When All You Have is a Hammer, Everything Looks Like a Nail

By Matt Stevens

There is no one solution in construction. Try as we may, it will always take several approaches working in concert to make a project come in on time and budget while keeping a contractor profitable. An older contractor has learned many hard won lessons how to keep his business and his projects running smoothly. He or she will be the first to tell you that there is no singular approach.

If someone is selling software, TQM, recruiting or other services, they may see their offering as the answer to construction's problems. I see these valuable services as part of the answer but, these solutions have to be balanced with other needs. Following one of these as a total focus is to ignore the complexities of running a construction firm.

We have an industry that is sick from a thousand cuts. Many little things compose the majority of our construction ills. We have all searched the world for the answer to construction's challenges and some of us are still searching.

I have categorized these multiple approaches into three main groups. Any profitable construction business is based on three keystones. All else is subordinate:

1. Processes
2. Compliance to the Those Processes
3. Risk/Reward Curve Position

Processes are those things that work in making the cost and revenue of a project distant from each other. Thoughtful processes drive cost down and keep revenue the same (if not rising). For a construction company, good processes keep corporate expenses lower than the competition.

Construction is a cost-side business and the greater the distance of cost from revenue, the more secure the business. Said another way, if these two business numbers are close together then the company may have one bad event and cost can quickly become more than revenue (a loss).

I have spent several years creating, observing and documenting these “best practices.” I did so knowing many of my clients stated that they make the most money consistently following a thoughtful approach. These processes can help contractors get faster to profitability.

Some processes are tactical (daily) and some are strategic (long term). The daily ones can be documented in a business management manual and the long-term ones written in a strategic plan.

Compliance to those Processes means a high predictability in behaviors. Just as a construction company is well regarded when it scrupulously keeps its promises to clients, so is the payoff when everyone inside a company keeps their “promise” to follow the company’s processes. The faster and more accurate the compliance, the lower the cost of business. The right employees affect this key variable positively.

Compliance is critical as the contracting market does not allow even modest premiums over competitors.

From my work with construction firms, I have seen compliance as high as about 80% in all processes. These are highly profitable firms. You may think that this is a surprise that compliance is not over 90%. It shouldn't be. Construction firms are the "tail on the dog" in many ways. We work for a funder and user (owner) and are subject to a designer’s vision. Both of these parties tend to have their own agenda and a highly productive contractor on their projects is not a top concern.

Your Risk/Reward Curve Position is where the business of construction contracting comes together. Find the sweet spot on that curve and your company is at a place where there is a high reward for the risk you are taking.

The risk/reward curve is inverse to the general business curve. Lessen risk and you make more money. It is odd but true. Increase risk and you will make less money on average. Long term, this is accurate. The effort of managing risk has a positive reward.

Lower-risk construction situations tend to have higher rewards. Companies who follow a thoughtful process move upward in profitability because they lessen or eliminate these profit impacts. It is important to note that some of these risks and thus your position on the curve is chosen by you.

These three factors drive profitability. What is comforting is that business can be more quantitatively managed. I don’t believe in a bloodless business model that discourages people from creative and entrepreneurial thinking. However, I feel strongly that this approach makes cost, schedule, quality and safety more predictable while driving all of these concerns in the right direction. As a result, business relationships with clients flourish. No greater goal exists in the business of construction contracting.
 
Matt Stevens is management consultant to construction contractors. His book, Managing a Construction Firm on Just 24 Hours a Day was published by McGraw-Hill Cos. in 2006. He may be reached at mstevens@stevensci.com