Managing the Profitable Construction Business The Contractor's Guide to Success and Survival Strategies

Take control of your construction contracting business and manage it through the natural highs and lows of the construction market.

Learn from a team of construction business veterans led by Thomas C. Schleifer, who is commonly referred to as a construction business "turnaround" expert due to the number of construction companies he has rescued from financial distress. His financial acumen, combined with his practical, hands-on experience, has made him a sought-after private consultant. His experience and no-nonsense philosophy have truly given him a unique perspective. Important topics covered include:

• Understanding the primary areas of construction business failure in the next decade
• Minimizing business risk with real-world examples
• Developing a positive and competent management attitude and strategy

THOMAS C. SCHLEIFER, Ph.D. has 45 years of industry experience and was founder and President of the largest international consultancy firm serving the contract surety industry. He was an Eminent Scholar and Research Professor at the Del E. Webb School of Construction at Arizona State University. Dr. Schleifer, is known as "a turnaround" expert because of the number of companies that he has rescued from financial distress.

KENNETH T. SULLIVAN, Ph.D. is an Associate Professor of Civil and Environmental Engineering at Arizona State University. He is Director of the Facility Management Research Institute and Co-Director of the Performance Based Studies Research Group.

JOHN M. MURDOUGH, CPA is Principal of Pittman & Murdough, founded in 1989. Mr. Murdough is a well-known and respected construction accounting and business strategies specialist.

Foreword xiii

Preface xv

Acknowledgments xix

How to Use This Book xxi

Part 1 xxi

Part 2 xxi

A Teaching Text xxi

About the Authors xxiii

PART 1 1

1 Managing with Confidence 3

1.1 Lessons Learned 3

1.2 Objectives of This Book 4

1.3 Managing Areas of Risk 4

1.4 Recognizing Signs of Potential Trouble 5

1.5 Layers of Management 6

1.6 Owner versus Top Management 7

1.7 Disciplining Performance 7

1.8 Boards of Directors 8

1.9 Accountability 9

1.10 Selecting the Members 9

1.11 Importance of Credit 10

1.12 Volume versus Profit 11

1.13 Employee Benefits and Compensation 12

1.14 Borrowing 13

1.15 Business Planning 13

Chapter Review Questions 17

Critical Thinking and Discussion Questions 17

2 Elements of Contractor Failure 19

2.1 Capitalizing on Experience 19

2.2 Increase in Project Size 20

2.3 Unfamiliarity with New Geographic Areas 21

2.4 Moving into New Types of Construction 23

2.5 Changes in Key Personnel 26

2.6 Lack of Managerial Maturity in Expanding Organizations 28

Chapter Review Questions 29

Critical Thinking and Discussion Questions 30

3 Increase in Project Size 31

3.1 Limits of Growth 32

3.2 Increased Risks with Larger Projects 32

3.3 Case Study 33

3.4 Case Study Review 37

3.5 Underestimating the Size 37

3.6 Owners and Retainage 39

3.7 Allocating Time 39

3.8 Alternatives to Taking on Large Projects 39

3.9 Conclusion 41

Chapter Review Questions 41

Critical Thinking and Discussion Questions 42

4 Change in Geographic Location 43

4.1 Defining “Normal Area” 43

4.2 Reasons for Changing Geographic Area 43

4.3 Case Study: Long Distance Project 44

4.4 Review of the Long Distance Project Case Study 46

4.5 Managing the Risk with Long Distance Projects 47

4.6 Case Study: Regional Office 48

4.7 Review of the Regional Office Case Study 49

4.8 The Need for Personal Attention 50

4.9 Opening a Regional Office 50

4.10 Regional Office Contingency Plan 51

4.11 Conclusion 53

Chapter Review Questions 54

Critical Thinking and Discussion Questions 54

5 Changing or Adding to Type of Construction Performed 57

5.1 Reasons for Changes in Type of Work 57

5.2 Challenge: Lack of Experience 58

5.3 Challenge: Differences That Appear Subtle 60

5.4 Resolution: Know Your Specialty 60

5.5 Background to Case Studies 61

5.6 Case Study 1 61

5.7 Case Study 2 62

5.8 Example: Union versus Open Shop 64

5.9 Know the Risks 65

5.10 Volume versus Profit Alternative 65

5.11 Withdrawal Plan 66

5.12 Conclusion 67

Chapter Review Questions 67

Critical Thinking and Discussion Questions 68

6 Replace Key Personnel 69

6.1 Identifying Key People 69

6.2 Partners 70

6.3 Founders and Succession 71

6.4 Inactive Founders 72

6.5 Succession Case Study 72

6.6 New Management Team 75

6.7 Adding Key Personnel 75

6.8 Management “Dilution” 76

6.9 Summary 77

Chapter Review Questions 78

Critical Thinking and Discussion Questions 78

7 Managerial Maturity 81

7.1 Start-Up Construction Companies 81

7.2 Importance of Management Skills 82

7.3 Company Growth Phases 83

7.4 Limit of Managerial Effectiveness 84

7.5 Company Growth and Management Thresholds 85

7.6 Telltale Signs of Insufficient Managerial Maturity 85

7.7 The Challenge of Management Changes 86

7.8 Delegation of Authority 87

7.9 Test of Delegation 87

7.10 Managerial Maturity Case Study 88

7.11 Summary 90

Chapter Review Questions 91

Critical Thinking and Discussion Questions 92

8 Accounting Systems 93

8.1 Accounting and Information Management 93

8.2 Types of Systems 93

8.3 Who Is Responsible? 94

8.4 Accounts Payable 95

8.5 Disputed Invoices 96

8.6 Case Study 96

8.7 Recording Liabilities 98

8.8 Accounts Receivable 99

8.9 Timely Data Entry 99

8.10 Summary 100

Chapter Review Questions 101

Critical Thinking and Discussion Questions 101

9 Evaluating Contract Profitability 103

9.1 Measuring Performance 103

9.2 Accounting for Profit 104

9.3 Selection of Systems 105

9.4 Percentage of Completion 106

9.5 Estimated Profit 107

9.6 Case Study 107

9.7 Percentage of Completion Method of Accounting 108

9.8 Construction— Work In Progress Method 110

9.9 Over- and Underbilling 113

9.10 Impact of Total Revenue 114

9.11 Cost Control 116

9.12 Timeliness 116

9.13 Cost Control versus General Ledger 117

9.14 Tracking Costs 117

9.15 Working without Information 118

9.16 Summary 119

Chapter Review Questions 119

Critical Thinking and Discussion Questions 120

10 Equipment Cost Management 123

10.1 Ownership Costs 123

10.2 How Much to Own 123

10.3 Reasons to Buy 124

10.4 Competitive Position 124

10.5 Calculating Equipment Costs 125

10.6 Time and Usage 125

10.7 Replacement Costs 127

10.8 Equipment Costs Charged to Projects 127

10.9 Idle Equipment 128

10.10 Cash Flow 128

10.11 Equipment Obsolescence 129

10.12 Equipment Obsolescence Case Study 130

10.13 Replacement Cost Incurred Daily 131

10.14 Summary 133

Chapter Review Questions 133

Critical Thinking Questions 134

11 Other Industry Concerns 135

11.1 Introduction 135

11.2 Growth and Risk 135

11.3 Market Driven 136

11.4 Controlling the Need for Volume 136

11.5 Rate of Growth 137

11.6 Flexible Overhead 138

11.7 Mobility of the Industry 139

11.8 Diminished Profits 140

11.9 Employee Benefits and Compensation 140

11.10 Motivation and Loyalty 142

11.11 Internal Company Disputes 142

11.12 Debt 143

11.13 Business Planning 144

11.14 Recommendations 145

Chapter Review Questions 145

Critical Thinking and Discussion Questions 145

PART 2 147

12 Financial Management Issues 149

12.1 Keys to Success 150

12.2 What Financial Statement Are Supposed to Convey 150

12.3 Three Major Functions 151

12.4 Financial Statement Basics 152

12.5 Balance Sheet 153

12.6 The Holding Tank Concept 155

12.7 Assets 156

12.8 Current Assets 156

12.9 Property and Equipment 157

12.10 Other Assets 158

12.11 Liabilities 158

12.12 Equity 159

12.13 Income Statement 160

12.14 Financial Statement Sets 161

12.15 Summary 163

Chapter Review Questions 163

Critical Thinking and Discussion Questions 164

13 Financial Analysis and Indicators 167

13.1 Working Capital 168

13.2 Calculating Target Backlog 169

13.3 Calculating Target Annual Income 169

13.4 Maximizing Working Capital 169

13.5 Liquidity 171

13.6 Current Ratio 171

13.7 Quick Ratio 172

13.8 Receivables to Payables Ratio 172

13.9 Leverage 173

13.10 Financial Capacity 173

13.11 Additional Indicators 174

13.12 Break-Even Point 174

13.13 RScore 176

13.14 Change Percentages 177

13.15 Summary 177

Chapter Review Questions 179

Critical Thinking and Discussion Questions 180

14 Projection and Budgets 181

14.1 Terms 181

14.2 The Projection Process 182

14.3 The Pre-Projection Process 183

14.4 Key Operational Factors 184

14.5 The Projection Process 185

14.6 Putting the Projection to Use 191

14.7 Short-Term Cash Flow Projections 192

14.8 Summary 193

Chapter Review Questions 193

Critical Thinking and Discussion Questions 194

15 The Effective Use of Credit 195

15.1 Introduction 195

15.2 The Primary Creditors 195

15.3 Banking 196

15.4 Bonding 198

15.5 Leasing 200

15.6 Summary 202

Chapter Review Questions 203

Critical Thinking and Discussion Questions 204

16 Making Decisions in Volatile Conditions 205

16.1 The Effects of Market Cycles 205

16.2 G & A Stair-Steps 207

16.3 Using Cycles Positively 209

16.4 Consecutive Cycles and Fighting Tendencies 210

16.5 Summary 210

Chapter Review Questions 211

Critical Thinking and Discussion Questions 212

17 Success Factors for a Changing Industry 213

17.1 What a Client Wants 213

17.2 A Client Perspective of the Contract 215

17.3 How Contracts Are Awarded 217

17.4 How Contracts Are Won 218

17.5 Relationships and Contract Divergence 219

17.6 The Client’s Vexing Problem 221

17.7 Goals of Alternative Delivery Methods 221

17.8 Successful RFP Response Strategies 224

17.9 Effectively Using Risk Analysis in a Proposal 225

17.10 How to Develop a Winning Proposal 230

17.11 Successful Interviewing Strategies 231

17.12 Summary 233

Chapter Review Questions 233

Critical Thinking and Discussion Questions 234

18 Performance Measurement 237

18.1 What to Measure 238

18.2 Setting the Client’s Expectations 238

18.3 Risk-Based Preplanning 239

18.4 Measuring Project Performance 242

18.5 Measuring Past Performance 244

18.6 Performance-Based Client Relationships 244

18.7 Measurement and Leadership 245

18.8 Summary 248

Chapter Review Questions 248

Critical Thinking and Discussion Questions 249

Appendix: Answer Key for Chapter Review Questions 251

Index 253

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