Project Selection Realities
Dr Thomas C Schleifer
The gambler plays a hunch and takes a flyer. The odds maker weights past performance variables and uses probability statistics to estimate the possibility of future successful outcomes. Who do you think most often prevails in this battle of wits?
Last week we established a contractor’s bona fides as a gambler. “Construction contracting is unlike any other business. The product is sold for a future fixed price before anyone knows exactly what it will cost to build. In effect, the contractor is placing a bet that we will get paid a pre-arranged sufficient amount while incurring costs we can only tally after the job is complete. In other words, we contractors are gamblers. Every time we win a bid and sign a contract, we are betting that we can make a profit on the transaction.”
Texas Hold’ em
The problem is when the contractor gambles he or she is not just sports betting. They’re playing Texas Hold ‘em poker. When small to medium sized contractors win a bid and sign a contract, they often find themselves going “all in”. Unless they are willing to settle for smaller jobs of shorter duration, contractors are almost always betting the farm on their bigger projects even if they don’t realize it. That’s one of the major reasons why the failure rate is so high in the construction industry.
- Imagine if you were the only player at the table in a Texas Hold’ em game who had to go “all in” on the turn of the next card regardless of the cards you had in the hole.
- On the other hand, imagine if you were an expert card counter who could calculate your odds of winning just by analyzing the cards you could see as they were played. Then the decision to either cautiously bet behind the action or go “all in” at “the turn” would be made based on probability statistics worked out long before the game began.
Causes of Construction Company Failure
For many years as my company was asked by sureties to complete hundreds of projects suddenly interrupted, I began to research in great detail why so many contractors were failing without warning. After reviewing hundreds contractors’ historic financial records and studying a history of their operating experience, I found myself asking the remaining executives the following obvious question, “Why did you guys take this job (or jobs) in the first place?”
From the financial history, the operating experience study, and the executive interviews, I usually discovered one or more of the following risk factors were present:
- The failed construction firms were attempting size of projects they had never done before.
- The construction firms were attempting a type of construction they had never done before.
- They were working outside their usual geographic area.
- They were working with unfamiliar sub-contractors.
- They had never worked for the owner before.
- They were woefully undercapitalized.
As the years passed and we were asked to complete literally thousands of projects, I could see certain risk patterns emerge and began to compile statistics on the causes of contractor failure. I was becoming an odds maker and realized that with the data I was collecting I could calculate the odds of a contractor successfully completing a given project. I was becoming construction’s “Jimmy the Greek”.
The Project Selection Program
The gambler takes a flyer and plays a hunch. The odds maker weights past performance variables and uses probability statistics to estimate the possibility of future successful outcomes.
The Project Selection Program is a program I designed using the risk data collected over the many years I was in the workout business. I designed it as a self-administered handicapping program that contractors could easily use to calculate their odds of success on each proposed project.
- Each risk factor is weighted (in the background) to reflect its impact on the failure rate of individual projects when the risk factor is present in the contractor’s DNA.
- Everyone involved in project selection should participate, but it is important that the CFO (or a senior accounting manager) also fill out the form to avoid the “bettor’s bias” present in the CEO, the estimators, the marketing department, or even field operations supervision. (Bettor’s bias is present when the gambler bets on his “home” team. In construction, the “bettor’s bias” is the desire on the part of executive management to always get bigger and better jobs by telling themselves that their team can do anything.)
- The Project Selection Program is not designed to tell the boss what to do or not to do, but only to set the odds of winning in a dispassionate way. That’s how the odds-maker (handicapper) protects the bookie and how you and your CFO can set the odds in your favor.
Next week we’ll discuss the details of how to utilize the Project Selection Program to your best advantage. Take a look at the program on the Simplar Site (https://simplarfoundation.org/blog/) . It’s free!
Find additional information on topics discussed here in the book The Secretes To Construction Business Success, published by Routledge https://bit.ly/3G9ornf.
For a deeper look into the Project Selection Program, read more here: PSP
For a broader view into the construction business failure, read more here: FAILURE
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