Matt Stevens

The Practical Construction MBA Qualitative and Quantitative Approaches to Construction Contracting Management

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 1997–2002. He earned an undergraduate degree in Construc-tion 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, Con-struction, 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 Im-provement engagements with dozens of associations and private companies and con-ducted 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 ad-visor and assisted owners in improving their firms with business and process improve-ment initiatives, some lasting as long as eighteen months. He is certified on several sub-jects 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), current-ly 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 deposi-tions outside the courtroom. His area expertise focuses on construction business opera-tions 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 xi

FOREWORD xv

CHAPTER 1 THE NEW BUSINESS MODEL 1 What Has Changed in the Construction Industry over the Last Four Decades? 3 What We Know 7 Some Parts of the Construction Industry Remain Unchanged 9 Volume-Based, Fixed-Cost Business 10 Volume-Sensitive, Variable-Cost Business 11 Part of the New Approach: The Quantitative Method 11 The New Business Model of Construction Contracting 15 Profile of a Profitable Contractor in This Millennium 17 Two Sources of Personal Wealth for the Contractor 21 Summary 23

CHAPTER 2 CORPORATE OBJECTIVES AND STRATEGIES 25 The Owner’s Goals Are Primary 25 The Learning Curve 29 Strategic Planning for Construction Businesses 33 Vision/Mission: How You Want to Be Seen and How to Get There 40 Construction Compared with Manufacturing 43 Strategic Planning to Change the Market 44 The Cold Hard Strategic Truth 48 Summary 51

CHAPTER 3 WORK ACQUISITION 53 Win Three Times to Win One Project 53 Selecting the Right Work 55 Market Analysis 58 Marketing versus Selling 61 Marketing 65 Common Marketing Rules for Contractors 67 Comparing Market Share and Profits 68

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

CHAPTER 4 OPERATIONS MANAGEMENT 121 Proven Principles 123 Construction Business Planning is Critical 125 Taking the Lean Approach to Construction Contracting 126 Creation and Implementation of Quality—LEAN—Processes 134 Processes That Consistently Deliver Results 136 Management Load Balancing 138 Management: A Short Course 147 Planning, Forecasting, and Scheduling 151 Managing a Construction Firm in a Down Economy 161 Firing Your Worst Client to Improve Your Risk Profile 163 Summary 169

CHAPTER 5 HUMAN RESOURCES 171 The Key Role of the Human Resources Manager 174 Self-Actualization Motivates More than Money 174 Knowing Yourself Well is Critical To Management and Leadership 175 Personality Assessment 176 Leadership/Management Assessment 179 Time Management Essentials 181 Teaching and Mentoring: investment with Hardcore Results 182 New Employee Orientation and Continuing Education 186

CONTENTS

ix

Leader-Manager: New Definition of Leadership in Construction Contracting 188 Four Habits of Highly Effective Construction Managers 190 Managing Yourself Better 193 The Most Important College Class Not Taught 194 Compelling Reasons to Manage Labor Well 196 Beginning the Learning Curve in College 197 You are the Chief Morale Officer 199 Best Organizational Structure for Optimal Use of Human Resources 201 The Age of Less Delegation 203 Proactive Management 204 Multiple Delegation by Electronic Means (MDEM) 205 Managing the Latest Generation 207 Recruiting Tips 208 Advice to Young Construction Professionals 209 Summary 211

CHAPTER 6 FINANCIAL MANAGEMENT 213 The Cost of Doing Business 213 Tracking Revenue and Costs 214 Accounting vs. Financial Management 214 Financial Management of Individual Project: Job Cost Reporting 218 Financial Statement 226 Rate of Return Measures 236 What Is a Reasonable ROI to Expect? 242 Additional Financial Indicators: Critical Metrics to Compute 244 If Limited to One Indicator, Which Financial Ratio Would I Choose? 252 Overhead Management 253 Retention Management 257 Budgeting 262 Keep a Cushion of Funds in Your Account 263 Smart Billing and Collection Processes 264 Typical Financial Trouble Spots for a Construction Firm 267 How Financial Policies Affect Your Construction Business 270 Increasing Employees’ Awareness of Key Financial Data 274 DuPont Analysis 275 Ours is a Recession Resistant Industry 278 Ways to Weather Down Economic Times 279 What To Do with Profits? Remember the Rule of 72 280 Summary 284

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CHAPTER 7 TECHNOLOGY 287 Reticence about Adopting Technology 288 First Things First 289 Technology to Have and Master 292 Emerging Trends 298 Virtual Construction 299 Measuring ROI of Your Technology Investment 302 Compelling Business Reasons to Invest in Technology 303 Summary 304 CHAPTER 8 BEST PRACTICES 307 Risk versus Reward 309 Characteristics of Superior Projects 313 Strategic Actions and Operational Methods Make up Best Practices 316 The Indices 318 Strategic Value Index for Construction Contractors© 319 WorkSmart Leverage Analysis 320 Best Practices Research using WorkSmart Leverage Analysis 322 Summary 326

CHAPTER 9 SUMMARY AND CONCLUSIONS 329

WORKS CITED 337 APPENDIX A CASE STUDIES 339 APPENDIX B DIGEST OF OTHER MANAGEMENT INSIGHTS 409 APPENDIX C WHAT CONSTRUCTION PROFESSIONALS ARE READING 417 APPENDIX D CONSTRUCTION PARABLES 439

INDEX 447

Tables & Figures CHAPTER 1 The New Business Model 1 Figure 1. New Business Model Three-Phase Cycle 16 Figure 2. The Contractor’s Risk/Reward Curve 21 CHAPTER 2 Corporate Objectives and Strategies 25 Figure 1. Sample Construction Firm Five-Year Plan 36 Exhibit: Sample Press Release: Construction Contractors Urge Fair Dealings 44 Exhibit: Sample Letter to a College Dean of a Construction Program 46 Exhibit: Sample Open Letter to Government Officials 47 CHAPTER 3 Work Acquisition 53 Figure 1. Marketing-Selling Continuum 62 Figure 2. Buying Market Share by Cutting Profit Margins 70 Figure 3. Market Share Stable but Profits Down 70 Figure 4. Falling Market Share and Profitability 71 Figure 5. Golden Situation: Rising Market Share and Rising Profitability 72 Figure 6. Budget Worksheet for Use in Creating Bids 90 Figure 7. Dual Overhead Recovery Rate Calculator 97 Figure 8. Overhead Sizing Calculation 100 Figure 9. Determining Overcost 111 Figure 10. Gross Margin Comparison of Field Performance/Estimating 114 Figure 11. Labor Hours Backlog 116 Figure 12. Increasing Hit Rate with Decreasing Gross Profit Margin 117 Figure 13. Steady Hit Rate but Decreasing Gross Profit Margin 118 Figure 14. Decreasing Hit Rate and Decreasing Gross Profit Margin 118 Figure 15. Increasing Hit Rate and Increasing Gross Profit Margin 119 Table 1. Closed Job Analysis 56 Table 2. Focused Marketing Template for Location 59 Table 3. Client Type/Customer Rating 60 Table 4. Work Type Rating 61 Table 5. Comparison of Company Benefits to Attributes 68

THE PRACTICAL CONSTRUCTION MBA xii

Table 6. Three-Year Trend on Profit and Market Share 72 Table 7. Data Sort for Bid Strategy 85 Table 8. Bid/No Bid Template 88 Table 9. General Conditions Cost Template 93 CHAPTER 4 Operations Management 121 Figure 1. Athletics vs. Contracting 123 Figure 2. Documentation of Business Process 133 Figure 3. Rummler-Brache Mapping 135 Figure 4. Issue Board 136 Figure 5. Best Practices Matrix 137 Figure 6. Management Load Balancing 138 Figure 7. Production Contrasted with Productivity 141 Figure 8. Risk-Reward Curve for Construction Contractors 148 Figure 9. Management Cycle 150 Figure 10. Construction’s On-Time Challenge 153 Figure 11. Comparison of Planning, Forecasting, and Scheduling 154 Table 1. Balance Load Management Tracking Form 146 Table 2. Sample Short-Horizon Planner and Scheduler 158 CHAPTER 5 Human Resources 171 Figure 1. Old Management Paradigm 202 Figure 2. New Management Paradigm 203 Table 1. Common Workplace Attributes 175 CHAPTER 6 Financial Management 213 Call-out: Cash Basis vs. Accrual Basis Accounting 216 Figure 1. Billings Curve Data (Chart Format) 248 Figure 2. Short Squeeze (Graphical Format) 255 Figure 3. Cash to Cash Cycle 274 Figure 4. DuPont Analysis 277 Table 1. Job Cost Report 221

TABLES & FIGURES xiii

Table 2. Balance Sheet, Part 1: Assets 230 Table 3. Balance Sheet, Part 2: Liabilities and Equity 231 Table 4. Profit/Loss Statement 234 Table 5. Cash Flow Statement 235 Table 6. A Prototypical Construction Project ROI Calculation 239 Table 7. Billings Curve Data (Spreadsheet Format) 247 Table 8. Declining Trend in Asset Turnover Ratio 252 Table 9. Upward Trend in Asset Turnover Ratio 252 Table 10. Short Squeeze (Spreadsheet format) 255 Table 11. Basic Retention Management 260 Table 12. Compound Interest at 12% over 43 Years 281 CHAPTER 8 Best Practices 307 Figure 1. Contractor’s Business Cycle 308 Figure 2. General Business Risk vs. Reward 311 Figure 3. Construction Risk vs. Reward 311 Figure 4. Sample Questions from the Strategic Value Index 321 Figure 5. Sample WorkSmart Leverage Analysis Survey Results 321 Figure 6. WorkSmart Leverage Index Plot 322 Figure 7. Disparity Calculation 325 Table 1. Typical Bid Day Spread 315 Table 2. Sample of Obtained Disparity Measures 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 condi-

tions. As an aside, change in the industry will continue infinitely. It is part of our indus-try’s 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 reac-tion from outsiders who do not understand construction contracting. Good labor is scarce. Craftspeople and operators are not being produced in great num-bers. 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 specifica-tions 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

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2 Corporate Objectives and Strategies

onald Trump emphasizes accumulating wealth. To him, that is success. Howev-er, we are talking about you. What is your goal? Yours is more important, espe-cially to you and your loved ones. Singularly focusing on accumulating wealth

may ignore many good things in life that money can’t buy. THE OWNER’S GOALS ARE PRIMARY The first rule of business in this new millennium is to strive toward the owner’s 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 owner’s 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. Let’s start at the beginning and you will see what I mean. All business entities are driven by the owner’s 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 busi-ness. 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 own-ers are responsible for the success or failure of their businesses, business goals are as dif-ferent as the American people are.

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120 THE PRACTICAL CONSTRUCTION MBA

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 doesn’t, investigate why not. If your area’s 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. Don’t select the most prestigious work if that is not what you’re 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 acquisi-tion 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. Mea-suring 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 stra-tegic 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

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 won’t 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 effec-tive 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 crew—the fabri-cation 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-

Athletics

Contracting

Weakness – Conditioning - Strength

Mediocre Profits - Best Practices - Superior

5 Human Resources

uman resource management comprises half of construction contracting. Man-aging people is complicated because people are more complex than any ma-chine. 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 shouldn’t we have one for as valuable a resource as people?” Proceed slowly as you make decisions about your people. How you manage can engend-er loyalty or reduce their commitment to you and your firm. In construction, it’s often been said that you are not buying a person’s 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 don’t 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 don’t fake any-thing because they know that’s 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.

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6 Financial Management

sound grasp of financial management is a crucial component of any contractor’s 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 can’t 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 pro-vided 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 de-pression. 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 fund-ing 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 transactions—bills and payments—that 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 retire-ment still remains. The opportunity is lost.

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DEFINE YOUR BUSINESS PROCESS Technology is of little value if you don’t define your business process up front. Comput-ers 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 data—inaccuracy, inefficiency, disorganization—will 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 technology—hardware or software—you should approach the en-deavor 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 competent-ly 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 don’t have room for grand ex-periments. 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 they’re using. Ask questions. Don’t 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 cash—profits or funds to further develop their product—software 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.

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9 Summary and Conclusions

n our quest to understand the major themes of construction contracting as a busi-ness, 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 grow-ing their bottom line (profit) as well. I have known a few of them. Like all high perform-ing 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 in-terpretation of the attitudes and business focuses these profitable firms demonstrate: The owner’s goals determine success. No one destination labeled “success” exists. The focus of the shareholders is more personal to them. Commonly, younger contrac-tors would like to acquire wealth. Good for them. Older contractor’s want a more ba-lanced approach to wealth that includes their family and their significance to the industry. The owner’s 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 doesn’t 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 don’t 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 “uncon-trollables” means whatever you do doesn’t affect the outcome. On the contrary, invest-ing your effort in controllable items returns your effort in dollars.

I

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 under-stand 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 fore-man, 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 demon-strated 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 mechanic’s 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 Harry’s 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 Harry’s 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 DON’T 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 mar-ket and profit leader. It also confirms what most construction professionals have suspected for many years: supe-rior 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 re-search in order to reach conclusions. Of course, qualitative research, in which data is ga-thered 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 care-fully 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 Micro-soft 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 company’s fortunes. (Firm is at least thirty years old.)

• Both good-to-great and comparison (only good) companies were chosen in tan-dem because they were so much alike in many characteristics before the break-through year(s). Market share, profitability, share price, revenue amount, etc. compared closely. This allows key distinctions to be made that weren’t generated by luck or explained in some non-business way.

2 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. pro-cess, 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, 264–267, 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 Asso-ciation, 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, 180–182, 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, 228–233, 235, 244, 246, 267, 367 Ballard, Glen, 127 Bausman, Dennis, 6

Benford’s 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, 307–327, 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

THE PRACTICAL CONSTRUCTION MBA 448

bid(ding)(s), con’t. 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, 86–88 electronic reverse auction bidding (ERAB), 107–110 low b. mentality, 38, 100, 101–103 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, 117–119 Big Hairy Ideas (BHI), 40 billing, 2, 15, 114, 129, 139, 142, 238, 241, 249, 258, 261, 269, 273, 275, 295, 324 completed/uncompleted pro-jects, 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 es-timated 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 prac-tices, 264–267 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

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 predic-tions 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, 307–309, 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., 243–246, 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. prob-lems during, 279, 413 cash-to-cash cycle. See working capital turnover CEOs, 32, 142, 182, 188, 189, 201, 202, 204, 206, 406, 424–426 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, 264–267, 269 Collins, Jim, 307, 317, 423–430 Good to Great, 252 commodit(ies)(y), 8, 22, 110, 166, 423 c. market specialists, 5 c. material supplier, 238–241 c. prices, 5, 268, 392 communication, 180 confidentiality of company c., 297 good management improves c., 140, 150–152, 155 miscommunication, 134 morale and c. connection, 200 obstacles to effective c., 172 organizational structure impact on c., 202 prospects, c. with, 62–65 technology speeds up c., 287–295, 298