A Negative Bias
We called this blog “Let’s Talk Business” (letstalkbusiness.net) because we wanted to emphasize business management issues in construction as opposed to operations, engineering, or design. Many senior managers in the construction industry started as tradesmen, apprenticed to carpenters, electricians, plumbers, or heavy equipment operators. Some are engineers, but few are business or accounting majors. This background leaves them with a bias toward operations and away from the “home office” functions of planning, budgeting, and accounting. As construction concerns grew larger and more complex, senior management did hire “accounting types” but considered them “bean counters” who didn’t know anything about construction. They didn’t speak “construction”.
The Bias Identified
“The three primary functions of a construction business are the following: getting the work, doing the work, and accounting for the work.” (Managing the Profitable Construction Business, Thomas C. Schleifer, Ph. D, Kenneth T. Sullivan, Ph. D, John M. Murdough, CPA, Wiley, 2014, p.15)
Ask yourself this question: “Do I consider each of these three functions equally important to the success of my company?”
Research tells us that your answer is a resounding – NO.
An Unbiased View
The purpose of all business endeavors is profit. Profits add to capital and sufficient capital is the foundation on which all construction enterprises are built. In construction, however, profit is a tricky business.
Our industry is unlike any other. Every new project is an entirely new business. Long periods of time elapse between inception and completion. All along the way, profitability is a guess. Even when a project is completed and signed off, one man’s “profits” are another man’s “losses”. What portion of overhead was charged to the job? Are all expenses in and accounted for? Was the original bid too low? Were “extras” properly assigned? How about wear and tear on equipment? Etc… etc… etc.
Let’s Talk Business
This blog is dedicated to altering the construction industry’s bias toward top-line growth to a bias toward insuring profitability on every project. We are trying to move “accounting for the work” in the minds of senior management to parity with “getting the work” and “doing the work”. All three functions are equally important to profitability, capital stability, and company longevity.
Negative Bias Audit
How severe is your negative bias? Here is a confidential soul-searchthat all senior management in the construction industry should conduct.
Ask yourself the following questions:
- Do you respect and listen to your CFO? Do you even employ one?
- Do you have a formal written business plan?
- Is every PM constrained by a budget?
- Do you review budget performance regularly?
- Are you a “cash flow” fanatic?
- Are bids designed by operations or marketing?
- Do monthly financials have clear, consistent, and properly timed cutoffs?
- Are you a bulldog collecting accounts receivable?
- Does your company have a formal change order policy?
- Do you keep your bankers close?
- Do you know where your surety plays golf?
- Does your company encourage employee professional and personal development?
- Do you have formal risk management plans?
If you found yourself answering an abrupt “no” or “who needs that?” to many of these self-audit questions, you have a negative bias toward formal business management skills. If constantly booking more business while using your gut feel to control expenses sums up your strategic plan, you are at risk of unexpectedly depleting your capital and slipping into liquidation. If you believe your company is stable, because you’ve been in business for twenty years and you’re still growing, you’re ignoring the ongoing sudden collapse of construction firms large and small, domestic and foreign, legacy and recently formed.
Construction Company Self-Analysis Program
Decades of research lead us to create a do-it-yourself diagnostic tool that provides the equivalence of an independent expert evaluation of every aspect of your business. This tool will provide you with a comprehensive insight into the complex functional areas of your business. I strongly recommend that every construction company CEO, Owner or manager fill out the questionnaire found here on the site (click on at “Tools,” top right and then “Construction Company Self-analysis Program.”). Take the opportunity to reflect on your company’s performance from a “big picture” perspective. I submit that, after careful reflection, you will see a path forward that you perhaps had not imagined before. After completing the questionnaire, and without further consultation, the experienced CEO always finds himself altering his bias against those “bean counters”.