True or False
Thomas C Schleifer, Ph.D.
The human brain is a problem-solving instrument that learns how to care for its host through experience. Its job is to keep us safe from harm and, as it makes its journey through life, it remembers the choices that work along the way. These successful experiences harden into firmly held “beliefs” that the brain holds dear and rarely reexamines.
Throughout my career as a construction contractor and now as a business consultant to the construction industry I frequently had, or heard from contractors, firmly held “beliefs” about our industry. When I or a contractor would express one or another of these “beliefs” I later learned to ask myself, “Is that really so?”
Common Contractor “Beliefs”
- We have no choice. We must aggressively bid low for new business, or our competition wins the work.
- Growth is survival. You’re either growing or you’re going backwards.
- Bigger jobs supply more cash flow.
- We can build anything or can hire the talent to build it. To be successful a contractor needs to be versatile and take any job we can get.
- Not all jobs are profitable, but the profitable ones make up for the occasional loser.
- Cash flow is king, not job-by-job profitability.
- The home office team that I have built is my company, and I often have to take work just to support it. If I have to bid too low or take big jobs or jobs out of my familiar territory that’s just business. If I cut overhead every time the market goes down, I will effectively dismantle my company.
- It’s too expensive to lease heavy equipment. It’s better to own it and use it for its entire useful life.
- Front load as much up-front payment as you can because progress payments are always slow and contentious and rarely match ongoing expenses.
- Accountants produce after-the-fact reports for sureties and bankers which are not useful for real-time management information.
True or False
The most important question regarding these “beliefs” is – are they really true? Most firmly held beliefs are rarely re-examined. They are accepted as true and relied on almost as common sense. But are they? Let’s take a look at the beliefs above and see if systematic methodical research confirms they are true or false.
- False – Research has shown that aggressive low-bidding leads to inefficient job selection, contentious legal battles, excessive and expensive bank borrowing, a reduction in quality, and an increase in contractor failure.
- False-In the volume-driven industry of construction that thrives on growth, research shows that a rate of continual growth in excess of 15% is considered substantial. At just 15% a company doubles in five years and triples in eight. At higher rates it gets worse. At 25% it doubles in three years and triples in five. At this rate the risk of failure is high because a company grows beyond its people and systems repeatedly and does not have the same organization long enough to truly test it.
- False – Bigger jobs use more cash and hold retainage for long periods of time. The working capital requirements are often in excess of the company’s capital capacity and costly bank borrowing is required to sustain the project over slow progress payments, contentious extras, and excessive retention.
- False – The amount of prior experience with a type of project is directly proportional to the likelihood of successfully proposing and delivering the project profitably, on time, and on budget.
- False-ish – Contractors take on a wide variety of jobs and inevitably some are unprofitable. However, the “belief” that unprofitable work is normal and acceptable is a mistake because it leads to sloppy and cavalier project selection that will eventually catch up with you.
- False – Cash flow does not trump profitability. It precedes it.
- False-ish – The collective expertise of your team is your company. However, the use of advanced management concepts like flexible overhead and managed project selection reduces the need to take high-risk projects to support existing overhead.
- False – Leasing and even renting expensive heavy equipment has proven to be an efficient use of capital that compensates for the fluctuating business cycle and often intermittent utilization of owned equipment.
- True-ish – Front loading is a financial technique used to manage a construction business transaction. However, our industry demonstrates insecurity, even low self-esteem by historically and continuously accepting slow pay in violation of binding contract terms. It is a costly flaw that puts too many contractors in financial jeopardy.
- False – Too many contractors are surprised when they run out of money. It is critical that contractors, regardless of size, employ competent CFOs and listen to them in order to help manage the tricky financial environment of a construction business.
Contractors tend to rely on instinct to manage their business. A lifetime of acquired “beliefs” informs these instincts but often misleads management. Step back and take a careful look at your beliefs. Make sure they are still accurate and relevant. If not, have the presence of mind to change them.
Next week we will revisit commodity pricing.
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