Dr. Thomas C Schleifer
I should have called The Project Selection Program the “Contractor’s Odds-Making Tool” because, in the end, I designed it to work just like a Vegas sports book. By isolating the most common causes of project failure, then weighting them according to their impact on the thousands of case histories I used in the sample, I found that the causes of project failure were both identifiable and measurable, and that the Project Selection Program could predict with an excellent degree of accuracy whether a contractor could complete a project successfully/profitably.
Contractors rarely think that they are at risk of sudden failure. It’s always the other guy “who didn’t know what they were doing”. That is not surprising. Most of the contractors who suddenly failed and had to abandon the projects I was hired to complete for the sureties were “surprised” and “shocked” that they unexpectedly could not pay their bills. I admit, that did surprise me also. I wanted to know why experienced and otherwise competent contractors had no idea that they were about to fail. What were the circumstances surrounding this mystery? What was causing these failures? Why didn’t the contractors see it coming?
The Top Ten Risk Factors Identified:
- Jobs too big for a contractor’s competence or capacity.
- Working for unfamiliar owners.
- Working with new designers, architects, and sub-contractors.
- Diversifying into unfamiliar construction specialties without proper preparation.
- Questionable owner’s financing or payment history.
- Unreasonable contract terms.
- Project located outside of contractor’s familiar geography.
- Pursuing growth at any cost for its own sake.
- Ignoring (or not even employing) competent financial professionals.
- Ignoring the balance sheet and the role of capital in a construction firm’s ability to survive.
- If other incidental risk factors had an impact on isolated situations, I dropped them from consideration as insignificant.
- I analyzed each of the top ten risk factors and weighted them in accordance with the frequency of their appearance in case histories.
- I took it for a test drive. I sent the program to a large sampling of contractors and asked them to apply the program to jobs they had completed successfully and to jobs they had lost money on. Almost 100% of participants reported that the Project Selection Program accurately projected the success or failure history of the projects back tested.
Three core insights emerged from the mountain of data assembled over a ten-year period:
- There are no inherently bad (unprofitable) jobs.
- There are, however, mismatches of contractors to projects.
- It is not the projects that cause sudden contractor failure. It is mistakes in judgment along the way that aren’t noticed but finally add up to catastrophic failure.
Free to Self-Administer
In the beginning I charged a fee to administer the Project Selection Program. I quickly realized, however, that setting the odds on every bet a contractor makes is an essential contractor’s management tool. So, I refined the program making it free and easy for contractors to self-administer. That was the only way this tool would get in enough hands to make a difference. If you haven’t yet tried the program, you can find it online on the Simplar website. To use it to your best advantage, however, it is important to take two preliminary steps:
- Avoid distorting “bettor’s bias” by appointing people in your organization (CFO/Accounting Manager/etc.) to self-administer the program who do not have a vested interest in “growth” for the sake of growth. (Having multiple team members administer the program independently is most appropriate.)
- Whoever self-administers the program should first “back-test” it on jobs your firm has already completed. I recommend applying it to at least two past successful projects and at least one unsuccessful project. This will build your firm’s confidence in the accuracy and usefulness of the program as it applies to your company.
Contracting is not a traditional business. The contractor is not a brown shoe business executive. He or she is a gambler. After establishing an organization to deliver construction services, the contractor is left to place one bet after another that their organization can complete complex projects for a fixed price and make a profit doing it. What are the odds that he or she will win this bet more often than not? That’s what the Project Selection Program predicts with a consistently high degree of accuracy. It’s a tool similar to the one that Vegas odds-makers use to set the morning line. They always make money. So can you.
Next week we will discuss financial malpractice. Don’t miss it.
Find additional information on topics discussed here in the book The Secretes To Construction Business Success, published by Routledge https://bit.ly/3G9ornf.
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