Tony the Temper
Thomas C Schleifer, Ph.D.
Contractors and their senior executives don’t pull wire, pour concrete, drive nails, or dig holes. They don’t do the estimating, scheduling, or accounting for ongoing work. Once a contract is signed and a project is underway, they begin to look around the market for the next project. They are continually engaged in the skilled trade of project selection.
Project Selection is a Skilled Trade
Looking for the next project is not a passive random exercise. Successful contractors are not sitting around the office waiting for the next contract to drop into their lap. As soon as their team goes to work on a project, top management begins a methodical search of the market for the next appropriate project that will take the company into the future. Skilled project selectors do not take just any project that comes along. Rather, they apply a set of criteria to evaluate a potential project that fits their organization’s accumulated skill sets, management capability, and capital capacity. In other words, they are looking for projects that, on balance, they have the best chance of completing on time, on budget, and for a profit.
Measuring Risk of Project Success
Every contractor brings a different risk profile to the already well-known risks inherent in any project. In other words, each company’s collective experience and competence defines their risk factors. A lack of experience in specific areas dramatically increases risk, which is the primary reason that contractors often find themselves in a situation I call the “80/20 syndrome”. Most contractors take on a verity of projects and our research data indicates that often over time 80% are profitable while the other fail to earn the anticipated profit or lose money. Accepting a certain amount of losing projects is a dangerous tendency because without careful evaluation, history tells us that in this industry (with the second highest failure rate) losing projects can overwhelm the winners and busy contractors who think they are full steam ahead suddenly fail when they run out of cash without warning.
The Racing Form
Tony the Temper, a professional handicapper at Belmont Raceway on Long Island, always said “liars figure, but figures don’t lie”. The first time you go to the track you bet on your hunches with enthusiasm and continue until you lose all your money. After a few visits, however, you temper your enthusiasm and learn from the handicappers how to read the racing form and apply some science to each horse’s chances of winning.
When contractors are relatively new to the industry, they take any work they can get. However, after they have been around a while and have achieved some institutional maturity, they become more selective. Like the racetrack tout, they use historic data to assess the likelihood of making a profit on the jobs they are considering.
Project Selection Program
It took three years of research to identify the data that can be weighted and placed in a numeric formula to handicap a construction project’s chance of being a winner. There are five statistical risk factors that must be considered when placing a bet on the next project.
- Project size – Often the apparent deluge of cash from big jobs entices contractors to take jobs that are much larger than their organization has experience building.
- Complexity of design – Each construction organization has its own institutional experience, but statistics confirm that the collective experience of the construction industry is with conventional projects following established designs. Any deviation increases project risk dramatically.
- Experience of the construction team – Experience is accumulated institutionally but is captured individually. The number of members on a project team with direct and relevant experience improves a project’s delivery performance and reduces risk.
- Project location – Because construction work is produced differently across various parts of the country, experience working in a certain geographic area impacts the contractor’s likelihood of success.
- The type of project – Experience with similar work is critical. For Example: If an organization has been successful constructing relatively straightforward warehouses and strip shopping centers, then decides to attempt their first sewage treatment plant, they would have no institutional experience on this type of project. The likelihood of successfully pricing and producing the work would be limited, resulting in high risk compared to an organization that regularly builds treatment plants.
The Project Selection Tool
It took years of research to design and develop a systematic process (not unlike Tony the Temper’s handicapping system) for use by contractors in deciding to go after a given project. The need for a process to screen-out losing projects at the pre-project stage to enhance profitability led to the development of the Project Selection Tool. The five project risk factors discussed above were able to be weighted and placed in a numeric formula developed to provide a measurement of project risk. The “Project Selection Program” is available on this website at no cost (research@simplarfoundation.org). It is simple to use and extremely accurate in calculating project risk. It’s similar to Tony the Temper’s handicapping system but put to legitimate business use. Give it a try. (Next week we’ll offer coaching on how to use it.)
For a deeper look into the Project Selection Tool, read more here: TOOL
For a broader view into project selection, read more here: Project Selection
To receive the free, weekly Construction Messages, ask questions, or make comments, contact me at research@simplarfoundation.org
Please circulate this widely. It will benefit your constituents. This research is continuous and includes new information weekly as it becomes available. Thank you.
