The Construction Leader's Digest: Construction Contracting Archives

October 12, 2005

The Best Industry in the United States

My child is in college. She is starting to ask about industries and careers. Olivia has made me think further about what construction contracting has to offer her. I have concluded it is the best career a young person could choose. You may not believe it, but, the facts will show our business is unmatched. It offers participants long term tangible benefits. However, many people will argue. Let me show you the many virtues our industry has. You be the judge.

The Industry is Not Going Away - Construction is a basic neccessity to human life - shelter, food, clothing, and water. Contrastingly, most manufacturing will be leaving this country over the next few years. Construction cannot be exported. It must be "insitu" or occuring where it produces the end product. This is unlike service center, computer programming or engineering where other countries provide it from afar and then send it back to the United States. Construction and it's sister, demolition are captive to the site.

Merit Based – the construction industry rewards hard work. There is no substitute. We are all dissatisfied with the work ethic today. When we find it, we reward it. Let me give you an example – a person comes to you (male / female) doesn’t speak English well but has promised to work hard and keep their nose clean. You give them a chance and 1 year later, you are glad you did. They kept their promise. Now, what will you do? Ignore them? Cut their pay? Of course not. You will increase their wages and give them more responsibility. Construction contractors reward merit.

Additionally, the industry is also. Let me show you. What is the best advertising in the construction business? A completed project on time and on budget. This speaks volumes of a contractor’s savvy and diligence. Word of mouth travels fast. Excellent contractors have more opportunities for work than their lesser competitors.

Small is Big – Construction rewards the small construction firm. That is they make a higher percentage of profit. This is a variable cost business. In other words, you do not have to have “critical mass” to be profitable. Net profit statistics consistently show that smaller contractors make a higher percentage of profit before tax than their larger brethren do. Construction is one of the few industries that the big don't eat the small, the fast eat the slow.

Tangible – Our industry erects monuments. Our work is visible to everyone. We can see it for decades after we complete it. Construction people show friends and relatives these projects. Unlike other industries, we see what we accomplish every day. Unlike politics, there is little room for spinning.

Highly Paid The construction industry for a non-supervisory, production work pays the forth higest wage of all industries. Current average hourly wage is north of $19.00. Industries who compensate production worker better are 1)Utilites or mostly high voltage workers. They are the highest paid. 2)Petroleum and Coal (Miners and Roughnecks) 3)Information or computer technicians. The lowest 1) Apparel - lowest 2) Textile 3) Retail Trade

Best Earning Years Later in Life – Statistically, this is difficult to prove. However anecdotally, a case can be made. In my travels working with clients in the United States, A contractor's profitabilty grows over the years. I have seen increases as either percentage or gross dollars or both. Construction becomes more profitable with experience.

In contrast, the best earning years of most other industries is between 35 and 50. (Professional Sports excepted). The reason for this youthful compensation is energy, the willingness to travel, to take risks and to make extraordinary things happen. Profitable construction is based on consistent and correct processes, somewhat like the manufacturing business. The more consistently a person does the correct things, the better the outcome.

In our opinion, construction contracting consists of two components –people and processes. What does an older executive have over a younger one? The knowledge and experience handling people and building projects. (They have the scare tissue to prove it!) My conclusion is a contractor’s best earning years tend to be in their 50’s and 60’s.

No Consolidation – The construction industry is an owner – operator business. Efforts to consolidate have shown the power of the small business – you cannot beat an owner who is risking his wealth every day. Large firms are at a disadvantage. Again, small is big and the fast eat the slow.

Local – Where can a construction company be started? Anywhere! Construction expertise is needed in all fifty states. It does not need a port facility or wide open spaces to operate. You can start one where you live and that is family friendly. An important consideration these days.

No college degree needed – Construction people who have worked in the field for several years have the equivalent of a college degree. A majority of construction knowledge is earned while working not studying. Technically, you learn how to install quality work with your own two hands. College student studying construction don't go to class with their tool belts on. I strongly believe that someone who has owned and operated a construction business for 20 years has a master’s degree maybe even a Ph.D.

No large capital investment needed – Some successful construction firms have been started with no money. Beginning capital is not a major obstacle. This is a cash flow and variable cost business. To start, a person does not have to float an IPO or have a rich uncle. What they need to do is understand the economics and have technical expertise.

Shortage of people wanting to be in it – Industry economists agree that we still have a shortage of people employed in Construction. Conservatively, the number needed is 150,000. As we have learned in our lifetimes, the Demand / Supply curve is very powerful. A shortage of anything drives the price up. Competent people earnings have outstripped general wage increases in other industries. That is job security as well as wealth building. Ask a computer programmer or airline pilot about over supply of people and the effect on wages and opportunity.

What other industry has all these attributes. The answer is none. Although, the perception persists that our industry does not have much to offer young people. It is not true. Surveys have shown people in construction do not recommend our industry to their children. We must stop this habit. I challenge each of us to promote our industry. Let the truth be told.

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. His firm, Stevens Construction Institute assists contractors in working smarter, is located at http://www.stevensci.com. His direct line is (407) 678-0730

Posted by Matthew S. Stevens at 04:18 AM | Comments (4)

September 01, 2005

Construction Economics: The Supply - Demand of Contracting

In the study of economics, there are many models used to illustrate key concepts. Some of the models were created to explain real world behavior. One of these practical models, in our opinion, shows the dynamics of the construction industry. The model is the Supply – Demand Curve and it is insightful in explaining the business of contracting.

Once understood, the Supply - Demand Curve shows some difficult realities of contracting. It illustrates the problems and opportunities in the industry. That is, how good and bad contracting can be as a market and a profession.

As a concept, the Supply – Demand Curve for construction services shows how both supply and demand of any industry reacts to a price change. For a construction firm, it means how does the demand for construction services and the supply of contractors react with a change in the cost of construction. In essence, how do clients and contractors behave when price goes up or down. We will use the Supply – Demand Curve Model to explain, some of the economic issues of the construction industry. First, let’s make clear three definitions:

Price is the Owner's Cost – In other words, when contracting prices are high, we mean that the market sees a high cost to build. When cost is low then contractors have dropped their bid prices (and presumably decreased profit margins)

Supply is the Number of Contractors. For simplicity purposes, we will keep our discussion contained to this point. However, please understand that the number of contractors drives capacity. A changing number of contractors affects the amount of construction that can be installed.

Demand is the willingness for people to pay the average price quoted by contractors. Clients want construction services at that cost.

We will not to discuss current prices, their level or future pricing movements. What we will discuss is how a price change affects demand and supply. When we state the word cost, it is not the cost of material or labor to the contractor, it means the cost of our construction services to the market.

The purpose of this article is to take a macro or global view of the industry. For business planning, this is an important item. It answers the question: what will I do if demand drops. What is my plan “B”? Alternatively, how do I take advantage of a price increase thus an opportunity for more profits?

The supply curve is flat. That is the supply or number of contractors does not greatly increase due to an increase in price (profit). Furthermore, it doesn’t decrease due to a drop in price either. People who are contractors will stay in the construction business. They might make their business smaller but they will still own a construction firm.

Why?

Contracting is a long term skill where entrants cannot learn it quickly unlike real estate. Real estate is not an easy profession but it is one that widely understood. If we look at the real estate industry, most of those professionals have owned property or a house before they entered the business.

In construction, the demand curve for services is steep. That is, a change in price greatly affects demand. If price goes up then, demand lessens. If price goes down, demand rises. The inexpensive metal building (imported) market is an example of this.

The reason: people have options other than building a new office, factory or home. In the short term, they will stay in the existing facility and if necessary, renovate what is absolutely essential.

Don’t forget, construction of a home is the largest individual purchase a person will make. Building of a new factory or corporate office is a top three corporate investment. This decision is not an impulse buy. The cost / benefit value is weighed carefully.

Contractor supply (the number of contractors) does not rise or fall markedly due to price (whether low or high profit margins) in the short term.

 Highly technical
 High risk
 Not a professionally attractive industry to the general public.
 Competent contractors don’t’ grow quickly
 A majority of participants do not desire another field of work.

Said another way, short term supply of contractors will not increase or decrease greatly. The phrase used by economists is “it is inflexible”.

An important point: if the supply of contractors does shrink prices should go up. There is little chance of that. This business breeds people who work as an employee and then start their own business. It is relatively easy to form a construction company.

Furthermore as we look at the industry from the early 60’s to present, we see the following:

 Constant dollar value of construction has stayed flat around $400 billion annually.
 The number of contractors has raised three fold.

To place it in a sentence, the number of construction firms has tripled while the volume has stayed the same. The pie has stayed the same size but there are people at the dinner table. Thus the following effects:

 Competition has increased
 Margins have decreased

All older contractors do yearn for yesteryear and with good reason. It was easier to make a profit. Competition was less and margins were stronger.

As a result, ours is the second riskiest business (as a % of business failures) in the United States and it is becoming more difficult. Rightly or wrongly, this is the situation we find ourselves in.

As a contrast, let’s look at real estate. Most people have owned real estate and are comfortable with it. However, a majority of people have not owned a construction business and probably never will. To say they would be comfortable owning a contracting firm is not possible.

The supply curve of realtors is steep. That is when the market is good; people will jump into the business. It is interesting to note that the number of licenses in resort towns is approximately 10% of the native population. This is more than attorneys.

Reasons for the number of Realtors:

 The skills demanded are not highly technical. It is a sales business. People can float in and out the business and have.
 The licensing and regulation is less onerous than construction.
 The profits can be superior. 90+% of millionaires have real estate in their investment portfolio.
 Speculative money is part of the real estate business. No one will buy a construction firm speculatively.
 The risk is less in Real Estate. You are at risk for your time as real estate. The commission is paid if the deal goes through.

The demand curve for real estate is also flat. As you know, the demand doesn’t change much due to price. There is only one location per parcel and the value of that subjective. In the short term, many people believe U.S. real estate is a better value versus other countries. Thus, demand has been steady.

In summary:

When prices rise for Construction Services:
 Demand goes down significantly
 Supply of contractors is mostly unchanged.

When prices decrease for Construction Services:
 Demand goes up significantly
 Supply of contractors is mostly unchanged.

Our conclusion is that construction service prices will never be driven up wildly unlike sectors such as gold, internet stocks and in our example, real estate. People have options to building including delaying, minimizing or even doing it then selves.

For the contractor, there are no windfall profits on the horizon. This means he or she has to be highly focused on the right work and highly disciplined to only accept profitable price for that work. The market for construction services will never be generous.

Posted by Matthew S. Stevens at 09:26 AM | Comments (0) | TrackBack

August 24, 2005

There Are No Windfalls Left

We know our business is a tough one. However, it has not always been that way. A time or two ago, material prices were stable, people wanted to work, the economy was steady and legal/political issues were a minor concern.

We all have worked as labor in the field. Some of us remember how fun it was. Loud music playing on the radio, our shirts off, and after work time was ours. What happened? In the decades since, we have moved up in our responsibilities thus less fun. However more to the point, the business has changed.

Our industry has tightened up in the demands in places on us to make a profit. There are no windfalls left. We don't have the luxury of naive competitors. Information in out there. Addtionally, the clients, subcontractors, and suppliers have become more sophisticated leaving us with less opportunity to make a profit.

Lets' look at the changes that have occur in the last 30 years or so. These points are compiled from several groups of contractors at different times. They were asked what has changed in the last 3 decades?

 Rising Age of Workforce - The average age of foremen has risen to 47. No one is replacing them. As a witness to that fact, the average age of an construction apprentice rose to age 27. Less people want to be in our industry. The replacements are not coming.

 Declining Quality of Construction Documents. Designers work has been under price pressure from owners / developers. With price pressure comes cost / labor management. Less time is spent on those plans and thus the details are not there. Frustration by the contractor is the result.

 Fast track schedules - Years ago this was a new concept, now "Fast Track" is standard and expected. We are starting to evolve into "Flash Track" (our term) and it is starting border on ridiculous.

 Material availability - Between the shortages and the lack of stocked material at suppliers' warehouses, this another change that is negative. Material logistics are a greater concern than ever.

 Restrictions/Red Tape - Demands by others on contactors has risen to an all-time high. Permitting, OSHA, Enviromental, Client paperwork requirements make office work important.

 Technology - it took this country 30 years to exhaust "800" numbers and then 3 years to take up all "888" numbers. Wireless, internet, software, voice and the like were not facts three decades ago.

 Design/Build - The advent of Design - Build Construction is a welcome change. More project control by one organization. Contractors are glad to take over. However, some liability issues are a concern.

 Risk - With more change and demands there is more risk in contracting than ever before. Add to that price (profit) pressure and again, the opportunities are limited.

 Workforce - less high schoolers and more immigrants work in construction contracting. It is a different workforce and this will not change. We have to gear up and get cosmospolitan.

 Competition - There are three times the number of contractors that there where in the 60's. That speaks volumes about the lack of profit opportunities.

The contracting business will some day settle down and become more predictable. We can't say when that is but it will be welcome change.

The disciplined contractor will survive. The undisciplined one will struggle and become extinct. Processes and people make up the construction business. Tighter procedures and careful hiring/mentoring is the key to a predictable future.

Matt Stevens is a management consultant who works only with construction contractors. He has worked as one since 1994. He can be reached at mstevens@stevensci.com His firm, Stevens Construction Institute assists contractors in working smarter, is located at stevensci.com

Posted by Matthew S. Stevens at 05:51 AM | Comments (0) | TrackBack

August 19, 2005

What is a Contractor's Business?

Defining a contractor's business is a challenging exercise. There are so many different types of contractors and types of work. We are hard pressed to try to write a definite explanation without ignoring several segmens of the construction industry.

We observe over 100 market sectors in the construction industry. F.W. Dodge reports in its construction permit data 30-odd categories and that is just the type of projects. Multiply that by the all the different types of contractors. The old CSI classification methodology outlines 16 divisions of work. Each division typically has several construction firm types occupying each of those.

Regardless of the type of work and the type of projects, all contractors must perform the following.

What we see is that all contractors have to do the following.

1) Acquire Projects - estimating, pricing, bidding, marketing and selling.

2) Build Projects - project management, field management, material procurement, and labor productivity.

3) Keep Track - accounting, financial management, administration and tax reporting.

For a the remainder of the article, click on the following link: http://stevensci.com/pages/infoform.html Fill in your information and type in "What is a Contractor's Business?" and we will send it to your email address within 2 working days.

Matt Stevens is a management consultant who works only with construction contractors. He can be reached at mstevens@stevensci.com His firm, Stevens Construction Institute assists contractors in working smarter, is located at stevensci.com

Posted by Matthew S. Stevens at 02:30 AM | Comments (0) | TrackBack

August 13, 2005

Business Planning for Contractors

A business plan is a contractor's road map at the begining of his firm's journey. The business plan is similiar to a pre-job plan. Both documents are essential in keeping wasted time and adverse events to a minimum. The reason for planning is simple, it is foolish to make up your process as you go. In other words, if you don't plan, you don't have a business, you have a job.

Business Planning is not an exciting event. Contractors want to do something now. They are action biased people who like to see something physically built every day. As we said, A business plan is similar to pre-job plan. However, pre-job planning is energizing since there is a new project to build.

Business planning does not make one's heart quiver with excitement. Since, we don't have a project to build, it becomes a very abstract, dull exercise. Hence, we have to sit quietly and think through the details of our new business.

Construction people are visually attuned. They love to see physical progress. A business plan is mostly an invisible thing. It is emotionally hard for a contractor to put one together.

Once we get past the pain of collecting information from others, doing some reading and writing drafts of our plan, our focus should narrow on what are the real reasons for this document. Here are the areas of benefit (and risk) that a plan should concentrate.

1. Labor Management and / or Cost Management: Since the firms that have cash stay in business, this is a top priority. A majority of projects that run over on cost do so because of labor. For a general contractor, it is also general conditions(or time). You have to know at the earliest possible moment that you have a "problem" job on your hands.

2. Cashflow: It is a one of the leading indicators for financial success or failure in construction. How will you keep from using your working capital and not the client's?

3. Overhead and Profit Margin: These percentages will determine whether your business will have money to invest, grow or harvest. What is the cost of doing business (all costs)? Personal financial considerations should be addressed such as how much do you need to live on? What will you do with company net profits?

4. Revenue: The bane of all contractors. Too much and we can lose intensity on the profitable details of the business. Too little and we have less dollars to pay ourselves and make neccessary investments in the business of contracting. We will never get it perfectly tuned however, we can minimize the wild swings.

5. Target Market - It answers the questions: What type of work, what geography, and what type of customer. To figure this out, it might take some time. However once you are in the "sweet spot", you will be nicely rewarded. A niche that has volume is never a bad place to be.

6. Tools / Equipment Needed - Office and field tools, especially technology. Today, the right technology will allow you to hire less people. Not a bad trade off.

7. Personnel - Hiring people who are strong where you are weak. Furthermore, how will you find and hire people who won't unpleasantly surprise you.

8. Office location - Sometimes a moot point especially if you are small. Most smaller contractors work from their house. If you do lease an office, consider where the your type of construction is. Think about the location of trusted suppliers, service providers and clients.

9. Administration: Paperwork can be the death of you. In time, importance and stress. Try to collect all the forms, checklist and other time saving tools you can. These things will keep you effective and productive. Map out how paperwork will be handled. As a pilot never takes off without reviewing his checklist and having a plan "B", you should never allow administration of your new company to be undefined. It can be fatal.

This is a very basic treatment of Business Planning for a Construction Contractor. It is complicated and does take time and energy. Be smart, start early. Think through the business you envision. Do so and keep your emotions as distant as you can. Objective thinking makes your business plan less prone to changes later.

Remember that this plan is never final. It is a "living" thing. A contractor should visit it every year. Review it, and comtemplate it in light of lessons learns from last year and potential opportunities for next year. Some parts must be visited any way. Areas such as budgeting, dual overhead rates, technology and target markets. These by their nature are never stagnant. These parts will benefit from the owner's attention. He has to work "on the business" as well as "in the business" if he is to build serious personal wealth.

If I had to choose one thing to focus on above all others, it would be to be brutally honest in your creation of the plan. The construction industry is not a business for hope, wishes or guesses. It is one that deals in the real world and enforces reality severely.

Posted by Matthew S. Stevens at 06:55 AM | Comments (0) | TrackBack

August 10, 2005

We Choose Our Risk Curve

Contractors are on a risk - reward curve that is much different than the general business one. (see our “Get on the Right Side of the Risk-Reward Curve”). There is little similarity of construction to most businesses. Due to its nature, its risk - reward defies some precepts that most other business people hold as fact.

Our business is:

1) Craft driven - it cannot be replicated by machine, only man. Craftsmen are hard to find and are our only means of production.

2) Variable Cost driven (not fixed cost) - we have to make a specific % of profit with little exception on each job.

3) Treated as a commodity - strangely, even though our business lives and dies on the quality of craftsmanship, the customer assumes craftsmanship is constant. Therefore, they focus on price.

4) Natural conflict - people expect a minimal price for above average quality. Add to that time pressure and safety along with uncontrollable weather, Thus, the inexperienced end use is unhappy.

5) No road test - Product samples are non-existent. People don't understand what the final product will look like.

6) High expectations - The earthmoving and structural work gets naive end-users excited and the detail work afterward makes them frustrated.

7) All projects are custom - Even though the project may a cookie cutter it still is on a different site and at a different time. You cannot be at two places at same time hence custom.

These are risk factors that cause us financial harm or reward. Remarkably, the choices we make determine the risk we take.

For a the remainder of the article, click on the following link: http://stevensci.com/pages/infoform.html Fill in your information and type in "We choose our Risk - Reward" and we will send it to your email address within 2 working days.

Posted by Matthew S. Stevens at 08:09 PM | Comments (0)

August 08, 2005

Computers and Managing Construction

We live in an age when we actually can work smarter and don't have to work harder. That is, if we use current construction related software, hardware and service providers, we don't have do as much clerical work (collecting data, compiling information). This allows us more time to do management work (analysing, planning, thinking). If you are not taking advantage of this phenomenon, it might be an oversight. Your competitors will show you technology's power at one time or another. You will see it in the way they bid/sell or build work against you.

As you know, electricity travels at 187,000 miles a second and can certainly speed up the information gathering, analysis and transfer functions that are a substantial part of a manager's duty.

Some software programs have been around for more than thirty years. They contain many "worksmart" functions learned over the past three decades. Again, the power of technology in construction is indisputable.

For a the remainder of the article, click on the following link: http://stevensci.com/pages/infoform.html Fill in your information and type in "Computers and Managing Construction" and we will send it to your email address within 2 working days.

Posted by Matthew S. Stevens at 12:42 AM | Comments (1) | TrackBack

August 01, 2005

Management Education & Training Seminars - Public

Please find below our Public Seminar Schedule:

Project Control for Field Supervisors and Project Managers
October 13 and 20

Course Fee is $299 total for both days.

These will be held at the:
Central Florida Builder's Exchange
340 North Wymore Road
Winter Park, Florida 32789-2855

Contact Trudi Larson for registration and other information at tlarson@cfbe.net

_______________________________________________________

December 9th

Intermediate Excel for Contractors - "Hands-on" Laptops will be provided

Course Fee is $249

These will be held at the:
Central Florida Builder's Exchange
340 North Wymore Road
Winter Park, Florida 32789-2855

Contact Trudi Larson for registration and other information at tlarson@cfbe.net

_______________________________________________________

December 16th

Intermediate Quickbooks for Contractors - "Hands-on" Laptops will be provided

Course Fee is $249

These will be held at the:
Central Florida Builder's Exchange
340 North Wymore Road
Winter Park, Florida 32789-2855

Contact Trudi Larson for registration and other information at tlarson@cfbe.net

_______________________________________________________

Private Company Training - Jacksonville Florida
Decemberr 7 and 8, 2005

_______________________________________________________

Value Based Estimating, Pricing and Bidding:

January 17th, 2005

The Keystone ABC
Mannheim, Pennslyvania

Email us for Details

clientservices@stevensci.com

_______________________________________________________

St. Cloud, Minnesota

February 6-10, 2006

- Negotiating Skills for Contractors
- Value Based Estimating, Pricing and Bidding
- Effective Scheduling

February 13-17, 2006

- Hiring Smart
- Conflict Management
- PDA's in Construction

March 6-10, 2006

- Project Control for Field Supervisors and Project Managers
- Foreman Skills
- Making Time Management Work
- Introductory CPM for Construction

March 13-16, 2006

- Beginning Excel for Construction - "Hands On"
- Advanced Excel for Construction - "Hands On"

Email Us for Details

clientservices@stevensci.com

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Value Based Estimating, Pricing and Bidding
March 28, 2006
Pensacola, Floirda

Email Us for Details

clientservices@stevensci.com

_______________________________________________________

Value Based Estimating, Pricing, and Bidding
April 6, 2006
Orlando, Florida

Email Us for Details

clientservices@stevensci.com

_______________________________________________________

"Hands-On" Computer Classes

Orlando, Florida

March and April 2006

QuickBooks for Contractors
Beginning Excel for Construcion
Advanced Excel for Construction

Orlando, Florida

Email us for details

clientservices@stevensci.com

_______________________________________________________

Orlando, Florida

April 6th, 2006

Value Based Estimating, Pricing, and Bidding

Email us for details

clientservices@stevensci.com

_______________________________________________________

Value Based Esitmating, Pricing and Bidding
Jacksonville, Floirda
August 4, 2006

clientservices@stevensci.com
_______________________________________________________

Project Control for Field Supervisors and Project Managers
Orlando, Florida

October 5th, 2006

Email us for details

clientservices@stevensci.com

Posted by Matthew S. Stevens at 04:26 AM | Comments (1)

Business Planning - Market

A healthy construction industry suggests that its members are fit. Construction health can be gauged by trends in key factors of the supply and demand for the industry’s products and services.

First, if the economy is growing then, construction should be growing. Construction worker employment should be increasing and unemployment should be declining. Housing starts and building permits should be rising at the front end with utility hookups and certificates of occupancy increasing at the backend.

These kinds of statistics, especially the construction payrolls, starts, permits, hookups and certificates of occupancy are monitored closely by and reported frequently in most state and local news media.

Counting potential competitors is literary as easy as downloading business licenses, reading the yellow pages or talking with the local contractor’s association(s)

For a the remainder of the article, click on the following link: http://stevensci.com/pages/infoform.html Fill in your information and type in "Business Planning - Market" and we will send it to your email address within 2 working days.

Please note: We send articles to company domains and not public ones. As an example: mstevens@stevensci.com is appropriate and mstevens@hotmail.com is not. We are vigilant about copyright abuses of our information.

Posted by Matthew S. Stevens at 01:25 AM | Comments (0) | TrackBack

July 24, 2005

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?

For the complete article, email us at clientservices@stevensci.com and write "Risk Reward Curve Article" or go to stevensci.com and click on forms page.

Posted by Matthew S. Stevens at 11:33 PM | Comments (0) | TrackBack

July 10, 2005

Construction Statistics / Productivity

Current Statistics are pointing to a robust construction economy. It is a 1.1 trillion dollar industry. Subsets and their volume are as follows:

1) Private construction: $856 billion
2) Public construction: $247 billion

Residential construction is $614 billion
Non-Residential construction is $242 billion

Educational construction is $64 billion.
Highway construction is $65 billion

Employment stands at 7.1 million persons

Productivity Statistics - 2005 Employment

All Construction $152,778 / employee

Residential Buildings $200,353 / employee

Non-Residential Buildings $322,667 / employee

Heavy / Civil $194,505 / emmployee

All dollars are current dollars.

Calculation is made by dividing $ put-in-place construction by number employed

Posted by Matthew S. Stevens at 05:29 PM | Comments (0) | TrackBack

July 03, 2005

The Construction Industry is Less Productive

We track several metrics that indicate the general health of the our industry, its workforce and its practices. Our on-going tracking of productivity has indicated a stagnant state for some time.

Our consulting firm reviews the constant dollar value of construction put in place and divides it by the number of people who work in the industry.

What we have found is unsettling. The overall trend is flat. That is with all the computer technology, efforts made to improve the industry practices and other directions, we still have not improved the productive rate of work installed each year as an industry.

For the complete article, email us at clientservices@stevensci.com and write "productity trend" or go to stevensci.com and click on forms page.

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June 26, 2005

It's a Tennis Match!

In the 1960's the name of the game for construction firms was to "get it done", deliver the project and then hash out the financial issues with the client. Contractors were comfortable doing this. Clients understood the ethic and appreciated the extra work this involved.

Since that time, owners have slowly changed but, change they have. They view construction firms as a resource which is to be managed. Owners understand more about the construction process than ever before. They involve themselves deeper in projects. It is their right; however, if they manage the details closer, we should expect a responsive and reliable partner. If not, we should be reasonably expected to hold them accountable.

For specialty contractors who work for general contractors, the business has changed also. The two main factors for the change are:

1. The rise of the construction management degree
2. The desire not to gain “field experience”

This has made some prime contractors frustrating to work with. Let me quickly say, there are many great general contractors in this country who understand what I about to state.

Most young construction professionals do not (did not) go through the “field”. They won’t. They didn’t want to work in the dirty and dangerous world of a construction project. They would rather be in the office. This lack of field experience has lead to a decline in construction knowledge. Thus, decreases the amount of coordination that can be offered by a general.

The other part in the rise of the number of construction management degrees earned. More colleges offer them than ever before. (The author has one). They have made construction turn into a business. The contracts are thicker and have more language that protects the general contractor.

Due to these two trends, some subcontractors now build projects with more paperwork, less coordination and less leadership from the general. Decades ago this wasn’t the case.

Again, the top 25% of general contractors are different. They build projects with the help of their subcontractors. They offer leadership, coordination and are a good business partner.

In practical terms, construction is now a tennis match. Hit the ball over the net. Wait for the return. If there is no return, stop the match and find out why. Then, persuade (or force) the other side to continue to play.

Additionally, keeping score has new meaning. Today, capturing, notifying and tracking issues on a project is a must. Our primary scoring mechanisms are the CPM schedule and the budget but are augmented by all other project documentation.

In the contracting world, when we send a request for information, we should expect it to be answered in a timely fashion. If not, contractors have to address the problem now. To install work without needed clarification is indefensible. There is no clear recourse afterward. The same for change orders, pay requests, changed project conditions and the like.

Here are items that if not answered promptly might be grounds for a contractor to stop work on the entire project or just the affected part.

1) Monthly Draw Requests
2) Change Orders
3) RFI answers.
4) Submittals
5) Product Information on Owner Furnished Material.
6) Color Selections
7) Signed and executed contracts

Each contractor is aware of the problem with slow or non-responsive clients. This is just one problem of many risks we take. However, it is one we control. We can affect this and therefore, direct the project to a satisfactory end.

Contracting has changed from the 60's to now. That is to be expected. Years ago, the construction business was more straightforward, now it is not. Today, business people and lawyers are showing us that leverage is more important than ever. They have put the word “contract” into “contracting”. Sadly, Construction has evolved into a business while craftsmanship devolved into a secondary priority.

Matt Stevens is a management consultant who works only with construction contractors. He has performed business consultation and training for the contracting community since 1994. Matt can be reached at mstevens@stevensci.com. His firm, Stevens Construction Institute assists contractors in working smarter, is located at stevensci.com. His direct line is (407) 678-0730

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June 24, 2005

Negotiating Skills for Contractors

Negotiating is the best use any construction professional's time. We make or save the most amount of money in the shortest period of time. In our experience, everyone has said "yes" or "no" at the right time and made a $1,000 in twenty minutes. If we could do this on an hourly basis, we would retire early. The construction business would be our hobby.

These are basic rules that must be observed if you are to have an above average negotiation. Do these and you will reap benefits. Guard against the gambits that others will use against you. Remember, what you deserve is what you negotiate. Here is the list of rules with some of the tactics to be wary:

1) Small talk first - It doesn't cost a dime to talk. Start an interesting conversation about a non-construction issue. Observe body language, emotions, attitudes etc. This is your final homework before the actual business negotiations starts. Do this homework and you will be better prepared.

2) Always have the other side give the intial price. It is an easy win for any negotiator. Have the potential client set the price bench mark. As an example, if you are the seller, they (buyer) name the price, you have now set the "floor", the price goes up from there. As you know, sometimes they will name a high price and you are glad you followed this rule. If you are the buyer, the opposite is true.

3) Have a "walkaway" number. Professional negotiators do their homework and know the limits of their proposals. They calculate cost, price, cashflow, value amoung other things.

A professional's overall goal is to receive value in the negotiation. Value is the benefit divided by the cost. Benefits can be non-economic and are judgement calls. For we as amatuers, we must remember to take the emotions out during the process and focus on what we will not accept. This objective approach, keeps our eye on the ball and goals clearly in mind.

4) Have multiple options. The person with the most options usually succeeds in reaching their goals. As in sales, negotiations is no different. Conversely, if you have only one project to try to sell or no plan "B" in your discussions, the pressure is on you. If you have several jobs, you have less pressure and can say no easier. Even if have no other options, to act if you do gives you more power.

The successful contractor has many qualified prospects when selling work. He or she have several choices and possible outcomes for the future. Said another way, multiple options. We define a qualified prospect in the following way:

-Has a Deadline - that is, they are kicking tires. This person has to make a decision in a limited amount of time.

-Has a Budget - they have money set aside to spend. The old saw is "you can't get rich by dealing with poor people". The time spent on un-budgeted bids and proposals can ruin a contractor.

-You Can Build A Relationship - people from the same part of the work tend to have more to talk about. A U.S. Marine has more in common with their breathern. The lack of commonality leads to less personal interest by either party. This person may see you as just another contractor.

-Has Authority to Make a Decision - Many books are available about how to identify and then to negotiate with the decision maker. A married couple who is buying the house, the decision maker most time is, of course, the wife. The husband is the check writer.

-Has a Need - the other side has a compelling reason to buy your construction services. Employee cars parked in adjacent fields means a manufacturer is busting at the seams. Sales at a distributor are at record levels or the home lease is up in a year. Clients who have this problem are motivated and at not causual about it.

-Is Ethical - If other side has all the above, the final test is one of personal character. You cannot ignore this. To do so is at your peril. There a serious reasons for the this. One is the high probabilty at the closing table you will feel cheated. Second is that the agreement will span some length of time and have to be implemented. An unethical person will agree in principal and spirit but fall short on the letter of the agreement. In summary, an unethical person by definition will say and do anything for their benefit.

4) Always say "pass" and not no. Keep your negotiation alive. People may come back with a better offer. Don't cut off negotiations prematurely.

5) There are people that you should not negotiate with. It would be an unbalanced. Not many people have negotiated successfully with Donald Trump. To try and do so would be foolish.

6) Never say never and never say always. Either statement commits you to a course of action that limits your options. Whether in war, peace or contracting, if you opponent is not certain what you will do, this gives you more power.

Tactics

The tactics listed below will be used against you in your career at one time or another. Take time t during your negotiation to identify and then to counter act these. It will keep the natural horse trading

1) Country boy. The rule here is dumb is smart. The one party who acts as if the world is going too fast sometimes frustrates the other side. Other times, we feel sorry for him and make a more generous offer.

2) Good cop / bad cop - the use of both a friend and an adversary produces pain and relief for the other side. This is a motivator to give more than you planned to. We have seen this on television shows. It is a little more subtle in a developer's office.

3) False deadline - the other side has suddenly stated that the deadline to conclude negotiations is now sooner. You are surprised. This is a collary to "time is money". Your opponent is using pressure to force you to concede more.

4) Funny money - sales professionals and other people sometimes explain price in a multitude of ways but rarely, as one that is high. Some sales training teaches to divide price by the number of months or use percentages. This makes our bank accounts and investment porfolios seen less important. Always use dollars. Think in terms of "if I negotiate just one more hour with this person, then I can shave a $1,000 off the price." Now that is just compensation for a contractor.

5) Straw Man - This a tactic that emphasises a small possibility or detail as having high importance. Major league baseball used the threat of franchise closing. It became a valuable chip in the game and helped closed the labor agreement quickly. In retrospect, the court would have ruled in the favor of the fans. For a contractor, your new client may ask about the superintendent to manage the project. His reaction could be to bitterly complain about your choice. The client may be only angling for a further concession and not have a care about the superintendent.

6) Lack of authority - The other side says that they have to have the approval of a another person before they agree to anything. You will give your proposal in writing and cannot make personal contact. You will always receive an answer to your proposal through the intermediary with some changes to it. No explanation nor logic but the messenger doesn't know. Again this is a tactic meant to put you in an awkward place.

7) Reluctant Buyer or Seller - They have no deadline. They are thinking about buying or selling. This tactic tries to force you to give a great deal to spur interest on their part. That proposal as we know from the above is now the floor or ceiling to any further negotiation.

8) Use of anger - Some negotiators will feign emotion in trying to place the other side on the defensive. As we have learned and sometimes now believe that what we see we believe. Keep your cool. In 100% of all instances if someone is undeservedly unset, there is no reason to react.

9) Flinch - This gambit is related to the one above but is different. It is used immediately after a proposal is given. Since most contractors are visually attuned, we are susceptable to such a gambit. The idea is make it seem your proposal or counter proposal is insulting. Logic must take over such as the market reality of what is normal.

10) Vise - It is ploy that the majority of times is used on the first proposal. The phrase uttered after the price / terms are delivered is "you will have to do better than that". Meaning, you are out in parking lot and not even in left field. Be careful not to react.

11) Use decimal places in your price. As we look at price over the years, numbers rounded off to the nearest $1,000 have more cushion or room to change. Prices that are calculated to a decimal point, seem to carefully reached and have less "fat" in them. They are more believable. You have to do your math homework and know what the number should be.

12) Third party testimony is more believable than yours. A credible source who has no affiliation to the negotiator carries more weight in determining fact or truth than the person does. Certainly, we need to be careful about who is the third party. "Industry studies" or "common knowledge" does not qualify. Written testimony is many times more credible, so make the other side prove it in paper.

13) Time is money - some negotiators will extend negotiations so you have increasing amounts of time (which is money) dedicated to the negotiation. This becomes an investment that some people will not walk away from. Smart negotiators will see no progress being made and feel that this tactic is being played. Their next move is to stop this negotiation and go to their next option or client.

14) Nibbling - This gambit is used after agreement has been reached. The other side will ask for a small concession or convenience item with a straight face. If you are flush with success, the tactic might just work. Given the fact that we are in business of less than 5% net profit and is brutal to the careless contractor, don't let this gambit be successful with you.

Matt Stevens is president of Stevens Construction Institute, a management consulting firm who works only with construction contractors. We perform training and business consultation for the contracting community. Matt can be reached at mstevens@stevensci.com We assist contractors in working smarter. We are located at stevensci.com Our direct line is (407) 678-0730

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June 18, 2005

The Benefits of Defining and Documenting Your Management Processes

All construction professionals want to do a great job. Their goals are to make more money, garner a promotion, earn respect of their peers, be the “go-to” person, and generally enjoy a better work environment. It should follow that most construction contractors would be better off than they are now. So why does this not happen in all cases? Certainly, 95% of construction supervisors give the necessary effort working hard every week and contractors certainly want to be successful.

The answer: it is the process. Casual and assumed processes are in every construction company. That is, there is no clear and written set of procedures. It not obvious what is to be performed and what behaviors expected. Only though months of working with a company, does one understand all the major processes.

It would be micro-managing to commit to writing all processes. However, clearly the crucial ones have to be.

Some companies have no process documentation. No standard procedures manual. Subsequently, there are many processes left unstated and thus not communicated. Equipment has a reference book. Why not business processes.

For the rest of the article, click on the following link: http://stevensci.com/pages/infoform.html Fill in your information and type in "The Benefits of Defining and Documenting Your Management Processes" and we will send it to your email address within 2 working days. For a sample of a Construction Company Management Manual, please add the words "sample manual page"

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June 08, 2005

Using Excel Spreadsheets in Construction

Spreadsheets have been around since the 1980’s. They were the first software to which most of us were exposed. I used VisiCalc back then. Since those years, not much has changed to the look of spreadsheets, but the power has risen dramatically. Today, the uses are many and far reaching. From simple estimating to data analysis of thousands of labor codes. Furthermore, they are the base calculator for several software packages. Presently, spreadsheets have grown with our industry and are as common as cell phones in a contractor's office.

They are simple in their layout of rows and columns but powerful in their use of functions, commands, etc. Professionals in the construction industry use them from basic tasks such as number calculation to more advanced features such as database functions and goal seeking. The proper use of a spreadsheet will produce a fast and accurate result.

Names of commonly used ones are Quattro Pro, Lotus and Microsoft Excel.

A spreadsheet is the computer equivalent of a paper ledger. It consists of a grid made from columns and rows. It is an environment that can make number manipulation easy and painless. The math required with the paper ledger can be overwhelming. If you change the amount, you will have to start the math all over again (from scratch).

For the rest of the article, click on the following link: http://stevensci.com/pages/infoform.html Fill in your information and type in "Spreadsheet Article" and we will send it to your email address within 2 working days.

Matt Stevens is a management consultant who works only with construction contractors. He can be reached at mstevens@stevensci.com His firm, Stevens Construction Institute is located at stevensci.com

Posted by Matthew S. Stevens at 08:37 AM | Comments (1)

May 16, 2005

Negotiating Overview for Contractors

We offer these points of view to help contractors negotiate more effectively with clients, peers, and others. This summary list coupled with another article found elsewhere in this work, will give construction professionals better understanding of how other contractors negotiate more effectively.

Negotiating is the highest and best use of any contractors time. They make or save themselves hundreds or even thousands of dollars every time they negotiate. Whether it is an equipment lease, material buy or an employee salary negotiation.

For the rest of the article, click on the following link: http://stevensci.com/pages/infoform.html Fill in your information and type in "Negotiating Overview for Conractors" and we will send it to your email address within 2 working days.

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 His firm, Stevens Construction Institute assists contractors in working smarter, is located at stevensci.com His direct line is (407) 678-0730

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May 11, 2005

Computer Vocabulary

ASCII

Stands for American Standard of Computer Information Interchange. It is a type of file format. All software will read these files. Contractors should download data peridically from their accounting software package, open the file in common and flexible spreadsheet such as Microsoft Excel and analyze the data extensively. At the end of the day, this cost analysis will produce what the contractor is installing work for (versus what he “should” be installing work for)If unit cost of work that is bid is not the same as the what the cost is installed, there is a problem. If the bid unit cost is higher then the contractor is losing work. If the bid unit cost is too low, then he is paying to complete the work out of gross profit.

For the rest of the article, click on the following link: http://stevensci.com/pages/infoform.html Fill in your information and type in "Computer Estimating Vocabulary" we will send it to your email address within 2 working days.

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 His firm, Stevens Construction Institute assists contractors in working smarter, is located at stevensci.com His direct line is (407) 678-0730

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May 05, 2005

Project Risk in Construction

Some young construction contractors dispute the risk factors that banks, sureties and others assign to construction projects. He just doesn't believe that the risk is there. The confidence which the youthful contractor shows is needed if he is to weather all the ups and downs of this business. However, risk in construction is a given. In any town in the United States, there is a local story of a bankrupt contractor.

A Contractor's Risk on a project is caused by two potential events.

1) Unaccepted work by the client
2) Higher than estimated project costs

Most contractor's project defaults generate from these two sources. Sureties, banks and investors know these risks and take conservative financial approaches to manage them.

For the rest of the article, click on the following link: http://stevensci.com/pages/infoform.html Fill in your information and type in "Project Risk" we will send it to your email address within 2 working days.

Matt Stevens is President of Stevens Construction Institute, whick works only with construction contracting organizations. He has performed training and business consultation for the contracting community since 1994. Matt can be reached at mstevens@stevensci.com His firm, Stevens Construction Institute assists contractors in working smarter, is located at stevensci.com His direct line is (407) 678-0730

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April 15, 2005

Listing of Recruiting Firms

We will send to you a list of recruiting firms that are active in the construction industry. This list is a service to our readers but, not an endorsement. As in all business transactions, please make sure your expectations are clearly understood by the other party. Not to do so, makes for a poor experience for both parties.

As this list changes, we will attempt to update it for our audience. These firms are in no way connected nor business partners with the author or his firm. However, they have more knowledge and experience in the construction industry than the average recruiting firm.

For a free list, click on the following link: http://stevensci.com/pages/infoform.html Fill in your information and type in "list of recruiting firms" and we will send it to your email address within 2 working days.

Posted by Matthew S. Stevens at 06:32 PM | Comments (1)

April 08, 2005

Risk versus Reward in Contracting

We know that the general business environment is governed by a specific risk / reward equation. Otherwise known as a "curve". This line is generally 1 to 1 and is a straightline. For every increased risk factor there is an increased reward. The normal risk vs. reward curve is linear. It states that for every risk factors taken there should be a reward. High risk propositions successfully overcome should pay a handsome sum.

Strangely, the construction industry is different. For high risk situations, there is less reward. For lower risk situations, there is more reward. The curve is perpendicular to the general business one.

So what are the risk factors and what is the reward in construcion. Let me start with the last first - rewards.

Two items are the reward:

1) Actual percentage of profit
2) Cash to Cash Cycle - (commonly referred to cash flow)

Actual Percentage of profit (this is versus estimated, which is a guess) is affected by several major items:

1) Difficulty of project - add to profit %
2) Location of Project - same percentage for farther out work
3) Owner demands - can be a surprise. More prestigous owners tend to be more demanding.
5) Prestige of work - we tend to price slimmer since a prestige job is a marketing opportunity.
6) Length of Project - exposure to unuusual weather, project disruptions, owner financial reversal.

If we bid a job locally, we do have less potential costs of construction - overhead and direct expenses.

If we bid a project which is some distance, should we not increase the overhead to support that project and thus, the total cost and bid price?

Project control is more difficult from afar. Sureties will be the first to tell you. The safety director cannot visit the project every day. The project manager won't review the project progress weekly. Again, the control of the project will be mitgated.

Billing tends to be affected by the same risk factors. If work is not completed and the owner is demanding, the cash to cash cycle lags.

Somewhere on the curve is where your sweet spot is. It is between the low risk house for your best friend and the high risk, multi-year, one of a kind project for the saavy corporation.

Part of the process to determine where you are on the risk / reward line is statisical. Several models help you get closer to the optimum place. This is the science.

1) Overhead Recovery
2) Gates 1 and 2
3) Target Marketing
4) Closed Project Analysis
5) Estimated versus Actual costs of tasks

Part of the determination is art. The owner has to have a gut feel for work he feel best at. Then stick close to it, hardly ever wandering off, and just for one project when he does.

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Time Management Ideas for Contractors

- Use a fax to email service such as EFAX. This is a great piece of technology that coverts your incoming faxes to an email. No more running to the fax machine. Just wait until the email comes through. Additionally, you don't have to waste toner on unwanted parts of the fax. Just print out those desired pages from your computer.

- Use an Action Plan Template Pad for Your Business Meetings. Efficient contractors have printed a pad of two part action plan templates. From their local copy store, they have made up an action plan form that lists "What is the Task", "Who is Responsible" and "When will it be Done". They fill this in when they have a meeting with any client, supplier, or other third party. As they conduct the discussion, they simply note on the pad what has been agreed upon as an needed action. One copy goes to other party and one stays with the contractor. When the time comes for the action to be finished, it is clear who was responsible. In those cases where the action was not done, there is no argument about who dropped the ball. This kind of system keeps everyone focused on those needed actions to accomplish the project or just make our business go smoother.

- Use the delivery notification on your email software. I am familiar with Microsoft's Outlook. When an important note is sent to your client, Outlook will notify you when it opened and then, you can call them immediately. In cases needing documentation, the notification can be printed out and filed away. Don't forget that your client's computer is under his control therefore there is less chance of mishandling. Lastly, there little room for argument.

- Use Adobe Acrobate Distiller - for billing, proposal, and other purposes. These files are graphics and therefore are diffuclt to change. So you can send those highly imporant documents to others with a lot of confidence. The Adobe Reader, as you know, is free. So everyone has it to read your corresponce.

- Colored Paper of Faxes: Use colored paper for your fax machine. This identifies a fax as an original and should be filed away in the master job folder. Yellow is popular and will copy cleanly. Additionally, any yellow faxes sitting on someone's desk can be seen easily. Again they should be in the master file but that doesn't always occur in a contractor's office. This keeps communication high and keeps “lost” faxes to a minimum.

- Send (fax) the client your promised delivery date confirmations from the manufacturer. This is an effective technique in keeping the client informed. It shows him or her that the delivery dates the client is relying on. This certainly helps in the cases where delivery was delayed and somehow the client thinks that we (the contractor) are to blame.

- Use a “worklist” with a “punchlist”– some construction contracts specifically call out for one punchlist on a project. Typically the architect will coordinate such a document with the engineers, owner etc. Project Managers have found that the early they start identifying items to be corrected on a project the more efficient the close out process will proceed. If the subcontract that you have issued to does spell out one punch list by the owner then starting a work list at some point during the job will keep the focus on areas that need rework. Working on the punchlist at the last part of the job only makes it more difficult. With retention at 10%, the average contractor's net profit is in retention along with his overhead cost.

- Scheduling Saavy – According to Richard H. Clough, On large projects 10 to 20 percent of all activities are on the critical path. That translates into 80% of the schedule are floaters and can be performed within a wide range of time.

- Place your Microsoft Windows on "standby" every night(instead of turning off). It will save your hard drive and reboot quickly in the morning.

- Use text messaging on your cell phone for those quick messages to others. You don't have to say hello, goodbye or anything in between. Of course, you only use this for those one word or one sentence answers others may need.

- Use a Computer "Hot Button" Software - To keep key strokes to a minimum, a "hot button" software is linked to a set of letters / numbers and then acts when the hot key is struck such as F8. This saves minutes and hours. If you use Microsoft Excel, once set up, this program will automatically go to Excel after hitting the link button(s). Personally, I type in "xl" hit F8 and in less than five seconds, I have a blank spreadsheet on my screen. Is applicable to all files, internet, outlook records. Almost unlimited combinations. My blog publishing site is "mt" and again hit F8. This type of software is inexpensive (less than $100) and keeps us productive. We don't need to take the "long cut" of Microsoft Windows and increase our chances of suffering from carpal tunnel syndrome.

Posted by Matthew S. Stevens at 12:11 AM | Comments (0)

April 03, 2005

Selling Your Contracting Firm

Owners of contracting firms are faced with the envitable. They will not be leaving this earth alive and breathing. Only astronauts do that consistently and then they return. Some day, a contractor's energy and attitude will wane. He or she will see that the business they built needs new leadership. Their body and mind tells them, it is time to take a different role in life.

What do they do about transferring ownership? It is often a diffucult intellectual and emotional decision. Fortunately, there are several options.

Sometimes, it is just a matter of some legal paperwork giving ownership to a son or daughter with a family payout agreement. This is a common occurence in the construction business.

On occasion, employees will step in as the new stockholders. Again, an ageement has to be sworn to and a cash payout schedule accepted by both parties. In this transaction, as long as there is a talented core group who own the majority of stock, this situation can give the company a new life and a thriving existence for several years.

The most complicated and daunting option is the third party buy / sell. In most cases, the buyer and seller do not personally know each other. This leads to a longer process and somewhat unpredicable ending.

In all these examples, the owner is attemping to accomplish two basic things:

- Change his / her relationship to the firm
- Derive some monetary value for the firm.

The transaction between the former and new owner(s) is unique. Each of these buying / selling situations have different seta of circumstances and needs by the parties.

As stated before, emotions are part of the equation. The owner who has spent many years nuturing the firm now has to say goodbye. Not an easy transistion. A majority of proposed transactions do not go through due to this very reason.

To address this, time has to be spent by the selling party thinking about this life's change and what he or she will do in their future. Walks on the beach or solo vactions are a good idea.

Once there is a comfort level with the idea, then the next hurdle is to think through the transaction. From both the seller's and acquiring party's perspective. All contractors have a fairly clear idea of what they want to happen. However, the buyer's perpsective is just as important. Keep in mind " What would I want or accept if I was buying a contracting firm?" Keeping balance in your approach to the negotiation will not prematurely kill it.

Contractors buy contracting firms. A majority of transactions occur between like professionals. Yes, sometimes there is the one off transaction far afield. However, only a contractor wants to be in this business. Hence, the search for a buyer is more efficient if pursued with contractors.

There are three types of buyers:

- Strategic Buyer
- Economic Buyer
- Familial Buyer

A strategic buyer is someone who is looking for geographic or service expansion. Either a different state such as yours or to add to the types of contracts. People from the North sometimes buy a firm in the south. A plumbing firm will purchase an HVAC contractor. Suffice it to say there are numerous possibilities.

An economic buyer is looking for good price for the value received. He or she might know that they can buy the firm at X and it will be worth 2X in a couple of years.

A familial buyer is someone who knows the owner through family relationship or is an employee(s) of the company. (Company employees are family too.)This kind of transaction is a good first option. There always seems to be more comfort with this situation. People know each other well and the payment terms are more friendly. Trust is high.

The value of a construction firm is fairly simple:

A multiple of the predictable income stream plus the value of the assets.

Ascertaining and agreeing on a predicable income stream can be diffucult. The historical performance not withstanding. A commercial or industrial contracor is based several factors including bids, present and future and work in process. A residential builder might be based on inventory, name recognition, product and economic factors. A service contracting firm is more straight forward since the business acts more predicatably if managed well.

A common mistake is to believe that a abnormally great year can be used as the basis for value. It cannot, an average should be taken. Again, think of what you would do.

The market determines the multiple and the value of the assets. The last years like transactions are a good basis for valuations. Certified professionals in this area are the only ones who can fairly peg the fair market price. In s some cases, each part will hire its own busienss appraiser and then negotiate with each other with report in hand.

The owner has a range of working options after the sale. He or she can stay involved as leader for a period of time. This gives a smoother transition to the new owner who will need to become familiar with teh business. The owner knows more about it than anyone else.

The other end of the spectrum of options is to completely remove himself from the business. People choose this sometimes. As you might think, there has to be some transistion but it is brief.

The seller should expect to be compensated for time spent working with the new leader(s). If the previous owner stays on as a senior manager, then an "earn out" is formulated. Typically, it contains salary plus bonus. the bonus being a precentage of profits, either net or gross.

One caveat to anyone considering selling their firm: Remember, there is not such thing as retirement. Understand you must be intellectually engaged in something. To not do so, decreases your chance at a long post-contracting life. Additionally, If you talk to others who have sold their companies, you will find that there is certain happiness in doing something challeging or rewarding.

Don't be mistaken. A construction contracting firm is hard to sell. It takes several factors to come together all at once. Most importantly willing and reasonable parties. The other factors only complicate the issue such as valuation, economic forecasts, business performance and the regulatory envirement. bottom line, if the two interests want to, they can make the transaction happen.

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 His firm, Stevens Construction Institute assists contractors in working smarter, is located at stevensci.com His direct line is (407) 678-0730

Posted by Matthew S. Stevens at 08:53 AM | Comments (0) | TrackBack

April 02, 2005

Using a Team Approach to Problem Solving

How to keep Your Cross Functional Team from Being Dysfunctional

Cross Functional Teams are an effective way for companies to solve problems. Both small and large companies have used them. Across the business landscape, these groups have tackled everything from Absenteeism to Zero Tolerance Policies.

Cross-functional teams are by definition, groups of people from different departments of your company. Their different expertise and prespective allows the group to create a more thoughtful solution.

These teams many times the most effective and efficient way solving a problem. CFT's produce not only superior solutions but ones that reflect the requirements of all departments. When using a group of one department, the solution reflects what is best for that department to the detriment of others. As an example, Accountants may come up with procedures that is the best process for cashflow management however; it will be to the detriment of project management and field supervision i.e. little flexibility in the rules to reward good subcontractors or take advantage of special material buys. In essence, the process of cash flow management is very good however; it is hurting field supervision and project management. In this example it actually hurts profitability.

In these times CFT’s are the best way to come up with solutions, which will not be overhauled next month.

CFT’s harness the power of three dynamics. 1) The years of experience of your employees and 2) The people closest to the problem are the ones that will create the most effective solution for all concerned 3) Solutions designed by your people (versus created by senior management) will be supported by your people.

Major corporations, small concerns, and everything in-between have utilized this concept and have found it valuable to use this type of team.

Here are some potential problems you may encounter when utilizing a cross functional group:

Size:
Size does matter. We have found through our experience that a group of more than 8 people hampers the efficiency and effectiveness of a cross-functional team. It is a function of the different points of view that slows down the process. With more people, there are more points of view and each detail is a debated to a greater degree.

One client had a group of 12 people to decide the best process to market and sell their construction services. The first meeting or so was uneventful. We had little or no discussion on each part of the process we were following. However, once we started with some of the problem solving and implementation that was when all twelve people started to voice their opinions and causing some conflict?

Subsequently, the sessions were longer and more numerous than what was called for. As a result, we saw the quality of work not being significantly better than other smaller groups we worked with. Also, we did see an increase in the amount of time that it took for each step we took.

Scope:

A primary reason for failure is too large of a scope of work. That is, the inclusion of such a high number of problems or a lengthy process to review, the process becomes a long commitment for the team. A highly focused effort is difficult to maintain over many months. The group simply runs out of steam.

As an example, a company recently felt that the review of their total business process. From the time a marketing lead is generated to the final billing and collection. Ambitious as the company was about making its business really hum, the cross-functional team became dysfunctional – missed meetings, infighting, action items not completed, process improvements not aggressively pursued.

The end result: the task force was disbanded and the improvement has not been achieved as of this date.

Numbers of Meetings:

Believe it or not, the more meetings that you have, the less energy your people can bring to each of them. As practical matter, it is far more exciting to see progress in short amount of time than to slowly trudge though an endless agenda of meetings.

As a rule of thumb, you will receive 95% of the thoughts and experience that people can contribute in 6 meetings.

Meeting Length:

From our history of working with many different types of firms and of varying sizes and cultures, we have discovered that meeting length helps drive group performance.

Additionally, what time you start can help reduce stress and increase focus on the task at hand. We have found that allowing people to start and end their day at regular station (desk, field trailer etc.) allows them to feel in control and there fore devote the necessary mental energy to the cross functional team.

When it is practical for our clients, we try to limit our meetings to four hours and start them at 10:00 with a working lunch have been effective in securing optimal performance and reducing the stress of the participants.

Thought Leaders:

Whenever you deal with implementing change in an organization, there are some obstacles to overcome. Thought leaders help Presidents sell the change to the company. These thought leaders are the highly respected, sought-after professionals who informally run the company. They can sell your program of change easier than the presdident can.

Change causes fear. Any movement away from the comfort of the known is against human nature. People automatically become less confident in the new process because it is not field proven. To overcome this resistance, people have to be given the comfort of people who are respected throughout the organization.

Change has to be sold to the employees of the company – Because of the fear is above; there is a necessary sales process to be undertaken. That is the role of the thought leader.

Change will be supported if your people design and implement it. In other words if there finger prints are on the new process, its forms. We have witnessed time and again, any solutions which are designed by your people will be cheerfully supported and implemented by them.

To smooth out all the problems associated with change, the thought leaders have to be involved in the process from the beginning.

Senior Management Involvement:

To make sure of the continued implementation of the change, it has to be driven by the Senior Management group. The message has to be clear – “This is an important part of our future success. To wit, the Executive Leadership of this company will be keeping a close eye on this process.

Process Improvement whether it is payroll or productivity, has to be keep alive by the thoughts, words and deeds of the Senior Management

Facilitator:

The quality of the solution(s) is directly related to the competency of the facilitator. Time and again, the total process we see every outcome of the cross-functional team process is affected to the degree of commitment and experience of the facilitator.

This has to be the major consideration by companies when they proceed down a path of improvement. In fact, all the above problems will be eliminated or at least minimized by a seasoned leader of the task force.

Cross-functional teams are a great tool. They have produced companies used them many creative and effective solutions. They may be the answer to some of the problems that you are experiencing. If you stay aware from the pitfalls, they can the most powerful management tool that you can implement.

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 His firm, Stevens Construction Institute assists contractors in working smarter, is located at stevensci.com His direct line is (407) 678-0730

Posted by Matthew S. Stevens at 03:13 AM | Comments (0)

Good Profit is a Process

Does anyone you know really want to do a bad job? Do they want to be demoted, or worse fired? Would they like to take a cut in pay or lose the respect of their peers? Of course not. Over 90% of people want to do a great job and receive the benefits for doing so.

This begs the question: “Why are we frustrated with performance with our construction staffs? (don’t forget our construction staffs are sometimes frustrated with us)

The answer is simple. It is the process. Look around your office and you will see people doing the same things differently. Most of the time, it is the way they learned from their first boss or they are self-taught. In any case, it is not the same way that others in your office are doing the same task. Hence, problems occur – miscommunication, missed timing, or just plain thoughtless approaches (also known as bad habits).

What if a new person is hired. Think how confusing it is for them. They learn under one person their way but hear from others they "ought to do it" another way.

How to address this? Contractors report superior results by approaching the business as a process. That is, creating one thoughtful and consistent process for doing most things. Because it is a process, it can be monitored and measured. More importantly, we can use it to coach our people and bring them to a level of superior performance.

On a piece of paper, write how many different parties are involved in each project you build. The list would include several subcontractors you work with as a peer or in a contractual relationship. The Owner, the owner’s representative, the designers, the governmental authority, suppliers, insurance entities and on and on.

Typically, a dozen or more. If you don’t have this number of parties to deal with, count your blessings.

Now, because you transact with them, means that you are passing information, money, material and other essential business items. With out these items, you and they would be in trouble.

Let’s take the examp

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