Every bet has a winner and a loser. The bookie always wins a little, but the bettor often loses a lot. What’s the difference?
The Recognition and Management of Risk.
Risk Recognition
Both the bookie and the bettor recognize that every bet has a winner and a loser. They both recognize risk but respond differently.
- The bookie seeks to minimize any chance of losing money.
- The bettor believes that only big risk can lead to big reward.
- They recognize risk from different perspectives; one trying to win big while the other is trying to eliminate loss.
- We contractors are risk takers. We’re bettors. We not only recognize the risk inherent in construction contracts but eagerly embrace it hoping for a big win.
The Bookie’s Risk Management
The bookie (currently a sports book website rather than a calculating money manager with a green eyeshade) uses a protocol called “balancing the book”, an advanced algorithm that changes the odds as betting rolls along. They endeavor to equalize the betting on both teams, balancing the book to eliminate any “gambling” losses to the bookie. If there is any imbalance at game time, the bookie lays the imbalance off to his bookmaker, thereby finally leveling the playing field. The bookie makes money on the “vig” or the fee he charges for handling the bets. Insurance companies use the same type of algorithm to “underwrite” insurance risk. Both are engaged in aggressive risk management techniques designed to minimize losses and protect their normal profit margins.
The Bettor’s Risk Management
Most bettors engage in risk management “off the books”. They accumulate information about the contestants and place their bet based on their knowledge about which team is statistically more likely to win the game. However, they are influenced by a heavy burden of “feelings”, “instincts” and “hometown favorites”. This risk management is not a mathematical calculation based on an algorithm, but rather an informed guess on a future outcome. That’s what is meant by “off the books” risk management.
Contractor’s Risk Management
Most contractors use a form of “off the books” risk management. They estimate a job, which most of us are willing to admit is sometimes just a really good guess. We are then forced to intuit the likelihood of the many risk variables such as on-time payment, efficient labor practices, stable material costs, management stability, etc. falling exactly into place as planned. Contractors have to believe that navigating a project through the shoals of risk is the competitive edge they have with their management skills.
The Bookie or The Bettor
During a research project I polled contractors on whether they would rather manage risk like the bookie or the bettor? Most saw the safety in being the bookie but said they would rather be the bettor. Many responders felt that taking on risk was the only way to grow their businesses, and they liked testing their skills to see if they could get a big “payoff”. When it was pointed out that the bookie was making a bigger bet than the bettor and that they were recognizing and managing risk in advance to eliminate loss, most contractors thought that the bookie displayed too little ambition. Too conservative, was their judgement.
The Thrill of Victory / The Agony of Defeat
Every time we submit bids or sign a contract, we are making a big bet. We sort of agree that “if anything can go wrong, it will”. But we are convinced that if we apply all of our administrative and operational expertise, we can mitigate the risk factors intricate in every complex construction project. Construction professionals are natural risk takers and risk takers tend to “bite off more than they can chew”. To contractors, big bets represent the “thrill of victory”.
In 2024 I hope to demonstrate that the “thrill of victory” (big bet = big payoff) is not eliminated by careful risk management, but the “agony of defeat” is. Contractors can still embrace some risk to grow their businesses while applying risk mitigation techniques like sports bookies and insurance companies.
I have designed comparatively simple risk mitigation algorithms like the R Score and The Project Selection Tool to assist construction professionals to recognize and measure risk and take steps in advance to mitigate its impact. In other words, manage risk “on the books” rather than “off the books and after the fact”.
In the closing weeks of 2023, we will summarize our construction business management dialogue for the past year and point to where it will take us in 2024. Stick around. Putting the fun back into the construction business has just begun.
For a deeper look into financial management and risk, read more here: RISK
For a broader view into risk mitigation, read more here: MITIGATION
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.
