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- Herausgeber: John Wiley & Sons
- Kategorie: Fachliteratur
- Sprache: Englisch
Explore this deep dive into the business side of construction, including how to structure, organize, and operate a construction organization to maximize profit
The most visible work of construction contracting happens on the job site, but some of the most important aspects of running a construction business happen behind the scenes, on the financial and operations side. Construction is the second-most risk-intensive industry in the US, and both minimizing business failures and minimizing the damage that results from inevitable failures are critical. Structuring and managing a profitable construction business requires strategic sense and up-to-date knowledge.
The Business of Construction Contracting describes and analyzes the business side of construction, with a detailed exploration of the major types of business failure and how to avoid them. It’s designed for construction professionals who understand that in this industry everybody faces risk exposure, and the companies that survive and thrive are the ones who understand how to recognize the risks and respond accordingly. It offers documented research findings, rooted in years of construction business experience, that can help both new and veteran business owners find success.
The Business of Construction Contracting readers will also find:
- Exploration of the concepts of flexible overhead, corporate, and financial self-analysis
- Detailed discussion of topics including cash flow thresholds, construction market cycles, and more
- The latest industry technologies and techniques to manage a construction business
The Business of Construction Contracting is ideal for construction professionals – including general contractors, construction managers, and specialty contractors – as well as bonding and insurance professionals, construction attorneys, and vendors servicing the construction industry.
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Veröffentlichungsjahr: 2025
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Table of Contents
Cover
Table of Contents
Title Page
Copyright
Preface
About the Authors
Chapter 1: The Construction Industry
1.1 A Brief History
1.2 What’s Ahead?
1.3 Industry Beliefs
1.4 An Example
1.5 How Many Ways?
1.6 Evaluating a Construction Organization
Chapter 2: Structure of a Construction Business
2.1 Organizational Structure
2.2 Quality Decision-making
2.3 Collaboration
2.4 A Superior Process
2.5 Business Planning
2.6 Business Planning Strategies
2.7 Overhead
2.8 Supporting Production in the Field
Chapter 3: Construction Business Risks
3.1 Definitions
3.2 Awareness of Risks
3.3 Business-risk Categories
3.4 Risk Management
3.5 Financial Risks
3.6 Inappropriate Industry Risks
3.7 Risk Identification
3.8 Profit Versus Value
3.9 Financial-risk Measurement
3.10 Operational Versus Financial Performance
3.11 Gross-profit Changes
3.12 Growth Risks
3.13 Management of Growth Risks
3.14 Market Recovery Risks
3.15 Summary
Chapter 4: Common Elements of Construction Business Failure
4.1 Common Elements of Business Failure
4.2 Increase in Project Size
4.3 Expanding into New Geographic Areas
4.4 Expanding into New Types of Construction
4.5 Changes in Key Personnel
4.6 Lack of Managerial Maturity
4.7 Summary
Chapter 5: Increase in Project Size
5.1 Limits of Growth
5.2 Increased Risks with Larger Projects
Case Study: Apartment Complex Disaster
5.3 Underestimation of Project Size
Case Study: Sewage Treatment Plant Failure
Case Study: A Road to Nowhere
5.4 Clients and Retainage
5.5 Alternatives to Taking on Large Projects
5.6 Summary
Chapter 6: Changes in Geographic Area
6.1 Business in Your Normal Area
6.2 Reasons for Changing Geographic Area
Case Study: Project in a New Area
6.3 Risk Management in Long-distance Projects
6.4 Regional Offices
Case Study: Regional Office
6.5 Establishing a Regional Office
6.6 Contingency Plan
6.7 The Wisdom of Withdrawal Planning
6.8 Summary
Chapter 7: Changes in Type of Construction
7.1 Reasons for Changes in Type of Work
7.2 Lack of Experience
7.3 Subtle Differences
7.4 Recognition of Your Specialty
Case Study: Forced Out of Business
Case Study: A Mechanical Failure
7.5 Union Versus Merit Shop
7.6 The Importance of Knowing the Risks
7.7 Volume Versus Profit
7.8 Withdrawal Plan
7.9 Summary
Chapter 8: Changes in Key Personnel
8.1 Breakup of a Partnership
8.2 Founders and Succession
8.3 Inactive Founders
Case Study: Succession
8.4 Replacement of a Team Member
8.5 Addition of a Key Person
8.6 Management Dilution
Case Study: Increase in Organizational Size
8.7 Summary
Chapter 9: Managerial Maturity
9.1 Importance of Management Skills
9.2 Company Growth Phases
9.3 Limit of Managerial Effectiveness
9.4 Company Growth and Management Thresholds
9.5 Telltale Signs of Insufficient Maturity
9.6 Changes in Top Management
9.7 Delegation of Authority
9.8 Test of Delegation
Case Study: Managerial Maturity
9.9 Succession Planning
9.10 Succession Issues
9.11 Measuring Succession Progress
9.12 Summary
Chapter 10: Understanding Construction Accounting
10.1 Annual Financial Statements
10.2 Internal and External Financial Statements
10.3 Management Accounting Inputs
10.4 Methods of Accounting
10.5 Accuracy of Accounting
10.6 Percentage of Work Completed
10.7 Work in Progress
Case Study: Profit Margin Decline
10.8 How to Account for Work in Progress
10.9 Summary
Chapter 11: Construction Industry Cycles
11.1 Market Decline
11.2 Market Recovery
11.3 Lessons Learned
11.4 Company Downsizing
11.5 Rightsizing
11.6 Overhead Research
11.7 Flexible Overhead
Case Study: Overhead
11.8 Expanding Flexibility
11.9 Equipment Ownership
11.10 Flexibility in Project Selection
11.11 False Beliefs
Case Study: Profitable and Unprofitable Work
11.12 Losing Projects
11.13 The Importance of Experience
11.14 Summary
Chapter 12: The Science of Project Selection
12.1 Industry Beliefs
12.2 Profitable and Unprofitable Work
12.3 Profitable Project Selection
12.4 Measurement of Project Risk
12.5 Impacts of Not Taking on Losing Projects
12.6 Flexible Overhead
12.7 Conclusion
Chapter 13: The Project Selection Program
13.1 The Origin of the Idea
13.2 Project Selection Program
13.3 Program Questions
13.4 Scoring a Project
13.5 Conclusion
Chapter 14: Project Controls
14.1 The Evolution of a Construction Business
14.2 Construction Is a Service Business
14.3 Productivity Analysis
14.4 Schedule
14.5 Budget
14.6 Earned Value Management
14.7 Conclusion
Chapter Review Questions
Answer Key for Chapter Review Questions
Index
End User License Agreement
List of Illustrations
Chapter 1
Figure 1.1 Post–World War II building boom fueled by housing demand created a p...
Figure 1.2 The built environment is an integral and large part of our nation’s ...
Figure 1.3 While the technical skills employed by each trade are unique and spe...
Chapter 2
Figure 2.1 Sample organizational chart for a small construction company.
Figure 2.2 Employing managers with different but complementary experience resul...
Figure 2.3 Job trailers can provide temporary office space during growth stages.
Chapter 3
Figure 3.1 In a construction business, risk management is everyone’s responsibi...
Figure 3.2 The ability to recognize risk is critical to the management of risk.
Figure 3.3 Example of a tool used to measure financial performance. R-Score Cal...
Figure 3.4 Contractors often fail by growing too fast in a robust construction ...
Figure 3.5 Managing a closely held construction company is like driving a truck...
Chapter 4
Figure 4.1 The three primary functions of a construction business are getting t...
Figure 4.2 Building a parking lot (a) and building a highway (b) are similar bu...
Figure 4.3 Expanding into an area beyond where a contractor typically works in ...
Figure 4.4 Contractors are often more specialized than they realize.
Chapter 5
Figure 5.1 The size and complexity of a project should be closely aligned with ...
Figure 5.2 Successively larger-sized projects of the same type can result in si...
Figure 5.3 A federal highway project can be much more complex and impose signif...
Chapter 6
Figure 6.1 Local working conditions can be unfamiliar and difficult to accurate...
Figure 6.2 Contractors may not always be welcome to a new area, which can resul...
Figure 6.3 Geographic expansion entails more than simply mobilizing equipment a...
Figure 6.4 Expanding into new areas can provide rapid sales growth, but experie...
Chapter 7
Figure 7.1 Contractors tend to be more specialized than they realize, and prude...
Figure 7.2 Installing force-main sewers and gravity flow sewers may seem like s...
Figure 7.3 It’s critical for management to understand the type of work an organ...
Chapter 8
Figure 8.1 Every contractor has key people who are the primary reason for the c...
Figure 8.2 The training of future leadership is critical to the continued succe...
Chapter 9
Figure 9.1 Management skills, rather than technical skills, are essential to th...
Figure 9.2 Delegation of authority builds managerial authority, spreads the wo...
Chapter 10
Figure 10.1 Accounting is the language of business, and financial statements are...
Figure 10.2 The Chief Financial Officer (CFO) is ultimately responsible for the ...
Figure 10.3 Field management is ultimately responsible for the accuracy of the i...
Chapter 11
Figure 11.1 The construction market is cyclical, going into a recession roughly ...
Figure 11.2 Downsizing is an intelligent response in a market downturn to protec...
Figure 11.3 Temporary employees can be used for 15–25% of contractors’ overhead ...
Figure 11.4 Renting equipment can be as effective as owning equipment and reduce...
Chapter 12
Figure 12.1 Contractors’ share of the market keeping pace with 5% market growth.
Figure 12.2 Contractor capturing a greater share of the market from competitors ...
Figure 12.3 There are no bad projects, just bad matches between contractors and ...
Figure 12.4 Unusual project features, such as curved walls, can greatly increase...
Chapter 13
Figure 13.1 Sample output from the Project Selection Program.
Figure 13.2 Sample from the first section of the Project Selection Program sprea...
Chapter 14
Figure 14.1 Typical production learning curve graphed over time.
Figure 14.2 Example of a benchmarking application.
Figure 14.3 Example of a scheduling application.
Figure 14.4 Example of a short interval planning application used to plan work o...
Figure 14.5 Example of a project control budget.
Figure 14.6 Rules of Credit for claiming quantities and calculating percent comp...
Figure 14.7 Example of a daily plan beating budget on cost but exceeding budgete...
Figure 14.8 Example of a scatter plot of CPI and SPI for budget items/activities.
Figure 14.9 Budget with forecasted cost to complete.
Figure 14.10 EVM dashboard displaying an S-curve.
List of Tables
Chapter 11
Table 11.1 Comparison of a company’s financial performance when overhead is fix...
Guide
Cover
Table of Contents
Title Page
Copyright
Preface
About the Authors
Begin Reading
Chapter Review Questions
Answer Key for Chapter Review Questions
Index
End User License Agreement
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The Business of Construction Contracting
Schleifer’s Guide to Financial Success
Thomas C. Schleifer, Ph.D.
Aaron B. Cohen, MS, CPC
Copyright © 2025 by John Wiley & Sons, Inc. All rights reserved, including rights for text and data mining and training of artificial intelligence technologies or similar technologies.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey.
Published simultaneously in Canada.
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Preface
This book provides the tools, strategies, and insights needed to build a sustainable and profitable construction business. Whether you are an aspiring entrepreneur, an established contractor looking to refine your business practices, a construction professional seeking to understand the broader industry dynamics, or a student of construction, this book will serve as your guide.
The construction industry is one of the oldest and most essential industries in the world. It shapes the built environment that surrounds us. The ability to successfully complete projects is at the core of what makes a constructor, but it does not inherently equip someone with the skills required to manage a thriving construction business. Many construction professionals enter the field with technical expertise and hands-on experience to produce the work but soon realize that success in business also requires a completely different skill set – one that is often overlooked in trade, engineering, and construction education.
This book bridges that gap. It provides a comprehensive guide to running a construction business efficiently and profitably, equipping construction professionals with the necessary knowledge to navigate the complexities of the modern construction industry. Readers will learn how to identify the common elements of construction business failure, how to structure a business, and how to select the right projects and effectively manage the business throughout the ever-changing landscape of the construction industry.
A key theme explored in this book is the challenge of growth. The very traits that make constructors successful in the early stages of a business, such as hands-on problem-solving, direct involvement in project decisions, and a relentless work ethic, can become obstacles to sustainable expansion. As a company grows, so does the need for structured management, delegation of authority, and strategic planning. Construction professionals must transition from working in the business to working on the business. Without this shift, many managers fail to understand that growth and the rate of growth include the risk of financial instability and business failure.
The complexity of the construction industry has increased significantly over the years. Regulatory requirements, supply chain disruptions, labor shortages, and heightened client expectations demand greater management abilities than ever before. Even small construction businesses must now navigate intricate legal and financial issues, risk mitigation strategies, and workforce management challenges. Without a firm grasp of these elements, even the most skilled builders can find themselves struggling to keep their companies afloat.
Compounding these challenges is a notable generational shift in the industry. Fewer young professionals today aspire to own a construction business, preferring instead the stability of employment over the uncertainties of entrepreneurship. At the same time, mergers and acquisitions are reshaping the competitive landscape, with small firms increasingly being absorbed by medium-sized regional firms that are also increasingly being absorbed by larger and multinational corporations. As the industry consolidates, independent small and midsize construction firms must adapt to new ways of competing and differentiating themselves in an evolving market.
All these factors contribute to one crucial reality: success in construction contracting today is no longer just about delivering a quality project – it is about running a business effectively. The ability to manage cash flow, hire and retain talent, navigate regulations, leverage technology, and adapt to industry changes is what separates thriving construction companies from those that struggle to survive.
The business of construction contracting is evolving rapidly, and those who embrace change, invest in their business expertise and adopt a forward-thinking approach will be best positioned for long-term success. Let’s get started.
About the Authors
Thomas C. Schleifer, Ph.D., joined the construction industry at age 16 and has more than 60 years of contracting and consulting experience. He has Bachelor of Science and Master of Science degrees in construction management from East Carolina University and a Ph.D. in construction management from Heriot-Watt University in Edinburgh, Scotland. Dr. Schleifer’s experience includes serving as foreman, field superintendent, project manager, and vice president of a construction company that he owned with his brother. From 1976 to 1986 he was the founder and president of the largest international consultancy firm serving the contract surety industry. During this period, he assisted in the resolution or salvage of hundreds of distressed or failed construction firms.
This combination of practical, hands-on experience as a contractor and assisting financially distressed companies has given Dr. Schleifer a unique perspective on the causes of construction business failures and how to avoid them. Dr. Schleifer, sometimes referred to as a “turnaround” expert because of the number of companies that he has rescued from financial distress, advises contractors on organization, structure, and strategic planning while he also writes, lectures and teaches.
The importance of education in the construction industry is one of Tom Schleifer’s favorite themes. He has lectured extensively at universities and professional and trade associations and authored numerous articles on construction and business management. Dr. Schleifer has been listed in Who’s Who in Finance and Industry, Who’s Who in America, and Who’s Who in the World. He was the 1993 Eminent Scholar of the Del E. Webb School of Construction, Arizona State University.
Publications by Dr. Schleifer include books The Business of Construction Contracting, 2025, John Wiley and Sons; The Secrets To Construction Business Success, 2022, Routledge Taylor & Francis Group; Managing the Profitable Construction Business, 2014, John Wiley and Sons; Construction Contractors’ Survival Guide, 1990, John Wiley and Sons; Glossary of Suretyship and Related Terms, CMA and weekly a blog Schleifer’s Weekly Construction Message.
Aaron B. Cohen, MS, CPC, is the Director of Estimate Products at InEight Inc., where he defines product requirements and oversees the development of software solutions for the construction industry. Prior to joining InEight, Aaron held the Associated General Contractors (AGC) Lecturer position at Arizona State University in the Del E. Webb School of Construction, where he continues to teach courses in Infrastructure Estimating and Project Controls.
Aaron also spent more than 10 years as the president of a trenchless engineering and construction services provider specializing in the application of trenchless technologies for public construction projects. He has extensive experience managing and estimating infrastructure and utility construction projects and has lectured on the subjects of Horizontal Directional Drilling and underground utility construction for various industry associations, including the American Society of Civil Engineers (ASCE), American Water Works Association (AWWA), American Public Works Association (APWA), Underground Construction Technology (UCT) Expo, and the North American Society for Trenchless Technology (NASTT) No-Dig show, and has been an instructor at the Horizontal Directional Drilling Academy since its inception in 2014.
Aaron received a Bachelor of Science degree from Arizona State University as well as a Master of Science degree from DePaul University and is a Certified Professional Constructor. He is the author of The Business of Construction Contracting, 2025, John Wiley and Sons; and has co-authored the books Construction Planning, Equipment, and Methods, 10th edition, 2024, McGraw-Hill; Moving the Earth, 7th edition, 2019, McGraw-Hill; and has made contributions to the Handbook for Building Construction, 2021, McGraw-Hill; and Horizontal Directional Drilling (HDD) Good Practices Guidelines, 4th edition, 2017, NASTT.
Chapter 1The Construction Industry
Construction may be the oldest industry in the world, but it was not until 1990 that it was discovered to have the second-highest failure rate of any industry in the United States. This finding was the result of 12 years of research that also documented the specific causes of construction business failure. And perhaps more significantly, the causes of failure were determined to be preventable. The research process included a detailed analysis of hundreds of annual financial statements prepared by independent accounting firms. A “statistically significant number” of all types and sizes of failed construction companies were analyzed in detail. The results were compared and contrasted with an equal number of similar non-failed companies over the same time period. It took years of research to identify the primary causes and in some cases the secondary causes of the failures. Most accounting experts were shocked to discover that the underperformance and losses discovered were occurring two to three years prior to losses being reported on the construction companies’ certified financial statements.
After the publication of this research, a lot of construction companies altered their behavior and prospered. However, a large number of contractors stated that while the findings were correct, the lessons did not apply to themselves but pertained to less informed and less skilled companies that failed. The rationale, of course, was: “We have not failed so the findings don’t pertain to us.” Unfortunately, hundreds who held on to that belief subsequently did fail. Many of those who failed said to us or wrote to us with comments like: “I heard you but didn’t believe it” or “I told others to change their behavior but didn’t change my own” or “I didn’t want people to think I didn’t know what I was doing.”
Few dispute that construction is a high-risk endeavor, and our research demonstrates that being in the construction business for a long period of time offers little protection. It may sound counterintuitive, but one of the difficulties in convincing construction professionals that these common elements of business failure are accurate and high risk is that the elements don’t always cause business failure. For example, there is a huge risk in taking a project that is much larger than the organization has ever built or taking a project in an unfamiliar geographic area. However, when a firm takes either of these risks and it works out successfully, they believe they have disproven the research, and that the size of the project and change in geographic area is not a common element of construction business failure. These firms then, of course, continue to embrace the risk in the future because they did not believe the risk exists.
The reality is that while the scientifically proven common elements of construction business failure do not always cause failure they are, nevertheless, hugely risky because they often cause failure, just not 100% of the time. Many make the mistake of trying to measure the risk by measuring the odds. They think something like 6 to 1 odds are better than 2 to 1. The fallacy of measuring the odds this way is the true measurement is not simply the odds that an occurrence might happen. The real measurement must include the odds of an occurrence AND the magnitude of the occurrence in question. For example, most reasonable people would readily accept a bet of $1 at 6 to 1 odds. The question is would they still be interested at 6 to 1 odds if the bet was a million dollars?
Six to one odds with a bet of $1 is inviting for two reasons; one it would be great to win $6 and two the loss of $1 is worth it because it doesn’t really hurt. The loss of a million dollars makes the bet seem almost ridiculous at any odds. An analogy I sometimes use is Russian roulette. If you take a six-shot revolver and place only one bullet in it, spin the cylinder, point it at your head, and pull the trigger; is it a small risk or huge risk? You might like 6 to 1 odds at a bet of $1, but few would bet their life at 6 to 1 odds.
If a larger project or a project out of your normal geographic area has the potential to weaken your financial position to the point of eventual failure, is it a reasonable business risk or a huge (almost ridiculous) risk? Indisputable scientific research data demonstrate that these activities have put a “statistically significant” number of other contractors out of business. Even if you are convinced you can beat the odds because you have been in business a long time, do you really want to “bet the farm”? If you were an investment advisor, would you be recommending these risks to your clients? You may also find it of interest to know how many of the failed construction firms in the database were second- and third-generation companies demonstrating that length of time in business does not protect against business failure.
The information about construction business failures we have to draw on today was expanded with the addition of 30 more years of research data. While the causes of business failure have modified some over time and the industry has grown tremendously in size, construction still remains the second-highest failure rate in the nation (second only to restaurants). Many of the construction professionals that were exposed to the original data have retired by now, and most of the new generation of industry leadership were never exposed to these essential documented research findings. The authors believe it is important to update and restate this material for the new generation of construction leadership. Fortunately, the industry has progressed, and leadership has benefited from specialized engineering and construction education programs developed over the last several decades, advancing the construction process considerably.
On the downside, very few of these education programs address the business side of the business of construction. Therefore, we are able to build better, but we are still having the second-highest failure rate. The industry failure rate continues, including spectacular failures like the 2022 multinational Carillion organization, the largest construction enterprise in the world. In light of the current US construction boom and global economic uncertainties, the failure rate will undoubtedly continue and has the potential to substantially increase. This information is most critical to a more receptive industry than ever.
The industry’s growth combined with the persistent nationwide labor shortage has increased contractor risk and will, in all likelihood, increase the industry failure rate. Similar historic conditions in the past resulted in construction business failures, which makes the solutions in this text that much more significant. We need to understand how constructors can succeed during various and changing market conditions. This is particularly significant because most construction professionals and managers are graduates of engineering or construction schools or came up through the ranks as tradespeople. Engineering or construction education curriculum teaches how to capture and produce construction work, but typically includes little or no business, accounting, economics, finance, statistics, marketing, or personnel management courses.
This text provides a shortcut into how to structure and manage the business side of the business of construction with guidance on:
Proven construction business strategies
The advantages of and how to develop short- and long-term business plans
The concepts of flexible overhead
Corporate, and financial self-analysis
The element of construction contractor failure
An understanding of construction market cycles
Cash flow thresholds
The threat of industry accounting weaknesses
The true cost of equipment ownership
Modern leadership techniques
The latest industry technologies and client maintenance
Global construction industry trends
And more
This book includes links to proprietary software programs, including:
Company self-analysis tool
Project selection tool
Corporate self-analysis tool
The R-score calculator
Schleifer’s manual of construction practice
Construction businesses underperform or fail not because they cannot produce the work, but primarily because they are not managed as a profitable “business” concern.
1.1 A Brief History
The modern construction industry in the United States as we know it today commenced at the end of World War II (WWII) when soldiers returned from the war and received benefits from the Servicemen’s Readjustment Act of 1944, also known as the GI Bill, providing accessible and affordable mortgages. A building boom began fueled by housing demands that created unprecedented employment opportunities (Figure 1.1). Since then, in spite of temporary recessions, the construction industry has continued to grow through today. The industry prospered through the 70s paying wages well above typical factory work and generating double-digit profits. Not long after that and almost unnoticeable the construction wage advantages over other industries began to slip, and profits slowly drifted along with them. About the same time (in reaction to this or by coincidence, it is difficult to tell), new contracting methods began to be introduced, altering the “competitive balance” of the old-line competitive process.
Figure 1.1 Post–World War II building boom fueled by housing demand created a prosperous time for contractors.
Construction Management (CM), heretofore unheard of, became the latest procurement method and some contractors believed it was great because they thought it would reduce their project risks while maintaining profit margins. Neither occurred as CM fees became miniscule compared to prior profit margins and, unbeknownst to contractors, they were still saddled with project completion in accordance with plans and specifications risks. The procurement method mutated into various permutations of CM, such as CM at Risk, Guaranteed Max, and various other limitations.
Then came Design-Build contracts, which designers originally jumped into as lead partners until they rapidly tired of the risks they did not realize they were undertaking. Then contractors jumped in with both feet without realizing they were “in effect” guaranteeing the design quality and function. As new procurement methods multiplied, court actions were bound to follow. It may be hard to believe, but it looks like low bid is making a comeback. It is beginning to appear that the only thing procurement experimentation accomplished was to drive down profit percentages across the board, which will be permanent unless the construction industry does something about it.
For both newcomers to the industry and old-timers, this history is hard to believe because it happened so slowly and because few top managers today have ever worked in the industry when contractors were regularly making two-digit profits. A less obvious, but very real ramification of the declining margins over time has created a less attractive industry. One of the more obvious signs is fewer family businesses. Our children see how difficult the industry is, the long hours we work, and the low margins we make excuses for. Most are too well-informed to follow in our footsteps. As a result, the industry is consolidating, which means that big contractors are getting bigger, small contractors stay small while midsize contractors (with no willing heirs) consolidate, liquidate, or sell out. The number of midsize contractors will be drastically reduced because there is no way they can accommodate the overhead necessary to maintain themselves or make enough profit to be worth the effort. They can’t effectively compete against large contractors who survive on greater volume at drastically reduced profits with a much smaller percentage of overhead costs. The economy of scale is very real, particularly under current market conditions. The next question has to be:
1.2 What’s Ahead?
The current state of the construction industry works well for the buyers of construction services (owners) because they take the position that they should not and will not share any risks as a result of the construction process. The designers aspire to the same position. Having considerable control over the construction contract documents (i.e. AIA contract documents, and the like), they continue to modify the contracts to provide the designer with total “authority” over the design while accepting no “responsibility” for the design. Contractors regularly work under contract language that states that the contractor must notify the designer if a design element will not work as intended, and if the contractor proceeds with the work, they are responsible for it. These difficult contract provisions will outlive us unless we do something about them. In the meantime, while we must follow the contract language specifically, we can also use the contract language to protect ourselves. This is addressed in the subsequent chapters.
The industry will continue to grow into the foreseeable future because as the country grows in population and wealth, the need and want for bigger and better shelter and facilities expands. There have always been cyclical downturns and recessions, but over the 80 years since WWII, the country and national wealth have grown continually in spite of short-term reversals. The built environment is an integral and large part of our nation’s Gross Domestic Product (Figure 1.2).
Figure 1.2 The built environment is an integral and large part of our nation’s Gross Domestic Product.
Contrary to industry belief there has always been more than enough work to go around, which calls into question another industry belief. That getting enough work is the main function of top management. This is inappropriate, in error, and a leading driver of the industry’s failure rate. The principal function of construction company leadership and all construction professionals for that matter, is to earn a profit from safely and efficiently producing the work (the built environment). This, and not continuous growth, is the only long-term sustainable business goal and is the guiding principle of this text. Construction industry participants sometimes need to be reminded that “profit is not a dirty word.”
1.3 Industry Beliefs
Construction being perhaps the oldest industry in the world happens to bring a lot of old beliefs with it. It is fair to say that the longer we are in this business, the more “baggage” we bring along with us. Beliefs however are not always factual and some beliefs that may have been true in the past may not be true today.
An expert on beliefs, author and philosopher Barry Kaufman says that:
Everyone, without exception, holds to beliefs that are largely unexamined, but are often our deepest conviction, and that we constantly collect evidence to support them. He goes on to say: It is almost impossible to dislodge these beliefs, even if they are patently false and threaten our well-being in the future.
This book tests a number of construction industry beliefs, the first of which is that expanding or growing a construction business is always good and should be a prime objective of any or every construction organization. In fact, many construction professionals will tell you “If you are not growing, you are going backward.” Having spent a large part of our careers researching the causes of construction business failures, the authors can assure you this is patently false and can be extremely dangerous. We have asked any number of failed construction company leaders why they went after a currently distressed and losing project that was so far outside of their organization’s collective experience. Inevitably the answer was: “I was running out of work.” Other answers that were popular were: “If the work is there go after it; We’ll figure out how to do it later; We’re not afraid of risk; We can build anything.”
Most of these long-held beliefs sound good and seem like they actually may make good sense. Questioning these strongly held industry beliefs is not easy. And it is compounded by the fact that contractors who have succeeded in this ridiculously risky and difficult business have a lot to be proud of. Add to this that none of us care to have our hard work and strongly held beliefs questioned, and it is an uphill battle to say the least. These are critical topics, so let’s take it one step at a time. As for the above comments about the need for work or running out of work, these are addressed later in this book and hopefully to your satisfaction. For now, let’s explore some of the realities of the construction marketplace that impact our need for profitability and actually constrain our ability to capture work at a profit.
This may be a good place for all of us to agree that if you bid cheap enough you can get all the work you want. This is just a reminder that the primary objective of being in business, other than a charity or not-for-profit business, is to make a profit. At the risk of offending anyone, if the profit motivation does not apply to you, you probably don’t want to read this book. For those still interested let’s explore the mathematical certainty that the construction marketplace is the prime factor affecting the potential for profitable work.
1.4 An Example
We have watched this principle dawn on construction professionals many times while assisting company planning groups attempt to compile their first-time multi-year business plan. Prior to the planning session, we would have distributed industry growth projections for the next several years for their segment of the industry in the geographic area they work. Early in the planning session, the group would be charged with coming up with sales expectations and goals for the next several years that they can all agree on. They would be encouraged to take into consideration their desired goals, the company’s resources, and available work. Inevitably, the groups would be discussing growth projections of 10, 15, 20%, or more for the next year and the years after. Shortly into these discussions, the group would be asked if they considered the projections made by the state chamber of commerce, their local contractors’ association, national contractors’ associations, and any other published forecasts we may have given them. They would also have been given the average of all these data, which they would be reminded of (for example) was 7% growth for each of the next two years. The typical response is yes, but that does not place any controls on us because our goals are separate and distinct from the forecasts.
While forecasts do not place any controls on planning groups and their projections may turn out to be higher or lower, they definitely impact profit potential going forward. Whether the industry forecasts are correct is not the point. They are all you have. Let’s consider what we do know. If our sample market grows at 7% and all practitioners grow at 7%; mathematics and logic suggest that the prior “competitive balance” should not alter much. This is because bid amounts and profits are under little or no pressure to reduce and may be able to increase.
If the same market grows at 7% and the company in question (and perhaps others) intend to capture enough work to grow 15 or 20%, their increase MUST result in and be at the expense of other practitioners in the same market because the others will capture proportionately less work. Mathematically, other businesses must get smaller for any business in the same market to grow at a larger percentage than the overall market grew. This is a fact, because the overall market has a finite size, such as 7% growth. Another historic reality is that to take that work away from other bidders who also want that work you have to “bid aggressively,” which means lowering your price.
This should be obvious to construction professionals, but it is not necessarily the way we think about our market because most of us have little motivation to subject this topic to a cause-and-effect analysis. We are fully entitled to want to grow faster than the market, but it defies logic to think that will occur if we stick to our old pricing because our competitors will be offering their old pricing or better depending on their growth plans. Some readers may be tempted to say fine we have always competed so what’s new. Nothing is new. If the pie is a certain size and we want more than our historical mathematical share, others will have to take less or fight back by lowering their prices. It’s that simple. Competitive balance is a concept successful contractors of the future will fully understand and once they do, it will impact and inform their pricing. More than one contractor has been heard to say: I know how to do this, just don’t change the rules on me. We are not changing the rules. Just shedding some light on the rules that are less obvious.
1.5 How Many Ways?
Another belief we need to address early on is that: We contractors can run our business anyway we darn well please. This may, in the literal sense, be true, but the statement is incomplete from a business standpoint. It should actually be: We contractors can run our business for a profit anyway we darn well please. If we all followed the second statement, our industry would not have the second-highest failure rate in the nation. There are well over a million construction contractors in the United States, and while there is more than one way to run a construction business for a profit, there are not anywhere near a million ways. There may be half a dozen ways and with minor differences maybe a dozen but that is it. In our work with failed construction organizations, we have experienced hundreds of different ways to run a construction enterprise, which is part of the reason our industry has such an abysmal failure rate. When an organization is managed in a random or informal manner, it inevitably achieves random inconsistent results.
To be clear, we are addressing here the business side of the business of construction as opposed to the technical or performance of the work side of the business. With plumbing, plastering, or painting; building, heavy/highway, or tunneling; general contractor, subcontractor, or construction manager, the technical side or performance of the work is different, specialized, and unique to each trade. However, the business side of every construction enterprise is not just similar, they are exactly the same (Figure 1.3). This will be widely disagreed with by many because just about every trade argues that their business is different from the others. They are correct on the technical side of the enterprise, but they are not on the business side of the enterprise. Taking this a step further, if any construction professional is running their businesses differently from the best business practices outlined here, they could be doing better and they may be doing it wrong.
Figure 1.3 While the technical skills employed by each trade are unique and specialized, the business of construction is identical for all trades.
For better or worse, how to structure and manage the modern construction organization was historically developed by trial and error. Those doing it well enjoyed varying degrees of success. Those doing it poorly resulted in withdrawal or failure. Both good and poor organizational structure or informal personal-preference management and accounting processes have existed for years. The good processes succeeded. The poor processes failed, or in a few cases underperformed for years until their luck ran out. The question of course is, how do we know which construction business management, marketing, and accounting practices are best? Quite simple, results.
In this complex industry, there is an interesting disparity in historic performance as measured in profitability. In most industries, the worst and best profit performers are separated by small percentages. In construction, the worst and best profit performance is measured by factors of two or four times and, in some cases, more. This makes little sense when you consider that, in theory, each of the firms had access to the same resources, drew from a similar labor pool, and worked in similar markets under the same conditions. Our research demonstrates that the differentiator is the caliber and quality of business practices. This is confirmed by our experience in the construction company turnaround business.
In turning around hundreds of underperforming or failing construction enterprises, the only changes we made were within the business side of the enterprise in question. In all cases, if the underperformance was within the production side of the business, turnaround was almost impossible. The reason was obvious. If a construction organization could not properly and profitably perform their specialty, they were by definition not a viable enterprise.
Few researchers have seen firsthand and had more access to the financial details and management practices of both failing and world-class performers. We were privileged to conduct studies to compare and contrast these processes, practices, and data, isolating best practices that generated consistent profits. These best practices have been dissected and deconstructed so that they can be understood, absorbed, and put into practice by readers who want to advance to world-class construction professionals.
1.6 Evaluating a Construction Organization
The authors break down the business side of the business of construction into three functional areas: getting the work, doing the work, and accounting for the work. These can also be expressed as marketing, production, and administration. This may seem an oversimplification, but it identifies the essence of a construction organization and highlights the reality that three separate and distinct talents and skill sets are critical for success. As these are clearly separate categories of education, profession, and experience, few, if any, individual businesspersons would be trained and skilled in each area.
As noted earlier, few engineering or construction curriculum have room for many business courses and few business, marketing, or accounting curriculum have room for construction or engineering courses. While most contractors, particularly small and midsize consider themselves a “jack of all trades,” few would agree with the old saying that describes this as “but master of none.” Our experience is that most people, contractors included, may be experts in one of these three fields that they were educated and experienced in, but not in two or three.
A simple case in point. When my brother and I formed our construction business, both of us were builders, and neither of us were marketers or accountants. We got by as so many do, but becoming world class is a struggle at best. Obviously, experts can be hired, but most contractors are not aware of exactly what skills are required. It is possible that few readers will be aware until now that these three skill sets are equally critical to the success of any construction enterprise. This will surely be debated; however, the fact that numerous construction companies failed because of weakness in only one of the three areas should put that debate to rest. Some failed enterprises were weak in two areas and a few in three, but many failed that were expert in two of the areas and weak in only one.
These three are equal in significance (even critical), not because they contribute equally to corporate profitability, but because each can cause business failure. While earning a profit is generally considered primary in any business. In construction, protecting the enterprise is a close second and some would argue co-primary with profit.
So, what does this mean to contractors and senior construction professionals with leadership responsibilities? One important message is to leverage your expertise with a full understanding of its limits and recognizing that none of us knows everything. An exceptional builder that came up through the ranks as an engineer would have had limited time for much formal education in accounting, marketing, or business management studies. A person’s success at building the work (production), combined with their intelligence, does not mean that you are now an expert in getting the work (marketing) or accounting for the work (finance and accounting). These are separate and distinct professions that take years of education and experience to master. These experts can and are hired, but the problem is that the contractor with no proficiency in the field in question is not, in fact, qualified to supervise the positions.
This is a far more serious issue than our industry recognizes in that mistakes are made, and companies fail when the experts are ignored, disagreed with, or countermanded. Because the majority of contractors are the producers of the work, the critical business areas of “getting the work” and “accounting for the work” are very regularly reduced to “advisory” capacities. Critical information is passed along to a contractor (owner or boss) with little or no education or experience in the discipline – who then makes decisions on what advice to accept or reject. It may seem harsh to say, but by definition, the owner or boss is not qualified to make those decisions. Some will say, that’s the way it is, so what choice do we have. The first choice is to recognize and accept that this is a dysfunctional management structure as verified by industry results – the second-highest industry failure rate. This is further verified by decades of research into the causes of construction business failure.
The solution is not complicated. Start by recognizing that the three functional areas of a construction enterprise are equal. Not because they contribute equally to profitability but because missteps in any one of them can and has, singlehandedly, caused numerous construction firms to fail. While it is important to concentrate on doing things to maximize profit, it is critical to avoid things that might even remotely risk failure. Once this is understood and accepted, the next step is to equalize the input from the leadership of the three functional areas of getting, doing, and accounting for the work.
During the day-to-day management of a construction firm, the persons in the roles of production, accounting, and marketing are critical to the success of the organization. Obviously, if the firm does not capture enough or appropriate work, it suffers. If the firm can’t produce the work at a profit, it suffers. And if the firm does not accurately and timely account for the work, it suffers. There may be differences between the amounts of profit each role contributes to the firm, but they are meaningless in the context of survival. Mistakes or mishaps in any of these areas can be costly, including the potential for catastrophic failure. Many profitable construction operations were triggered by the loss of banking or bonding relationships because of losses or because they could not pay their bills. A construction firm can lose either of these relationships because of unfavorable accounting reports or because it turns in no financial reports.
The three functional areas are equal, critical, and must work closely together to the point of being integrated closely. The authors have data on companies that failed because they did not capture enough work, the right type of work, or work in the right location. Others failed because they produced a large enough portion of their work at a loss sufficient to create a losing year or two in a row. And still others failed because they lost control of their accounting data and could not produce accurate annual financial statements, in a timely manner, and in a number of cases at all.
We can’t count the number of people who have argued that producing the work is all that matters in a construction operation. While it is true that for most enterprises, production of the work is the major contributor to profits. It is also the major contributor to failures, so some might say that balances out. The authors keep saying that prevention of failure is equally important as generating a profit, and the more it is discussed, the more important it seems to become.
The remainder of the book treats generating profit and preventing loss as equal, and readers will need an open mind because if our industry is going to improve our position from the second-highest failure rate in the nation, we are going to have to change some of our beliefs and some of the ways we do business. Change is always difficult.
Chapter 2Structure of a Construction Business
Construction is unlike other major US industries in terms of the number of companies in the industry. Other heavy industries, such as oil, mining, aviation, and shipping, have perhaps dozens of large, leader firms and hundreds of smaller companies. The majority of the large companies are publicly traded, and, as such, their performance information is widely known.
The construction industry is composed of over a million businesses. These businesses range from one- or several-person operations to the very largest companies. All but a dozen or so of these firms are closely held, family-owned, or have few owners and, as part of a very horizontal industry, tend to not share detailed performance information. With no clear industry leaders, unlike in other industries, construction companies have limited guidance on the ideal business structure, operation standards, and performance metrics.
This situation is further complicated by the differences in the sizes of companies that are structured and operate very differently. We categorize the companies as small, medium, large, and jumbo according to the following definitions:
Small: The owner(s)/contractor(s) personally perform some or all of the work and manage the business.
Medium: The owner(s)/contractor(s) do not personally perform the work but rather direct and supervise the people responsible for the work and regularly visit project sites.
Large: The firm has departments and/or divisions that are responsible for performing the work, and the owner(s)/contractor(s) have limited, if any, contact with the work. They seldom visit any work sites and may be informed about field activities primarily through written reports and perhaps occasionally at meetings.
Jumbo: The firm is typically organized into divisions according to geographic area or type of work. Each division operates similarly to how a large firm operates – usually with separate organization charts, chains of command, and so forth. Basically, the divisions look like and perform as separate large construction companies that report to a common owner.
2.1 Organizational Structure
A common weakness in the construction industry is that many firms are structured ineffectively: they have unrecognized chains of command, they don’t have departments or divisions, and they are loosely organized. One of the reasons for this ineffective structuring of the business is that many, probably most, of these companies were begun by one person, who learned how to do the work by coming up through the trades or through technical or engineering education. These individuals lack business or management education and believe that all that matters is producing the work. Thus, because they started out small, they didn’t think a formal organizational structure was needed. Working hard and hiring similarly minded people was sufficient. And as start-up companies experience success early, the idea that a formal organizational structure is not necessary to be successful gets reinforced and becomes a belief of the contractor.
Drawing on research, we determined that many more start-up construction companies fail within 10 years than continue operating. Because the defunct companies were small and unstructured, there is no way to verify whether having a formal structure may have helped. Consequently, the research we conducted on the common element of construction business failure does not include any companies in business for fewer than 10 years. From examining a statistically significant number of failed and operating construction companies, we determined that construction companies typically failed during the first generation; some companies lasted into the second and third generations. In most of the first-generation companies, an inappropriate management structure was determined to be a factor in the failure. The research on the structures of construction businesses began with these firms.
The structure of an organization should be built around the three primary functions of a construction enterprise, which were introduced in Chapter 1: getting the work (marketing/sales), doing the work (production/operations), and accounting for the work (finance/administration). The many other functions, such as personnel, equipment management, purchasing, etc., all fall under one of the three functional areas. We found that failed companies almost universally lacked structure or had inappropriate structures and that successful companies had efficient and appropriate structures. It is that simple. Construction professionals who decide to invent their own corporate structure should ask themselves if inventing business structures is what they’re experts in.
Some will argue, “We don’t need an organizational chart because everyone knows what their positions are and what they’re supposed to do.” When we consulted with successful companies, the majority of managers we interviewed would say things such as “I know exactly which direction I’m supposed to be moving in because the boss talks about it all the time.” The next manager we talked to would say the same thing but would refer to the opposite direction.
Our experience is that the construction workforce is willing and qualified to do the work. The industry’s main weaknesses are organization and leadership. It bears repeating; the preference for an informal structure is a weakness. Most owners and supervisors tell us they don’t want a lot of rules and procedures. They want their employees to have the freedom to do their best. In contrast, employees say that all they need is direction. If someone would clarify what they’re supposed to do, they’d be doing it. Instructing people to just do their best doesn’t work anywhere. Suppose we told soldiers on a battlefield, “there’s no rank or orders. Everyone do what you think is best.”
