We have all watched a sports team — professional, collegiate or otherwise — play to conserve a lead and lose as a result. Announcers typically offer the same response: “The team was playing to not lose, instead of playing to win.” As fans, we can only watch as this happens and acknowledge the fact that our favorite team’s players or coaches did not bring a winning attitude to closing out the game.
Based on FMI’s experience working with contracting organizations during the past 60 years, the difference between firms that consistently earn a solid profit and those that fluctuate with the industry, economy or the weather is more often the result of attitude than strategy, processes or systems.
Firms that operate with a profit attitude view the high risks and low margins of construction differently than other firms. They accept the challenges inherent in the contracting business and look for ways to increase their overall profitability by delivering better value to their clients. They approach their initial estimates as the minimum standard of performance on a job, instead of the optimal target. Instead of executing projects to protect margin, firms with a profit attitude seek out opportunities to expand that margin in a way that also benefits their customer. In an industry already operating with a shortage of margin and no lack of risk, the motivation to develop a profit attitude should not be hard to find. Nevertheless, too few contractors exhibit such an attitude.
Firms cite a number of common roadblocks that are obstacles to consistent performance and development of a profit attitude. Chief among those concerns in today’s world is the economy. The past five years have challenged the construction industry more than most other industries. While conditions are certainly improving, many firms have a hard time identifying that improvement in their P&Ls. In most markets, the overall volume of work being performed has declined, while the number of firms pursuing it has not. How can a firm expect to achieve excess profits in a buyers’ market such as this? Nevertheless, there are firms enjoying their best years. Companies with strong profit margins are looking for ways to push them even higher. While all firms must endure the realities of the current economy, not all of them allow that to affect their performance equally. While we are challenged with a down market, that is not an excuse to accept a down year.
In addition to external challenges, the mind of a contractor offers a set of unique challenges that hold back some firms from developing and executing on a profit attitude. First is the simple fact that the mind of a contractor is often that of a builder first and then of a businessperson second, if at all. This can lead firms to take on jobs based more on what they are building than on their ability to achieve a profit in doing so. Compounding this problem is the industrywide distaste for processes and systems. While there is such a thing as too much process, FMI’s experience is that contractors rarely end up on that side of the aisle. Instead, many firms operate with as many ways to run a project as project managers.
Firms with a profit attitude, on the other hand, overcome these constraints and instill sound business principles and practices throughout their businesses. Developing such an attitude requires a holistic approach. Firms that have developed a profit attitude exhibit it in their strategy and project selection as well as in their project planning, execution and closeout. Accomplishing this requires project managers and superintendents who behave as businesspeople, not just builders. Operating with a profit attitude requires knowledge of what drives profitability on a project and a sense of ownership over the ultimate success and profitability of a project from the CEO to the superintendent.
Simply put, strategy is nothing more than understanding the situation your firm faces, then deciding and delivering appropriate response. In the context of a construction business, strategy informs which customers and markets a firm will pursue in which geographies and the services it will provide. Firms with a profit-seeking attitude, as opposed to a profit-protecting one, search for opportunities where they have a true source of differentiation that customers are willing to pay a premium for. Such differentiation is based on unique skills and capabilities that competitors cannot easily replicate. Those circumstances create opportunities where only a few firms can successfully compete, limiting the disastrous impact of competition on margins and the opportunity to seek higher margins than are seen in the industry as a whole.
A profit attitude is also evident in the contracting methods or delivery systems of the projects that a firm selects to pursue and those it does not. Firms that wish to develop job profits in excess of their estimate often seek out lump-sum, fixed price projects as opposed to cost-plus or construction management arrangements. The benefits of project improvement vary significantly between the two, with the benefits of the former going to the contractor and those of the latter going to the owner. Without the opportunity to reap the rewards of improved job performance, what is going to drive a contractor to improve performance?
In order to reap those benefits, the contractor must perform. Otherwise, the firm is simply increasing its risk without improving its likely reward. Managing the added risk to achieve added reward requires effective project planning, execution and closeout processes. Based on FMI’s experience, there is no better way to ensure project performance than through continuous planning, which puts the right resources in the right place at the right time to keep projects on or ahead of schedule. Firms that consistently perform on projects genuinely engage in five core practices: pre-job planning, short-interval planning, daily huddles, exit strategy and post-job reviews. These practices, when executed consistently and genuinely, ensure that the firm is continuously planning throughout its projects. They are the building blocks of productivity and profitability.
The last and most important element of developing a profit attitude is the people in your firm. At the end of the day, the construction business is a people business. No amount of procedure or process will make up for poorly performing people, nor will lack thereof stop star performers from getting the job done right and on time. Firms that have developed a profit attitude have project managers and superintendents who are as comfortable operating as businesspeople as they are as builders. The skills of a businessperson go beyond the technical expertise of how to build the project into understanding how contract terms and progress billings affect the profitability of the job. Furthermore, project managers and superintendents in firms that have developed a profit attitude take ownership over the project. They do not come to work simply to observe as a project is built. Instead, these project leaders fully understand the impact their actions and leadership have on the success of a project and go out of their way to solve challenges that threaten to jeopardize that success.
At the end of the day, the success of the project for your firm is not simply a matter of meeting the schedule. The ultimate success or failure of a project is how well it performed financially.
Rick Tison is a consultant with FMI Corporation. He can be reached at 919.785.9237 or via email at email@example.com.