The Contracting Business
Thomas C Schleifer, Ph.D.
With only four weeks left in what everyone agrees has been a very eventful year, I’m inclined to engage in big picture thinking as I sum up the year in my mind. I realize that my readers are probably tired of hearing me talk about strategic planning, profit as opposed to top line growth, the proper role of a CFO, use of the balance sheet as a management tool, sufficient capital resources, risk management, and versatility through flexible overhead. Thinking ahead to next year, a few words about the high contractor failure rate that results from ignoring the science of business management.
For the most part, constructors are intuitive managers, risk takers with nimble minds that can keep six balls in the air at the same time. They are a tough lot who lead a large army of diverse trades through long-lasting complex engineering projects that, in the end, must pass close inspection. Assembling the many moving parts of a contracting enterprise and keeping an army of independent thinkers all pulling on the same oar at the same time is the constructor’s principal management skill. Most constructors have come up the hard way through the trades or engineering so they can bob and weave like the best prize fighters and throw the Hail Mary pass when the need arises. They are, after all, the professionals responsible for the entire built environment of the civilized world. Few construction or engineering curriculums include much advanced business training, yet U.S. construction industry put in place projects valued at $1.589 trillion in 2021. Pretty good for a group of tradespeople and engineers who never had time to go to Harvard Business School.
A Great Engineer/Businessman
Perhaps the best example of an engineer applying scientific principles to business management is Jack Welch, the legendary chairman of General Electric. A PHD chemical engineer, Welch led GE as Chairman and CEO from 1981 to 2001. Under his leadership GE increased market value from $12 billion in 1981 to $410 billion when he retired in 2001. In 1980, the year before Welch became CEO, GE recorded revenues of roughly $26.8 billion, and in 2000, the year before he left, they were nearly $130 billion. When Welch was asked what he attributed his success to he said that his training as an engineer taught him that the strict application of scientific principles was the only road to success. As he rose in management at GE, he realized that there must be scientific principles that applied to business management as well, and he constantly applied science to management as his career advanced. A good example is his adoption of Motorola’s Six Sigma quality program to all areas of GE’s performance.
Construction Is Engineering AND Management
I was a tradesman who with my brother Joe started out running a successful small contracting business. However, as the projects grew more complicated, I knew I needed to study the principles of engineering to understand the science of construction, so I went to night school and studied engineering. As our company continued to grow into a more complicated business, I realized I knew very little about how to manage a business, so I continued night school studying business management. Because of my interest in research, I eventually earned a PHD and embarked on a second career as a professor and consultant. For thirty years I studied how contractors succeed or why they fail. When success or failure factors were repeated often enough in company histories, I collated them into Schleifer’s causes of contractor success or failure. They are based on the science of construction business management that would not necessarily suggest themselves to a strictly intuitive construction manager.
Schleifer’s Tenets of Construction
- Contracting is a big money, high risk, complex partnership endeavor where projects often take years to bring to a successful conclusion.
- Every new job involves new pricing, new customers, new specifications, new geography, new sub-contractors, and often new employees–so there is limited continuity of form or function from job to job.
- Because the industry has never had the advantage of abundant equity capital raised in public markets, construction is notoriously undercapitalized.
- Contractors have come to rely on growth to fund ongoing operations which can cause them to lose track of job-by-job profitability–concentrating primarily on cash flow.
- The tradition of low-bid acquisition imposed on the industry a hundred years ago to combat government corruption has disrupted the industry’s proper pricing processes and led to a dangerous erosion of profit margins and a high industry failure rate.
- Most construction professionals do not use accounting as their primary essential management tool–concentrating more on producing the work than accounting for the work.
- Commodity pricing of construction services has evolved into a profit-squeezing vice that is killing contractors.
The list above is not even close to being all-inclusive but is meant to give readers a clue as to what we will be dealing with in 2023.
For a deeper look on how to construction company success or failure, read more here: SUCCESS OR FAILURE
For a broader view into construction business management, read more here: MANAGEMENT
To receive the free, weekly Construction Messages, ask questions, or make comments, contact me at email@example.com
Please circulate this widely. It will benefit your constituents. This research is continuous and includes new information weekly as it becomes available. Thank you