Americans are competitive. We were raised in the world’s “land of opportunity” where doing better than our forebears was not only encouraged but expected. This ingrained
expectation to “do better” drives the second and third generation of construction company management to grow the business beyond the founder’s vision. They are incapable of “leaving well enough alone”. Settling for small, profitable, familiar projects on their company’s home turf is simply unthinkable. “We can take on bigger more complex projects in neighboring states because we’ve proven, over the years, we know what we’re doing.” That statement is almost the “mantra” of second-generation construction company management.
Simply Not True
Although this competitive spirit resides in our DNA, it is not necessarily for the better. Thirty years of research into the causes of contractor failure overwhelmingly proves that careless project selection for the sake of growth is one of the main causes of contractor failure. Ambition can be dangerous and engenders beliefs that need to be reconsidered. For example:
- Growth is always good.
- Overhead is a symbol of success and not to be surrendered unless absolutely forced to.
- Cutting overhead is an admission of failure.
- Down times are bad news but a natural part of the industry.
- The industry is not necessarily cyclical.
- Unprofitable work is just part of the business.
Project Selection Risk Factors
- Experience: Perhapsthe biggest breakthrough in our project selection risk research is the realization that few construction projects have built-in inherent risk. Project risk is exclusively a measurement relative to the organization’s experience with the work and the experience of team members working with each other. Experience is accumulated institutionally but is captured individually. The number of contributors on a performance team with direct experience on similar projects impacts the likelihood of profitable performance on the current project.
- Small projectstypically generate the highest profit as a percentage of sales, but they are usually not sufficient to support the ambitions of growing organizations.
- Mid-size projects, which generally earn reasonable, but less profit as a percentage of sales than small jobs, are the projects the company survives on.
- Large projectsearn less than the mid-size projects as a percentage of sales, but they help the company meet critical mass, support growth appetites of management teams and support interests of key employees. However, these projects increase risk dramatically because of the challenge management has with pricing them properly.
- Type of Project: Prior experience with the type of project is directly proportional to the likelihood of successfully proposing and producing a project profitably, on time, and on budget.
- Geographic Area: Very much like type of project, any departure from the geographic area an organization is experienced in will generally involve a risk- laden learning curve. It takes experience to discern potential labor issues and skill levels, subcontractor availability, pricing and expectations, and other local customs that may impact how the work is managed or preformed.
Minimizing Ambition Risk
Rather than dampen the enthusiasm of young management, we have devised a tool for you to audit the ambitions of your management team when it comes to project selection. The risk of a proposed project succeeding can be measured in advance. The project attributes discussed above can be weighted and placed in a numeric formula to provide an accurate measure of project risk. We call this easy-to-use tool, The Project Selection Program under “Tools.” You can find it here on the site. Take a look and see how easy it is to audit the risks associated with your management group’s ambitious project selection process.