Let me begin 2024 by saying thank you to everyone who participated in our construction business management dialogue in the last eight years. We began the Weekly Construction Message with a few construction industry professionals and academics debating business concepts. We ended last year with more than 20,000 readers. It is clear that everyone is eager to find better ways to manage this unusual and complex business of construction.
How Contractors See Their Business
Our dialogue in 2024 will begin with a fresh look at outdated beliefs about the business of construction. As we learned in 2023, too many business management decisions are informed by the unexamined beliefs held about the nature of this business.
Belief #1. The construction industry is the business of signing a legally binding performance contract to complete a highly complex project for a fixed price in a limited time frame while adhering to detailed specifications. The typical construction contract assigns most of the financial risk to contractors by requiring us to front the working capital funded after the work is put in place by progress payments contingent on inspection by the owner’s design team. There is no payment allowance for expenses that exceed original cost estimates.
Belief #2. Construction contracting is a highly competitive business that requires aggressive pricing to acquire new business. Shrinking margins are just the nature of modern contracting and can only be mitigated by cutting corners along the way. This competitive market results in the occasional, but inevitable, unprofitable contract. This can’t be helped but must be accepted by the realistic contractor.
Belief #3. Traditional financial statements, while necessary for reporting to banks and sureties, are not ongoing management tools. CFOs and accounting managers compile “after-the-fact” reports but do not participate in ongoing management decisions. They are not considered construction professionals. They are accountants.
Belief #4. Cash flow is the name of the game, not job-by-job profitability.
Belief #5. Growth is always good. If you’re not going forward, you are going backward.
Belief #6. Expanding home office overhead is a symbol of success. Cutting overhead is dismantling your company. The only desirable flexibility is expansion. Contraction is failure.
Belief #7. Both skilled and unskilled trade workers are a commodity supplied by sub-contractors. Productivity is enhanced by discipline not motivation.
Belief #8. Trade unions are not part of the construction family. At the very best, they are distant recalcitrant cousins who need to be contended with.
Belief #9. Cash flow from ongoing activity is the primary source of working capital. Outside investors are not readily available for growth capital and represent a loss of control.
Belief #10. The nature of the contracting business does not lend itself to long-term planning. The business advances from contract to contract and that’s as far into the future planning can look.
Let’s Take Action
This year we will be examining how these long-held beliefs about the nature of the construction business are costing our industry billions of dollars. We will examine steps to recognize and mitigate the financial risk imbalance that has devolved almost exclusively to the contractor.
- We will demonstrate a technique for moving your firm away from low-bid acquisition toward “best-in-class” contracting that could eventually double profit margins on jobs both large and small.
- We will share tips on how to prepare your firm to access public markets to acquire abundant working capital without losing control of your company.
- We will discuss the essential use of financial statements to manage a complex business unique to the construction industry.
- We will suggest management methods to increase the industry’s supply of skilled labor.
- We will offer a primer in the “why” and “how” to assemble an active board of advisors/directors.
- We will spend some time defining contracts that properly assign risk to the responsible party in a construction transaction.
- We will discuss the intrusion of consolidation into the construction industry and how your firm can benefit in the long run.
- We will share secrets about how to make money on every project.
2024 is the year that we will endeavor to increase profitability on every project by recognizing erroneous beliefs and taking steps to correct not only our beliefs but also the management actions we need to take because of those beliefs.
2024 will be an exciting year of increased profitability and abundant cash flow. It is time for us to take action to prevent shrinking margins, refresh the labor pool, and rebuild America’s decaying infrastructure.
Let’s increase margins and make money.
For a deeper look into contracting beliefs, read more here: BELIEFS
For a broader view into growth, read more here: GROWTH
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.
