside the box.” Next week we’ll “think outside the box” about staffing in 2023.
For more on risks refer to a recent ENR Viewpoint on supply chain risks at: https://simplarfoundation.org/enr-supply-chain-snarls-arent-going-away-do-something-about-them/
For a deeper look into Supply Chain Risks , read more here: SUPPLY CHAIN RISKS
For a broader view into risk management read more here: RISK MANAGEMENT
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