Dr Thomas C Schleifer
Why do so many construction companies fail without anyone realizing they were about to go under? When I ran the largest surety consultancy in the country that completed projects for bonding companies after construction firms had suddenly failed, I was amazed to discover that the majority of those contractors were completely surprised that they had failed. And they rarely knew why they had failed.
Place Your Bets
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. If you think about it, this is a novel way to do business. In effect, we contractors are placing a bet that we will get paid a sufficient pre-arranged amount after incurring costs we can only tally after the job is complete. In other words, 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.
“Know When to Hold ’em – Know When to Fold ’em”
Like the song says, the first rule of the gambler is, “You’ve got to know when to hold ’em and know when to fold ’em.” As gamblers this is the most vital skill contractors can develop. But how can we know when to bid a job or when to stand pat? How can we accurately estimate the total costs we will incur in a hyper-inflation environment two years into the future? How can we place an informed bet rather than play a hunch? Only suckers play hunches. Gamblers rely on data to inform their risks.
“The secret to survivin’ is knowin’ what to throw away…Knowin’ what to keep.”
Be The Bookie
The gambler is never a consistent winner. The bookie is. The guy who sets the odds, then books the bets. He never plays a hunch or takes a flyer, but carefully measures risk through the application of intricate algorithms developed through relevant data extracted from the sport’s history. Bookies seldom lose money.
If contractors acted more like bookies and less like gamblers, we would save ourselves a lot of losses. Every bid submitted and contract signed should only be executed after data experts (your estimators and your Chief Financial Officer) have analyzed the relevant economic environmental factors (impact of inflation, labor costs, supply shortages) and have assessed the bottom-line risk of winning or losing.
A Disorderly Market
With fifty years in the construction business, I have never seen a more disorderly market. We are not experiencing a typical volatile construction marketplace caused by periodic economic stresses and strains. This post-pandemic market is rife with unexpected nightmarish economic traumas that render orderly business practices almost impossible. Two and a half years of a deadly viral pandemic that killed more than a million Americans, decimated our labor force, interrupted the worldwide supply of goods, and incited rampant price inflation across the entire world, has been followed by the Russian invasion of the Ukraine causing interrupted energy supply and fuel prices to skyrocket, adding insult to injury.
Without the keen eye of your in-house odds makers (accountants and estimators) assessing your chances of success (setting the line on every new proposal), you will almost certainly make bad bets based on wishes and hunches as you hesitantly move forward in this disorderly market. It’s time to be the bookie. It’s time to rely on your financial professionals to analyze risk before you make any moves. This is a mine field. One false step can upend your entire organization. If you won’t listen to me, how about listening to Kenny Rogers…
🎵You got to know when to hold ’em
Know when to fold ’em
Know when to walk away
And know when to run
You never count your money
When you’re sittin’ at the table
There’ll be time enough for countin’
When the dealing’s done. 🎵
Next week we’ll discuss how your CFO can help you beat the spread. Tune in.
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 causes of business failure, read more here: FAILURE
For a broader view into the role of CFOs, read more here: CHIEF FINANCIAL OFFICER
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