Size Matters

Size Matters

 

Megaprojects fail often because they’re too big and complex for even large, highly sophisticated contracting firms to plan accurately and manage effectively. At the same time, smaller contractors trying to grow their companies often jump too far and take on projects that are too big for their management capability. In fact, all the research into the causes of contractor failure point to the same thing. Undertaking projects that are much larger than a contractor is accustomed to doing is the most frequent cause of contractor failure. 

Size Always Matters

  • A start-up company will typically grow by attempting larger and larger projects to find and establish a comfortable size. These growing pains are difficult to avoid and are a large part of the reason that start-up construction companies have an extremely high failure rate.
  • One reason an established firm attempts a mega project is due to lack of work. When backlog is down, larger projects seem a quick way out. But a project 25% larger than any previous one carries much less risk than a project 200% larger.
  • For every business, regardless of the industry, there is a limit to the rate at which it can grow safely. The problem is finding that limit before passing right through it. Determining the limits of expansion is not easy because there are few rules or restrictions.
  • There are fundamental financial constraints to healthy and sustainable growth. These constraints are profitability, capital position relative to capital requirements, and access to additional capital.
  • If an organization is to grow, its management must grow. An organization’s management growth must be qualitative, not just quantitative. Qualitative organizational growth takes time. It usually takes more time than it takes to capture larger projects, but qualitative growth needs to occur prior to sales growth.
  • The increased risk with mega projects can be attributed to a lack of experience with a certain size and complexity. An organization with a profitable track record doing projects of a certain size cannot simply assume that it can profit from a megaproject.

Small firm – Big Firm, Same Problems

The term “megaprojects” is generally used to describe billion dollars plus projects because these are big, even for the largest of contractors. For these monstrous projects, “mega” is a good descriptor. However, while not common use, the term can also be “relative” and applied to any size contractor. To a contractor that normally builds projects up to $50 million, a $200 million project is “mega”. For a contractor who regularly constructs projects up to $3 million, a $50 million project is “mega”. We can learn about the causes of megaproject failures from the study of any size contractor. Let’s take a look at the failure of a small construction firm.

Case Study

Consider the smaller construction company that averaged annual revenue of sixteen million dollars. They had been in business for 15 years and their average project size had grown proportionately to about $3 million.  When they were offered the opportunity to bid a $12 million local project, they decided to take the plunge. Here’s what happened:

  • Right at the start they had difficulty getting accurate estimates together since some of the specialty items were from distant suppliers and sources they had never dealt with before – risk of mispricing.
  • The size of the electrical and mechanical work on the project precluded the ability of the local subcontractors that they were used to working with – risk of working with unfamiliar subcontractors.
  • Because of a last-minute snag on the bonding, they submitted their final bid at $11.8 million – risk of mispricing. 
  • Because this size job required a full-time superintendent and project manager from the day of inception, the contractor was not staffed adequately to handle the new job and finish up the jobs he already had in progress – risk of inadequate personnel.
  • The contractor’s assumption that the client would overlook some of the specifications he considered to be excessive also became costly. The client wouldn’t overlook them, and the unexpected cost fell on the contractor – risk of poor contract negotiation.
  • The payments on the project were very slow and much larger than the contractor was used to or easily able to finance. A threat to stop the job if payment wasn’t forthcoming was countered by a threat to terminate the contractor from the job if he ever threatened stoppage again – risk of slow pay.
  • More personnel problems developed when the contractor’s two key people announced that they were overworked and that the job was outside their expertise and comfort zone – risk of over-extended management.
  • By the time the project was 2/3 complete the contractor knew he was facing a substantial loss and additional losses on two other projects because he had stretched his key people too thin and too much detail had been overlooked or neglected – risk of over-extended management.

All of these insidious and unexpected problems led to a cash shortage that prevented the contractor from paying his subs on time, and the big job collapsed taking the entire firm down with it.

Conclusion

When you look deeply into the many megaprojects that fail to produce the intended results for all stakeholders, you will see the same risks emerging that confounded our smaller “case-study”, contractor. They all fail for the same reason – SIZE.

Read More: Survival Guide and Basics of Construction Business Success