The Practical Construction MBA

Qualitative and Quantitative Approaches to Construction Contracting Management

Matt Stevens

About the Author

Matt Stevens is the president of Stevens Construction Institute, Inc., Management Advisors to Construction Contractors. With over 30 years experience as a general and specialty contractor, he has been working with contractors as a management advisor since 1994. He also worked as a management consultant with FMI Corporation from 19972002. He earned an undergraduate degree in Construction Management from University of Louisiana-Monroe and an MBA from Rollins College, Winter Park, Florida. Matt is currently a doctoral student at The University of Florida College of Design, Construction, and Planning-M. E. Rinker, Sr. School of Building Construction in Gainesville, Florida. His research interest is the business operations of construction contracting. Stevens has performed Strategic Planning, Business Evaluations, and Productivity Improvement engagements with dozens of associations and private companies and conducted hundreds of training sessions ranging from one day seminars to weeklong boot camps across the country. He has analyzed many contracting firms as a management advisor and assisted owners in improving their firms with business and process improvement initiatives, some lasting as long as eighteen months. He is certified on several subjects ranging from people skills to business processes. Matt has written technical and business process manuals for firms seeking to document construction methods. He assists companies in keeping processes efficient, implemented, and structured for efficient monitoring. Stevens writes a monthly newsletter for his Website (http://www.stevensci.com). His blog, The Construction Contractor's Digest (http://www.contractorsblog.com), currently contains over 190 articles and templates. He writes a regular column for Contractor magazine. Stevens Also, Stevens Construction Institute offers an E-Learning Center (http://webex.geolearning.com/stevensci/). Matt has delivered expert witness testimony, both in the courtroom and in expert depositions outside the courtroom. His area expertise focuses on construction business operations for companies and projects. His first book, Managing a Construction Firm on Just 24 Hours a Day (McGraw-Hill, 2007) has been adopted by over 30 colleges and universities in the U.S., Europe, Asia, and Australia.

Contents
LIST OF TABLES AND FIGURES FOREWORD CHAPTER 1
xi

xv

THE NEW BUSINESS MODEL

What Has Changed in the Construction Industry over the Last Four Decades? What We Know Some Parts of the Construction Industry Remain Unchanged Volume-Based, Fixed-Cost Business Volume-Sensitive, Variable-Cost Business Part of the New Approach: The Quantitative Method The New Business Model of Construction Contracting Profile of a Profitable Contractor in This Millennium Two Sources of Personal Wealth for the Contractor Summary

1
3 7 9 10 11 11 15 17 21 23

CHAPTER 2

CORPORATE OBJECTIVES AND STRATEGIES

The Owners Goals Are Primary The Learning Curve Strategic Planning for Construction Businesses Vision/Mission: How You Want to Be Seen and How to Get There Construction Compared with Manufacturing Strategic Planning to Change the Market The Cold Hard Strategic Truth Summary

25
25 29 33 40 43 44 48 51

CHAPTER 3

WORK ACQUISITION
Win Three Times to Win One Project Selecting the Right Work Market Analysis Marketing versus Selling Marketing Common Marketing Rules for Contractors Comparing Market Share and Profits

53
53 55 58 61 65 67 68

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Selling Common Errors in Selling Estimating Cost and Proposing Price Bidding: The Price Proposal Process Pressures to Be Low Bidder Using Job Sizing to Consider Establishing a Small Project Division Bid Conditioning A Critical Consideration: When Should Cost Savings Be Reflected in Bids? Beware Questionable Procurement Procedures to Win Bids Be Proactive for Better Procurement Procedures Annual Job Cost Budgeting Alignment of the Work Acquisition and Field Staffs The Importance of Forward-Thinking Measurements Measuring Work Acquisition Success Using Past Performance to Make Adjustments for Future Work Summary 74 79 81 86 101 104 105 106 107 110 111 112 114 115 120 120

CHAPTER 4

OPERATIONS MANAGEMENT
Proven Principles Construction Business Planning is Critical Taking the Lean Approach to Construction Contracting Creation and Implementation of QualityLEANProcesses Processes That Consistently Deliver Results Management Load Balancing Management: A Short Course Planning, Forecasting, and Scheduling Managing a Construction Firm in a Down Economy Firing Your Worst Client to Improve Your Risk Profile Summary

121
123 125 126 134 136 138 147 151 161 163 169

CHAPTER 5

HUMAN RESOURCES
The Key Role of the Human Resources Manager Self-Actualization Motivates More than Money Knowing Yourself Well is Critical To Management and Leadership Personality Assessment Leadership/Management Assessment Time Management Essentials Teaching and Mentoring: investment with Hardcore Results New Employee Orientation and Continuing Education

171
174 174 175 176 179 181 182 186

CONTENTS
Leader-Manager: New Definition of Leadership in Construction Contracting Four Habits of Highly Effective Construction Managers Managing Yourself Better The Most Important College Class Not Taught Compelling Reasons to Manage Labor Well Beginning the Learning Curve in College You are the Chief Morale Officer Best Organizational Structure for Optimal Use of Human Resources The Age of Less Delegation Proactive Management Multiple Delegation by Electronic Means (MDEM) Managing the Latest Generation Recruiting Tips Advice to Young Construction Professionals Summary

ix
188 190 193 194 196 197 199 201 203 204 205 207 208 209 211

CHAPTER 6

FINANCIAL MANAGEMENT
The Cost of Doing Business Tracking Revenue and Costs Accounting vs. Financial Management Financial Management of Individual Project: Job Cost Reporting Financial Statement Rate of Return Measures What Is a Reasonable ROI to Expect? Additional Financial Indicators: Critical Metrics to Compute If Limited to One Indicator, Which Financial Ratio Would I Choose? Overhead Management Retention Management Budgeting Keep a Cushion of Funds in Your Account Smart Billing and Collection Processes Typical Financial Trouble Spots for a Construction Firm How Financial Policies Affect Your Construction Business Increasing Employees Awareness of Key Financial Data DuPont Analysis Ours is a Recession Resistant Industry Ways to Weather Down Economic Times What To Do with Profits? Remember the Rule of 72 Summary

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213 214 214 218 226 236 242 244 252 253 257 262 263 264 267 270 274 275 278 279 280 284

x CHAPTER 7

THE PRACTICAL CONSTRUCTION MBA

TECHNOLOGY Reticence about Adopting Technology First Things First Technology to Have and Master Emerging Trends Virtual Construction Measuring ROI of Your Technology Investment Compelling Business Reasons to Invest in Technology Summary

287
288 289 292 298 299 302 303 304

CHAPTER 8

BEST PRACTICES
Risk versus Reward Characteristics of Superior Projects Strategic Actions and Operational Methods Make up Best Practices The Indices Strategic Value Index for Construction Contractors WorkSmart Leverage Analysis Best Practices Research using WorkSmart Leverage Analysis Summary

307
309 313 316 318 319 320 322 326

CHAPTER 9

SUMMARY AND CONCLUSIONS WORKS CITED

APPENDIX A

329 337 339 409 417 439 447

CASE STUDIES
APPENDIX B

DIGEST OF OTHER MANAGEMENT INSIGHTS

APPENDIX C

WHAT CONSTRUCTION PROFESSIONALS ARE READING

APPENDIX D

CONSTRUCTION PARABLES INDEX

Tables & Figures

CHAPTER 1

The New Business Model

Figure 1. New Business Model Three-Phase Cycle Figure 2. The Contractors Risk/Reward Curve

1
16 21

CHAPTER 2

Corporate Objectives and Strategies

Figure 1. Sample Construction Firm Five-Year Plan Exhibit: Sample Press Release: Construction Contractors Urge Fair Dealings Exhibit: Sample Letter to a College Dean of a Construction Program Exhibit: Sample Open Letter to Government Officials

25
36 44 46 47

CHAPTER 3

Work Acquisition
Figure 1. Marketing-Selling Continuum Figure 2. Buying Market Share by Cutting Profit Margins Figure 3. Market Share Stable but Profits Down Figure 4. Falling Market Share and Profitability Figure 5. Golden Situation: Rising Market Share and Rising Profitability Figure 6. Budget Worksheet for Use in Creating Bids Figure 7. Dual Overhead Recovery Rate Calculator Figure 8. Overhead Sizing Calculation Figure 9. Determining Overcost Figure 10. Gross Margin Comparison of Field Performance/Estimating Figure 11. Labor Hours Backlog Figure 12. Increasing Hit Rate with Decreasing Gross Profit Margin Figure 13. Steady Hit Rate but Decreasing Gross Profit Margin Figure 14. Decreasing Hit Rate and Decreasing Gross Profit Margin Figure 15. Increasing Hit Rate and Increasing Gross Profit Margin Table 1. Closed Job Analysis Table 2. Focused Marketing Template for Location Table 3. Client Type/Customer Rating Table 4. Work Type Rating Table 5. Comparison of Company Benefits to Attributes

53
62 70 70 71 72 90 97 100 111 114 116 117 118 118 119 56 59 60 61 68

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Table 6. Three-Year Trend on Profit and Market Share Table 7. Data Sort for Bid Strategy Table 8. Bid/No Bid Template Table 9. General Conditions Cost Template 72 85 88 93

CHAPTER 4

Operations Management
Figure 1. Athletics vs. Contracting Figure 2. Documentation of Business Process Figure 3. Rummler-Brache Mapping Figure 4. Issue Board Figure 5. Best Practices Matrix Figure 6. Management Load Balancing Figure 7. Production Contrasted with Productivity Figure 8. Risk-Reward Curve for Construction Contractors Figure 9. Management Cycle Figure 10. Constructions On-Time Challenge Figure 11. Comparison of Planning, Forecasting, and Scheduling Table 1. Balance Load Management Tracking Form Table 2. Sample Short-Horizon Planner and Scheduler

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123 133 135 136 137 138 141 148 150 153 154 146 158

CHAPTER 5

Human Resources
Figure 1. Old Management Paradigm Figure 2. New Management Paradigm Table 1. Common Workplace Attributes

171
202 203 175

CHAPTER 6

Financial Management
Call-out: Cash Basis vs. Accrual Basis Accounting Figure 1. Billings Curve Data (Chart Format) Figure 2. Short Squeeze (Graphical Format) Figure 3. Cash to Cash Cycle Figure 4. DuPont Analysis Table 1. Job Cost Report

213
216 248 255 274 277 221

TABLES & FIGURES

Table 2. Balance Sheet, Part 1: Assets Table 3. Balance Sheet, Part 2: Liabilities and Equity Table 4. Profit/Loss Statement Table 5. Cash Flow Statement Table 6. A Prototypical Construction Project ROI Calculation Table 7. Billings Curve Data (Spreadsheet Format) Table 8. Declining Trend in Asset Turnover Ratio Table 9. Upward Trend in Asset Turnover Ratio Table 10. Short Squeeze (Spreadsheet format) Table 11. Basic Retention Management Table 12. Compound Interest at 12% over 43 Years

xiii
230 231 234 235 239 247 252 252 255 260 281

CHAPTER 8

Best Practices
Figure 1. Contractors Business Cycle Figure 2. General Business Risk vs. Reward Figure 3. Construction Risk vs. Reward Figure 4. Sample Questions from the Strategic Value Index Figure 5. Sample WorkSmart Leverage Analysis Survey Results Figure 6. WorkSmart Leverage Index Plot Figure 7. Disparity Calculation Table 1. Typical Bid Day Spread Table 2. Sample of Obtained Disparity Measures

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308 311 311 321 321 322 325 315 325

1 The New Business Model

onstruction contracting has a new business model, which is the culmination of changes that have occurred over many years. Some of these changes are fair and some are not. Nevertheless, contractors are currently working under these conditions. As an aside, change in the industry will continue infinitely. It is part of our industrys fabric. One school of thought suggests that the construction industry is broken. Several times a year, you may hear or read such an assertion. People will point to labor, material, design, software, and other areas where chaos exists in the marketplace. This is a normal reaction from outsiders who do not understand construction contracting. Good labor is scarce. Craftspeople and operators are not being produced in great numbers. Few want to be in our profession. We are lucky to have a loose immigration policy. Hungry immigrants who grew up farming make good field people. To have an American (second generation) pursue a construction career is a rare thing. Strong work ethics, in general, are dying. Others say current contracts are flawed. Contracts today, written by increasingly cunning lawyers, shift more risk to the contractor than ever before. Contract language that gives owners more control and contractors less is their goal. Design drawings are less complete than ten years ago. Savvy architects and engineers are under the same time pressures as contractors are, and the quality of plans and specifications show it. This leaves room for interpretation, conflict, and eventually, litigation. Yes, troubling events are occurring in the construction industry today. I agree that many of these things are problematic. They do increase risk for contractors. Some industry insiders and outsiders say we need to overhaul the entire system. I think that having a discussion about that would greatly benefit the industry. Provocateurs abound. To sell books in the United States these days, you can take one of two paths. The first is to write as thoughtfully as your God-given talent allows you. The second is to cause as much controversy as you can. (For example, see the political books by Michael Moore and Ann Coulter). Clearly, Broken Buildings, Busted Budgets: How to Fix

2 Corporate Objectives and Strategies

onald Trump emphasizes accumulating wealth. To him, that is success. However, we are talking about you. What is your goal? Yours is more important, especially to you and your loved ones. Singularly focusing on accumulating wealth may ignore many good things in life that money cant buy.

THE OWNERS GOALS ARE PRIMARY

The first rule of business in this new millennium is to strive toward the owners goals. Some owners want to provide a living for themselves. Others want a large business that will build serious wealth. Either is correct. Keeping, as Stephen Covey suggests, the end in mind, is my point. The owners mind is where that resides. Keeping a business small allows the owner to have options, not the least of which are having family and pursuing personal dreams. Growing the business to a large concern is what others desire. I have heard, second place is first loser. To be the biggest and the best is another worthy goal. There are many other reasons to own a construction firm. The point is that there is no right or wrong response, just choices motivated by whatever your goals and desires may be. Sometimes it is advisable not to share your goals for your firm with anyone. It cheapens them, subjects them to others judgment, and may become grist for the gossip mill. These days, my first inclination is not to discuss business plans because once spoken, they become the property of the people outside you. Your competitors could then adopt your goals. We should keep them to our trusted advisors and to ourselves. Lets start at the beginning and you will see what I mean. All business entities are driven by the owners goals. Rightly so: the person(s) who own(s) the business drive(s) toward their goals. Their values determine the what, how, where, when, and who of their business. They furnish the why. No one else can or should. There is no uniformity of purpose among Americans. We differ in many ways, physically, mentally, emotionally, and spiritually. Since goals derive from the owners, and the owners are responsible for the success or failure of their businesses, business goals are as different as the American people are.

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USE PAST PERFORMANCE TO MAKE ADJUSTMENTS FOR FUTURE WORK

So, we have discussed a way to track our ability to estimate costs and our work acquisition success rate. However, this is historic, not predictive. Diverging lines such as those shown in Figures 12 and 13 indicate that something detrimental to your profitability has changed. Once you see a trend that concerns you, it is time to further investigate the reasons. For example, comparing the economy with your BPI gives to you a clear picture about your work acquisition efforts. If there is increased economic activity, your BPI should indicate something positive. If it doesnt, investigate why not. If your areas economic activity has diminished, but your BPI is holding steady, that is good news. You might still investigate why, but you certainly would know that you are holding your own in a tough time.

SUMMARY
In construction, winning jobs is difficult. We must overcome four hurdles that are unlike those in other professions. The good news is that this keeps out the insincere and the unqualified. Selecting the right work is a critically important step. Dont select the most prestigious work if that is not what youre truly good at. In our industry, if you are good at a particular type of work, profits should follow. If you are not, they will never follow. Use a quantitative method as well as qualitative factors to determine your best work. The numbers will not lie to you. Quantity take off, costing, and bidding/proposing are mostly scientific and logical in practice. Using mostly quantitative methods for all work acquisition activities is the best long-term strategy. Three factors figure into a perfect project: (1) location, (2) work type, and (3) client type. Stay close to what you consider the best attributes in each of these categories and you will have a better business year. Market share and gross margin are interdependent in our highly competitive industry. Measuring both gives you a clearer picture of how your marketing and selling is performing. Aligning the work acquisition process with the project execution process is a critical strategic issue. The field is a majority of costs reside for the contractor. It is where we earn or lose profits. Project results are the primary detriment of contractors financial and reputation health.

OPERATIONS MANAGEMENT

123

Athletics Weakness Conditioning - Strength Contracting Mediocre Profits - Best Practices - Superior
Figure 1. Many tested processes in athletics parallel those found in contracting. We know the problems to expect and efficient solutions that result in better profitability.

PROVEN PRINCIPLES
You have to love this business. This business will test your love. If you love it, you might fail, but you wont quit. Quitting is failing in our business. Loving it makes you come back after failing. You can pretend to love it (do it because of money, status, or position) but that will catch up to you sooner or later. The business gets rid of insincere people in a myriad of ways. Successful contractors know these proven principles: 10-Year Rule. Years of hard work and extended hours are necessary to build a successful construction firm. We have heard this from experienced contractors. Gerry Grabach has been at it for more than forty years. We say it takes 10 years on average to learn how to consistently exceed industry profit margins. Once the skills are mastered, you may even see double-digit net profit percentages perhaps even a 40 percent or better ROI. Where can you find another activity with this level of financial a reward? Small is big. Small companies, divisions, and crews are more efficient and effective in construction. Large firms with small crews are hard to beat in several ways. Industry statistics such as association and banking information have shown smaller companies make a higher percentage of profit. Smaller crews have higher productive rates. Keep things small in divisions and crews. Gerry Grabach kept his firm smaller, which allowed him to continue his business over many years and through several crises. His Plan B includes getting even smaller. Every employee has to support the field operations. Gerry Grabach has no management staff positions. Gerry, the president, is managing a crewthe fabrication staff. In larger companies, each manager, executive, and owner must have line responsibilities; i.e., they all help getting work, building work, being paid, and keeping track of the work. At Grabach, Gerry performs all these functions him-

5 Human Resources

uman resource management comprises half of construction contracting. Managing people is complicated because people are more complex than any machine. They defy many preconceived notions regardless of gender, nationality, beliefs system, ethnicity, or other characteristics. Unlike Swiss watches, and regardless of their origins, when you look inside people, I guarantee you will always be surprised by at least one thing, probably many. Consequently, we are wise to understand people from many different angles. Any firm who realizes that employees are a leverage point to greater profits knows that we must find ways to improve them. A friend of mine once said, Software has a maintenance and upgrade process, why shouldnt we have one for as valuable a resource as people? Proceed slowly as you make decisions about your people. How you manage can engender loyalty or reduce their commitment to you and your firm. In construction, its often been said that you are not buying a persons time but their energy, ideas, and enthusiasm. We need to do more of the things that inspire more of this and fewer of the things that suffocate it. We dont all manage in the same way. Some of us lead from the front and others stay in the background. There is no precise prescription to managing effectively. You have lots of latitude. The results of safety, schedule, cost, and craftsmanship will judge you soon enough. How you get there is not as important as whether you get there. On the other hand, some approaches have been shown to be more effective than others are, and the approach you take should be suited to your strengths. In this chapter, I will share those ideas that we have found work well for many. The complex process of managing people starts with a simple premise: To lead and manage others well, you must first know yourself well. If you have great personal insight, you will use your strengths and involve others where you are weak. You will know where you can help or hurt the organization and its people. Wise leaders and managers dont fake anything because they know thats not in the long-term best interest of their company. After you gain these personal strengths, then you must invest in learning more about others. To do that, having a toolbox of methods and processes that you can use to learn about your people will help keep your relationships positive.

6 Financial Management

sound grasp of financial management is a crucial component of any contractors must-have education. Since the inability to pay bills is the fundamental reason for bankruptcy, it is at or near the top the list of critical topics.

My father was the first fiscal conservative I ever knew. He was the first of many things for me. He also had a devastating sense of humor. I appreciate that now, as I appreciate the value of a light moment. Humor is critical for our mental health. Early one morning he said, There is one thing money cant buy . . . poverty. What he meant was money gives to you many business options. It is funny thing he said then and I share with you now. We need to have a laser-sharp focus on finances if we are to have financial options now and in our later years. My mother, uncles, and aunts were not far from my Dad in their thinking. They all provided more for others than for themselves. They taught me that the purpose of work is to provide. They all saved money, clipped coupons, went out to dinner once a week at most, and were frugal in many other ways, including shopping for clothing and cars. They all had a great understanding of financial matters since they grew up during the depression. The lack of money forced them to keep careful track of their limited funds and make spending decisions wisely. Theirs is the generation that I miss in many ways, but for their financial wisdom most.

THE COST OF DOING BUSINESS

My family knew very well that all money has a cost. In conducting your business, your funding costs will fall into two major categories: The cost of borrowing: Fees charged by the bank and paid by you are obvious. There are agreements in writing and document trails of transactionsbills and paymentsthat are easy to understand and trace. The cost of opportunity: Not having funds to invest is a lost opportunity. $0 invested means $0 returns received. Cost of living including the cost of retirement still remains. The opportunity is lost.

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DEFINE YOUR BUSINESS PROCESS Technology is of little value if you dont define your business process up front. Computers only process data that human beings input. Once you precisely define the business process, the computer can operate on your data with lightening speed and accuracy. Any flaws inherent in your datainaccuracy, inefficiency, disorganizationwill remain inherent in the data that the computer produces. You will have wasted your investment in the technology and multiplied the weakness throughout your company. Adding technology first without such scrutiny and refinement is just paving the cow path. Nobody moves faster, but their feet are cleaner and they are more comfortable. DETERMINE THE WHAT AND HOW MUCH YOU NEED TO GET THE JOB DONE Before you adopt any technologyhardware or softwareyou should approach the endeavor just as our clients approach the challenge of choosing an excellent construction company: Seek the advice of experts whose business it is to advise about technology. Nevertheless, know that their purpose, like yours, is to make a profit, and to do that, they sell products and services. You must ultimately remain responsible for the decisions you make. Keep in mind that to have too much technology is as problematic as having too little or none. Computer applications that are too complex for your employees to use competently can confuse them. The results produced by the computer can only be as accurate as the data your people feed it. With our low margins and high risks, be very careful. We dont have room for grand experiments. So where do we start? What are like contractors using? To observe others is an inexpensive way to learn. Conventions and association meetings are easy places to chat with others about what theyre using. Ask questions. Dont be shy but do be polite. I have found construction professionals can be helpful as long as you are not their direct competitor and you are helpful in return. Software needs to be created with construction applications in mind. In their search for cashprofits or funds to further develop their productsoftware company representatives may claim all sorts of strong attributes about their offering. Regardless how attractive their products seem, be sure to investigate whether it has been developed for application to the construction industry.

BEST PRACTICE ES

31 11

Figure 2. General Business Risk vs. Re s eward

Here, we find that curve is quite differ from the one generat in the general busines H s rent e ted ss en nvironment. In construc ction contrac cting, we know that high h-risk situati ions yield les ss re eward and lower risk situations yield m more reward The curve this relations d. ship obtains is so omewhat per rpendicular to the normal one (see Fig 3). o l gure

Figure 3. Construction Ris vs. Reward sk d

As A you can see, risk/rew s ward relationship in cons struction con ntracting is v very differen nt fr rom the gene business one we saw above. Inste it is a mo eral ead, ostly negative relationship e p, meaning that with increase risk factor we see a de m w ed rs eclining rewa (ROI). ard

9 Summary and Conclusions

n our quest to understand the major themes of construction contracting as a business, we are well served by answering the question: What is the critical information to take away and remember in twenty years? My conclusions are major ideas gleaned from all construction firms with which we have worked and those that we have researched, with special attention given to those of highly consistent profitability. Especially insightful are those firms that have grown their top line (revenue) while growing their bottom line (profit) as well. I have known a few of them. Like all high performing firms in any industry, they are special. Other words such as rare and insightful also come to mind. We can learn a lot from them. We have discussed efficient and effective methods in detail in each of the chapters of this book. This is a summary of the most salient points. The following points are my interpretation of the attitudes and business focuses these profitable firms demonstrate: The owners goals determine success. No one destination labeled success exists. The focus of the shareholders is more personal to them. Commonly, younger contractors would like to acquire wealth. Good for them. Older contractors want a more balanced approach to wealth that includes their family and their significance to the industry. The owners personal goals are unique to each owner. Everyone must decide (construction company owner or not) what do they want to do, achieve, and become. To remain unfocused is also a choice, however, not a very fulfilling one. The speed of the business cycle determines your competitive edge. Having a faster cycle of work acquisition, building, and collecting payments will reward you. Whether your methods are elegant or inelegant doesnt matter. Whatever works for a quicker throughput it the answer. Said in a different way, if the monetary investment of getting work and building work is returned faster, then that investment costs less in labor and management and thus, the ROI is higher for the same profit margin. Dedicate energy toward the challenges that can be controlled or influenced and dont invest time into things that cannot be controlled, such as the weather. This keeps your focus high and the payoff higher on a per hour basis. Spending hours on uncontrollables means whatever you do doesnt affect the outcome. On the contrary, investing your effort in controllable items returns your effort in dollars.

Appendix A
CASE STUDIES
These case studies are fictitious, but they are based on consistent issues I have observed and advised about in many construction firms. Each case study examines several business issues in leading and managing. The trade or specialty they pursue is not important. The topics in each case study are common to a majority of firms. Some of the concepts and models here are from Managing a Construction Firm on Just 24 Hours a Day. You may have read and understand that to completely comprehend the themes and challenges of these case studies.

CASE #1. SOUTHWEST EXCAVATION AND UTILITY

COMPANY SITUATION: Southwest Excavation and Utility is a firm that has grown steadily, becoming a factor in its market. Jim Donaldson founded the company some ten years ago when he quit his project management job with the same type of firm. He started out with rented equipment, a foreman, and a couple of operators. From that humble beginning, the business has expanded each year, although some years it posts no profit, while in other years profit is good. Jim is ready for more growth as he envisions retirement in the next decade; he would like to have a substantial firm to sell. His personnel are an area of concern as he looks to increase profitable volume. He has kept David, his senior project manager and department head, over other project managers. But David has been slow to pick up changes Jim wishes to make. At times he argues against changes; at other times, he subtly works against them. Needless to say, this infuriates Jim. But David has been loyal and he does a good job on his projects. Jim is frustrated. He wants to give everyone every chance to succeed, but he has his own goals. He has placed David in senior executive level training classes, but he has demonstrated little improvement. Jim has a great project manager, Bert, who is younger than David and aggressive. He does everything Jim asks. He has been with Jim for the past seven years with the exception of a short stint during which he took a good job offer from a competitor who turned out to have an abusive work environment. He returned to Southwest Excavation and Utility with a new appreciation for Jim.

CASE STUDIES: CASE #3. SUPERIOR BUILDERS AND CONTRACTORS, INC.

349

projects. They are starting to get vocal about retention being held on jobs completed over a year ago. Harry says he is waiting for the check from the owner. A few specialty contractors are starting to threaten mechanics liens. Harry mildly threatens them with future business. Suppliers are starting to call on his material purchases. Harry pays them a little faster than subcontractors because he realizes that they will report slowness to credit-rating agencies. The bonding company has called and will visit next week. The representative wants to talk with him about his business. He told Harry there is nothing to worry about; it is just a checkup. Despite the myriad of creditors calling, Harry tells himself that if he can just generate a little more volume, he can solve his cash problems. Company statistics are shown in Table 3.
QUESTIONS: (1) Give reasons that might have caused the cash-flow problem? (2) From what you have read, point out Harrys incorrect assumptions about his business. (3) Where are some possible places the cash coming from to keep the company in business? (4) In your opinion, when did the current problem start? (5) What would you do if you were a subcontractor to Harry and knew the above? (6) What preventive actions might Harrys clients take? EXERCISES: (1) Write a turnaround plan based on the information given. (2) Write a letter to the surety and advocate that the company is not in poor shape and is improving.

WHAT OTHER CONSTRUCTION PROFESSIONALS ARE READING

423

GOOD TO GREAT: WHY SOME COMPANIES MAKE THE LEAP AND OTHERS DONT
By Jim Collins2 Good to Great is a breakthrough work by author and teacher Jim Collins. It distills dozens of critical business characteristics that are key for any firm to go from just good to a clear market and profit leader. It also confirms what most construction professionals have suspected for many years: superior leadership and management is a series of decisions over many years that allows a firm to build momentum, eventually accelerating past most if not all its competitors. This well-researched book serves as a counterpoint to the weakness of In Search of Excellence by Tom Peters. For that book, Peters performed less quantitative and more qualitative research in order to reach conclusions. Of course, qualitative research, in which data is gathered from a relatively small number of respondents, is more susceptible to the biases of researchers. Quantitative research, which statistically analyzes data from a large group, is less corruptible. Jim Collins clearly states this qualitative/quantitative problem and then he carefully supports the conclusions of his research with mostly statistical data. This book describes the transformation from a good firm to a truly great firm: Had a tenured existence before it became great. In the study, the company was in business for at least fifteen years as a good, mediocre, or poor firm before it turned into a great one. This kept companies out who started new industries such as Microsoft or have the good fortune of being in a commodity business such as oil. Has a cumulative stock return that is at least twice those of comparison firms; most were much higher. This doubling of results clearly signals a dramatic difference in its business approach. Has sustained these superior results for at least fifteen years. A business lifetime and not a fortuitous bounce of a companys fortunes. (Firm is at least thirty years old.) Both good-to-great and comparison (only good) companies were chosen in tandem because they were so much alike in many characteristics before the breakthrough year(s). Market share, profitability, share price, revenue amount, etc. compared closely. This allows key distinctions to be made that werent generated by luck or explained in some non-business way.

Collins is also coauthor of Built to Last. His newest book is How the Mighty Fall and Why Some Companies Never Give In.

Index
accounting, 225, 235, 324 cash vs. accrual basis a., 216, 229, 284 data backup of a. records, 295 construction-specialized a., 268 cost a., 220 financial management, a. vs., 214, 215, 217 job cost data used in a. process, 218 organizational structure, a. process in, 135 a. overhead, 266 a. software, 325, 360, 367, 389 accounts payable (A/P), 231, 232, 235, 245, 263, 265, 268, 273, 288, 420 age of trade A/P p., 249 accounts receivable (A/R), 232, 245, 246, 264267, 268, 273, 275, 249, 324, 413 age of trade A/R, 249 A/R days outstanding, 241 adjustments: future estimates, a. to, 94, 120 business process, a. to, 155 risk a., 86 advice to young construction professionals, 209 age of material inventory, 249 agreement(s), 438 contract a., 427 documenting a., 264, 265 home-building a., 364 industry a., 266 legal (dis)agreement, 145, 264 long-term value in a., 421 owner/partnership a., 346 piece rate a., 388 project a., 105, 141, 259 sales a., 366 third-party a., 266 work acquisition a., 79, 346 alignment of work acquisition to field staffs, 112, 113 American Subcontractors Association, 109 Application Service Providers (ASPs), 297 arbitration, 106, 165, 266 architects, 1, 6, 289, 302 archives, project mgmt., 289 searchable a. databases, 298, 405, 411 as-built drawings, 80, 289, 405, 412 assessment, 180182, 212, 220, 223, 228, 243, 318, 320, 322, 324, 415 client type, a. of, 59 DISC a., 177, 199 fact-based a., 174 leadership/management a., 179, 190 strategic practices a., 316 personality a., 176 productivity a., 133 quantitative a., 137 resource a., 190 risk a., 13 self-a., 176, 326 time management a., 182 assets. See also liabilities current assets, 231, 232, 241, 244, 245, 248, 251, 275 fixed a., 128, 229, 231, 232, 248, 268, 275, 276, 308, 309, 344 personal a., 395 return on assets (ROA), 13, 236, 237, 268, 276 total a., 244, 248, 250, 251, 252, 275, 276 a. turnover, 251, 252, 276 Associated General Contractors of America, 5, 109, 301 audits, 215, 268, 295 balance sheet, 145, 150, 227, 228233, 235, 244, 246, 267, 367 Ballard, Glen, 127 Bausman, Dennis, 6 Benfords Law, 270 benefit(s): acceleration of cash flow, business b. of, 267 assessment tools used by human resources, b. of, 174, 180 bad bid, b. of re-estimating, 91 b. of your company discussed during selling, 67, 80 best practices, b. of using, 332 client b., 23 company b. compared with company attributes, 68 compatible customers, b. of working only with, 87 competing against yourself, b. to company of, 334 conservatism, b. of, 258 cost/b. line crossing, 304 details, b. of attending to, 145 diversifying, b. of, 22 fringe b., 18, 187, 208 Lean, b. of, 132, 134 paying early, b. of, 273 perceived b., 80 physical and mental b., 194 purchase orders, b. of, 265 profit, b. of, 117 reputation, b. of good, 307 simple processes, b. of, 86 small projects div., b. of, 105 special projects div., b. of, 340 best case scenarios, 224, 415 best practices, 18, 47, 101, 110, 123, 137, 186, 271, 300, 307327, 332

best practices matrix, 322

bid(ding)(s), 15, 81, 82, 86, 87, 92, 95, 96, 99, 101, 113, 115, 120, 237, 270, 300, 308, 324, 377 b. aggressiveness, 72

448
bid(ding)(s), cont. avoid b. future projects to sever ties with client, 166, 169 b. conditioning, 105, 259 bidding hit rate, 117 bid lists, 4 bid/no bid decision making, 8688 electronic reverse auction bidding (ERAB), 107110 low b. mentality, 38, 100, 101103 b. models, 84, 107, 378 publicly b. projects, 313 questionable procurement procedures to win b., 107 research client ability to pay before b., 264 b. strategy, 83, 107 b. war, 209 Bidding Power Index, 117119 Big Hairy Ideas (BHI), 40 billing, 2, 15, 114, 129, 139, 142, 238, 241, 249, 258, 261, 269, 273, 275, 295, 324 completed/uncompleted projects, b. on, 230, 232 cost plus estimated earnings in excess of b., 246, 275 b. curve data, 247, 248 b. cycle, 16, 274 b. disputes, 163 b. in excess of costs and estimated earnings, 246 facilitation of timely b., 287 over b. (billings in excess costs), 233, 244, 247, 248, 253 b. personnel, 291 smart b. and collection practices, 264267 under-b., 222, 232, 233, 244, 247, 253 unremitted b., 10 bonds. See surety bottom-line, 44, 83, 150, 168, 262, 304, 325, 329, 331, 335 broadband service, 293

THE PRACTICAL CONSTRUCTION MBA

Broken Buildings, Busted Budgets (LePatner), 1, 2 budget(ing), 86, 89, 90, 92, 96 99, 111, 134, 223, 262, 334, 344, 346 allocated b., 45, 76 BIM, b. improved by, 301 compliance offers best way to meet b., 49 b. cost spent to date, 247 cost codes and b., 225 daily production compared with b., 300 low bid mentality effect on b., 100, 101 proactive management yields b. savings, 151, 204 on time, under b., 17, 54, 110, 152, 153, 160, 186, 198, 301, 309 over b. effect on retained earnings or equity, 82 overestimates, effects on b., 240, 241 project completion predictions and b., 224 profit- b. relationship, 222 publicly bid projects b., 313 tighter b. than years ago, 8 training b., 132 b. worksheet for bidding, 90 building information model (BIM), 301, 302, 404, 406 building work, 15, 16, 31, 86, 112, 119, 124, 145, 146, 173, 216, 253, 270, 284, 287, 303, 308, 324, 329, 412 business cycle, 112, 119, 137, 268, 287, 307309, 316, 329, 334, 406, 412, 426 business environment, 7, 310, 311, 424 litigious b. e., 438 business model, new, 1, 3, 8, 15, 16, 20, 23, 34, 124, 183, 307, 362, 406 business plans, 9, 25, 34, 41, 125, 126, 283, 314, 335, 409 call backs, 128, 142, 187 capital: being under/well-capitalized, 165, 258, 259, 420 working c., 243246, 250, 251, 312, 415 venture c., 125, 288, 401 careers, 331, 333, 334, 336 cash flow (statement), 235, 236, 248, 256, 261, 264, 267, 271, 272, 303, 349, 367, 380, 382 down economy, c. f. problems during, 279, 413 cash-to-cash cycle. See working capital turnover CEOs, 32, 142, 182, 188, 189, 201, 202, 204, 206, 406, 424426 certificate of insurance, 105 change orders, 9, 16, 29, 45, 50, 78, 89, 104, 106, 165, 219, 241, 242, 276, 289, 313, 331 Chief Financial Officer (CFO), 182, 206, 215, 216, 268, 372 close out documents, 271 closed job analysis, 55, 56 collections, 53, 249 smart billing and c. practices, 264267, 269 Collins, Jim, 307, 317, 423430 Good to Great, 252 commodit(ies)(y), 8, 22, 110, 166, 423 c. market specialists, 5 c. material supplier, 238241 c. prices, 5, 268, 392 communication, 180 confidentiality of company c., 297 good management improves c., 140, 150152, 155 miscommunication, 134 morale and c. connection, 200 obstacles to effective c., 172 organizational structure impact on c., 202 prospects, c. with, 6265 technology speeds up c., 287 295, 298