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Getting on the Right Side of the Risk Curve in Contracting
Risk versus reward is a basic rule of business. It states that for every increased unit of risk, we should receive an extra unit of reward. Typically, it is a one to one ratio. Conversely, when we are take a minor risk then, we cannot expect a large reward.
The construction business is not a minor risk, it is a major one. In terms of percentage of business failures, it is the second riskest. We certainly should ask for a substantial reward for our efforts.
However, the risk curve in contracting is not similar to the general business risk-reward curve. This curve in construction contracting is perpendicular to the normal risk-reward curve.
First, let's define terms. Reward is financial (as opposed to personal). In contracting, financial results are determined by profit % and the cash to cash cycle. This is why it is perpendicular. Risk free projects have better margins and cash flow than risky projects.
Project risk is defined as any factor that causes your profit margin to shrink from the estimated amount. Business risk is any factor that decreases your budgeted profit for the year.
Some of us are on the less risk / high reward side. Some of us are the high risk / low reward side and some of us are in the middle. How do we position ourselves in the appropriate place? Where do we start?
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Matt Stevens is a management consultant who works only with construction contractors. He has performed training and business consultation for the contracting community since 1994. Matt can be reached at mstevens@stevensci.com.
search terms: Pre-construction, post-mortem, lessons learned, Profitabilty, Profit, Business Planning,
Posted by Matt Stevens at July 24, 2005 11:33 PM
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