Top line growth represents survival to a lot of contractors. Without regularly signing new contracts most contractors would go out of business in short order. Growth isn’t just an important thing, to some contractors, growth is the only thing. Every existing contract eventually comes to an end. As long as you have new business coming down the pipeline, you’re in business. If the job flow stops, you can be out of business in a hurry. That’s the main reason contractors believe “growth is always good”.
Growth Management
As soon as a contract is signed the marketing department and estimators need to begin to browse through the available work for the next project to put in the pipeline. This is the critical moment in growth management. If a contractor is looking for any job they can get their hands on, the chances of the project they select contributing great returns to the company are slim to none. If, however, they are looking for the most appropriate project the company can tackle, the chances of profitability go way up. Finding the most appropriate project usually means finding a likely profitable project.
The Most Appropriate Project
But how does one decide which project is most appropriate? Obviously staying very close to your line of work is a good start in project selection. If you’re a road builder, attempting a building project is not going to help, and if a road building project includes a series of bridges, and your company rarely builds bridges, you probably have to reject that project in favor of one that doesn’t include multiple bridges. In other words, there are serious parameters that every potential project needs to be tested against to decide which project has the best chance of turning a profit. This may seem obvious, but in the industry with the second highest failure rate in the nation, it apparently is not. These are the primary considerations:
Size – Size refers to the magnitude and price of the project.
- Small projects are typically the most profitable but there are not enough of them to support the organization.
- Average size projects are the projects a company typically performs. Most of the estimators in the organization can price them, most superintendents and project managers can build them, and these projects almost always produce a fair profit.
- Large projects help a company achieve critical mass and support the natural desire for growth. But the desire to build big projects does not automatically translate into the ability to build bigger projects at a profit. Big projects often include more detailed designer inspections and requirements, and an increase in working capital that will be tied up for a longer period than the firm is accustomed to.
Type – A firm’s prior experience with a project type indisputably affects the likelihood that the firm will complete the project at a profit.
- A contractor who is experienced at building electrical generating plants might avoid trying to build a nuclear power plant.
- An expert hotel builder might want to stay away from sewage treatment plants.
- An electrical contractor experienced at wiring hospitals may want to stay away from electrical distribution projects.
Location – Familiarity with an area is an underrated advantage in the construction industry.
- A change in location often has an unexpected learning curve.
- There are often differences in how the work is produced, inspected, and paid for.
- A contractor with experience exclusively in rural and suburban areas puts profit at risk if the company takes on a project in a congested urban area.
Team – Before bidding any project, construction professionals must evaluate the capabilities of the team that will be responsible for completing it profitably.
- Will individuals who have limited experience with the project type be assigned to the project?
- Will new hires, who are untested, be needed to complete a project?
- Even though your firm might have institutional experience building certain projects, do the available members of your team have the specific experience required?
Catch 22
The temptation to aggressively bid the next job that comes along is almost irresistible. Construction is a competitive marketplace that requires risk-taking to acquire enough work to keep the company intact and growing.
Start-up contractors without a reputation must aggressively low bid just to get in the game. Because of aggressive low bidding, they find themselves running out of cash as jobs progress. They then must acquire the next job (even if they have no experience, are short of cash, or must travel to get the work) quickly to give their diminishing cash flow a fresh injection.
This, of course, turns out to be “Catch 22″. If you continually bid low to assure you can get the next job that comes along, you will almost certainly be gradually eroding your capital and eventually put yourself out of business. However, if you don’t bid low aggressively you will probably go out of business for lack of work. Catch-22.
Next week we’ll discuss a system for avoiding Catch-22 and for selecting the most appropriate (likely profitable) projects. See you then.
For more information about project selection, read more at: SELECTION
For a broader view of strategic project planning, read more at: PLANNING
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