Introduction
Many people think that building things is an easy way to make a lot of money. They may be working for a construction company and see owners and senior managers driving expensive cars, or they hear of companies doing well and declaring big profits. It looks like a quick way to earn money. So, many good tradesmen quit their jobs, put their life savings into a construction business, and work for themselves. Unfortunately, the truth is that for every rich and successful person in the construction industry, there are probably at least ten other business owners and managers who aren't as successful, work long hours, and make an average salary. Also, there are likely a number of business owners who have lost their businesses and are now working for someone else, sometimes in a different field. Almost all of these people are knowledgeable and skilled, and I'm sure they all worked hard. Many of them probably even completed successful projects, and yet, their company wasn’t successful and eventually collapsed.
People who have owned or run a construction company that did not do well usually say that it was just bad luck. Usually, it was just one bad contract that ruined their business. It could have been just one client who didn't pay, or it could have been one project that was messed up by bad weather when it wasn't supposed to be. I’ve worked on projects that have lost money, where we could attribute the loss to bad luck. It could have been bad luck! It might have rained, and the equipment might have broken down. But, to be honest, if we analyse the reasons for the poor performance, we probably could have avoided the loss, or at least reduced it, if we had done things differently and managed the project better.
To be successful in construction means more than just completing numerous projects. It says that the projects have to be done on time, to the required quality standards, without any safety problems, and, most importantly, make money. But more significantly, the company must be paid for the work they’ve done and be cash positive. Cash flow is one of the most difficult things for construction companies to deal with. Even if a project makes money, that doesn't mean the company has cash in the bank. Also, the company needs to build a good reputation by getting to know its clients and building relationships with them so that it can get more work.
Construction isn't an easy business, and customers can be difficult at times.
demanding, inexperienced, have unreasonable expectations and even in some cases may be simply dishonest. Clients also set unreasonable schedules and have their own cost pressures, which forces construction companies to find unsustainable ways to save money. They also hire substandard design teams that provide poor quality drawings and information, often late, and don't respond to the construction company's needs and questions. Contractors also have to deal with a lack of materials, more red tape, stricter safety and environmental laws, a more litigious society, more competition, projects that are harder and more complicated, and in some cases, even political interference.
Every project and client is different, and the terms of a contract often change from one to the next. Since there isn't a single recipe that works for every project, construction companies have to change and adapt their methods all the time. Also, contractors still face the same problems, like bad weather, price increases, and a lack of skilled workers.
But, if you want to know the truth, there aren't that many construction companies that are run well. Many people fail not because of outside pressures but because they are not good enough. Some of the reasons they failed were because they didn't do a good job of bidding, they didn't have enough cash or they didn't know how to manage it well, they took on too much work when they didn't have enough money, resources, or skills, they didn't get paid for the work they did, they didn't have good financial controls, they didn't have a leader, and there wasn
So, what does it take for a construction company to make money? Well, first managers have to find a project to price, and not just any project, but the right one. They need to accurately tender or price this project and make sure they win the work without giving all their potential profit away. Once the company has been awarded the project they must successfully do the work, avoiding mistakes and ensuring they’re paid for all completed work. To do this, they need to be good with money and contracts and hire good people. Managers need to improve the company's reputation, run the business as a whole, and grow the business all at the same time.
There's no magic formula for this, but I've laid out some common sense rules that will help you get there in the next few chapters. It's no accident that the two longest chapters are about putting out bids and cutting costs. If you get a project at the right price, make sure the conditions are reasonable and the deadline is doable, and then do the work quickly and cheaply, the company is already halfway to being successful.
To be successful, you don't need to be lucky as much as you need to make your own luck. Of course, it also requires hard work, technical knowledge, and practical skills.
To run and manage a construction company, you need to know a lot of different laws, such as those about company registration and compliance, labour laws, legal and contractual knowledge, safety and environmental laws, and tax laws. This book doesn't go into detail about them because they are different from country to country and change over time. Companies must, however, follow the laws in place, so it's important for managers to have a broad understanding of the requirements and get advice and help from experts.
I was lucky to work for a very successful construction company for twenty years. The company grew and passed up most of its bigger rivals. As the company grew, I was able to grow and improve. I grew as a person and got more out of my job thanks to the company's success.
The Right Project, Module 1
Due to their desperation for work, many construction companies will take on any project for any amount of money. I've experienced something like this previously. Accepting a project at any cost carries the risk that the business will win the project, put in a lot of effort to complete it over several weeks or months, and then end up in the red. How much more preferable it would have been if everyone had stayed at home, neither making nor losing money? Perhaps the company would have had time to search for other, more suitable projects if it hadn't worked on this one? Perhaps by taking on the project, the business lacked the resources necessary to take on a better suitable project when it came along?
The risk of choosing the wrong project has an effect not just on that project's profitability but also on other projects and the organisation as a whole. Management devotes more time to a project than usual in order to address and resolve issues when they arise. Spending this time on other, more fruitful enterprises' profit maximisation would be a better use of the time. In fact, when management is absent from other initiatives, it can occasionally cause other projects to fail as well.
Being employed shouldn't be a motivation for working on a project. Your sole motivation for working on a project should be to help the business make money, or occasionally to help it land more lucrative projects. I frequently witness contractors win jobs simply out of need for work, or occasionally, contractors accept large, prominent jobs in the hope that they would improve their reputation with the general public and their shareholders. Sadly, a lot of these projects wind up costing the business a lot of money.
What then is the ideal project? It is one that the contractor is able to: 1. finish on schedule 2. provide high-quality work that meets the client's criteria and standards and serves as a positive testimonial for the contractor
3. without any accidents involving safety, without endangering anyone or the environment
4. generate a profit 5. be paid on time 6. have positive or at least neutral cash flow 7. make use of their available resources
8. If at all possible, win more business from the same client or from other sources.
locally-based clients
Recognize profitable projects.
It makes sense for a contractor to focus more on and pursue the contracts that are most profitable for them once they are aware of which ones they are. Even though it seems simple, some contractors sadly don't always realise how much money each job has brought in or have looked into why some projects are more profitable than others. Because of this, contractors frequently submit bids for projects that won't be profitable or even jobs where they continuously lose money.
Instance study
We built two concrete cooling buildings and suffered significant financial losses on both of them. The projects first seemed straightforward and were priced accordingly, but each time the work ended up being more challenging and complex than expected. When we first experienced financial loss, we assumed that it was due to poor project management. We learned it was best to stay away from these initiatives after we lost money the second time.
Later, I spoke with several other contractors, and none of them appeared to have profited from these buildings.
I eventually gave in to the desire to price one of these projects and show that we could actually tender it appropriately and construct it effectively without losing money after declining the request to tender for several more of these projects. Thankfully, we were able to secure the deal at a competitive 20% profit margin. We obviously lost 8% of our tendered profit because we only made 12% on the project.
The aforementioned only serves to demonstrate that some projects are better left to be built by other construction firms.
Before you submit a bid for a project that didn't turn out as planned, you should understand why the project was unsuccessful so you can avoid making the same mistakes again.
serving the best clientele possible
One of the most important factors in becoming a successful contractor is undoubtedly choosing the proper customer and working for them. So what attributes do a good client possess?
1. The client must pay for the completed work, which is most crucial. The client must not only pay the contractor, but they must also do so promptly and in full. This requires that they have a healthy financial situation, with cash on hand, a solid cash flow, and no risky investments or enterprises.
So how do you ask a client about their financial situation? Although you can request a copy of their bank statements, many customers are reluctant to provide them. In any case, the client may not pay the contractor on time or at all even if there is money in the bank. So a contractor needs to do a little more investigation. One could learn about a client's financial issues by reading the newspaper. Additionally, speak with suppliers, subcontractors, and other contractors to obtain a feel of whether the client is a reliable payer or not.
2. Working for a client who might have multiple projects, either on the same project or elsewhere, is also beneficial. We frequently stayed on a site for a number of years, and many of the projects I was associated with moved onto a second phase. One even went through five phases. When we were based at the plant of the huge petrochemical firm for which we worked, we frequently had the ability to work on many projects at once.
For a while, our rivals made sure to steer clear of specific mining clients. When we eventually secured a deal with one of these clients, it was clear why our rivals had been so guarded. For this client, we were able to take on a number of other sizable projects, all of which were quite successful and ultimately contributed significantly to our overall revenues.
3. Some clients are better organised than others and work with powerful, experienced teams. The likelihood that drawings and information will be released in accordance with the timetable will increase with the client's level of organisation, resulting in a project that is finished on schedule, under budget, and with the least amount of hassle possible. Delays are frequently counterproductive since they tie up workers unnecessarily and prevent them from moving on to the next task, even while late information and delays may offer the contractor an opportunity to submit claims and variations, earning the contractor additional money.
and making them frustrated with the project. Obviously, it might be profitable to be late on a project and get paid by the customer for this period if the market is tight, there is little business, and no project for personnel to go to. The majority of the time, it is far preferable to finish the assignment within the allocated timeframe (or sooner) and move on to the next one.
4. If a client doesn't fully comprehend the construction process, they may be extra finicky and demanding. These clients occasionally quarrel about every nuance and dime. I'm not saying that customers shouldn't want quality and value; rather, I'm saying that certain customers go above and above these expectations, becoming extremely petty and aggravating the contractor's personnel and entangling them in time-consuming disputes. I've met contractors who will not work with some challenging clients or will purposely increase the tender price to account for the hassle of working with them.
Case Study: For one client who used to write us letters every day, sometimes even late at night, we conducted a road project. These letters frequently asked our project manager to respond, although they frequently concerned trivial matters that many clients would overlook. In actuality, the rationale and the facts were frequently flawed. Our project manager was unable to work on any other projects because of all of this. The client's continual intervention in our work processes also caused us to work more slowly, and if we hadn't been contractually savvy, the client might have taken money from us to which they weren't entitled. Due to all of these extra expenses that weren't anticipated for, the project cost us money.
We later learned that a different contractor who had previously performed work for the client increased their tender price by 15% to account for the extra expenses they were expecting to incur on the project.
The calibre of the client's staff
A team of designers, occasionally an architect, and occasionally a managing contractor are chosen by the customer. Some of these businesses have a high level of professionalism, and they frequently help the contractor complete the project on schedule. To the contractor's requests for information, drawings, and access, some have been found to be apathetic, inexperienced, or even obstructionist in how they manage the project.
Contractors rely on designers to deliver accurate drawings and timely information. Drawings that are inadequate impede project progress and may raise costs for the contractor.
Poor project management by the team forces the contractor to hire more administrative staff, increasing expenses. Additionally, these projects frequently involve delays, claims, changes, and conflicts, all of which increase the contractor's administrative costs, have a negative effect on their cash flow, and even harm their reputation. Therefore, it is recommended to steer clear of projects that include these teams.
I've worked with a lot of great customers and teams. The projects have generally been organised well, with high-quality drawings that have been released on schedule. They have been receptive to our inquiries and fair in their evaluations of our differences. While there were faults and issues, overall, everything were handled properly. The end result was always a successful project that was completed on schedule, with little fuss, and with a satisfied client. But more crucially, we always made money—often a lot more than was projected at the tender stage.
The building industry
What kind of project or field should you be submitting a bid for? One particular business owner I worked for was willing to tender on any project, even if we had no prior experience in the sector. It goes without saying that having some industry understanding is necessary to properly prepare a tender and establish an accurate pricing. In most cases, the client would only take into account giving a project to a contractor who has the necessary expertise in the task to be done. This is not to mean that contractors shouldn't look into alternative professions, but they should only be taken into account after weighing all the benefits and drawbacks.
The contractor frequently needs to hire personnel with the necessary experience and even buy specialised equipment when entering a new field. Therefore, there should be some assurance that these resources can be used on other projects of a similar nature once the current one is finished.
On occasion, the chance to work on a project with an existing client or in a different industry presents itself. If taking on the project has benefits, it should be thought about whether to outsource the specialised work or form a joint venture with another business that possesses the necessary knowledge.
Without first confirming that there is sufficient information available, either within the organisation or from outside experts who can assist with the tendering and building, I wouldn't advise tendering for projects in new domains.
Instance study
One of our rivals made the decision to launch a division that would handle slip-form construction. The concept made sense because there were lots of chances for slip-forming work and not many qualified contractors. However, their first two initiatives were poorly performed since they didn't use the right staff. Unfortunately, this cost them money and damaged their reputation.
It should be kept in mind that any subpar job, even if it is completed by a new section, might harm the reputation of the entire business.
Possibilities for additional work
A project with the possibility of receiving additional work is one you should work on. Being one of the first contractors on a significant project is frequently useful. Some contractors would even offer a project at a profit that is low or even negative to ensure that they win it in the hopes that they will be given other business where they can make a profit. This could put them at jeopardy of not receiving more project work.
Some projects may represent the initial stages of the client's facility, however they have already said that other phases would be built. Unfortunately, these stages frequently don't come one after the other in a steady stream of effort.
It still pays to conduct your research, comprehend the broad picture, and consider the possibility of receiving additional business from the same customer, a different client in the same facility, or even inside a specific location. For instance, a suburb that is undergoing redevelopment with many homeowners renovating may be an excellent region to be operating in if your company specialises in building renovations. There is a good likelihood that prospective clients may ask for a price for other jobs in the region if they notice the company's name on sign boards, cars, and equipment. The contractor won't necessarily receive the same exposure if they operate in an established neighbourhood where developments and renovations are scarce.
The location of the project
It might be desirable to build a project close to the company's headquarters. In addition to being easy to maintain and support, it wouldn't be a good idea for a competitor to build a project so close to the office, especially when prospective clients are there.
Some project locations are well-known, providing a chance to promote the business. If the project is completed well, it may generate positive PR that will allow the business to present its capabilities.
On the other side, some projects could be challenging, cause disruptions in business and traffic, and generate negative press, especially if they are located in visible areas.
proximity of the project to already-existing projects
One company I worked at sought to price everything, including projects thousands of kilometres away from our base of operations. It was possible that these faraway initiatives would be operated even worse because we weren't managing the ones close to home very effectively.
Never undervalue how much time management is consumed by travel. Project managers and project directors may frequently manage several projects with ease when they are close to one another, and they can manage more projects than when they are widely dispersed across a broad area.
Other efficiencies that come from having projects close to one another include the ability to share resources like mechanics, fitters, service trucks, gasoline bowsers, site administrators, contract administrators, transportation, office space, and lodging.
remote locations
Many businesses are adept at operating in remote areas. In truth, some people specialise in working in faraway locations, although the majority don't do so successfully.
Remote project locations present unique difficulties:
1. These initiatives demand employees who are willing to work in these environments, but the majority of individuals are unwilling to do so, and many businesses simply lack the appropriate employees for such projects. These businesses either force their current staff to relocate, which causes them to be unhappy and either not focus on the project or resign, or they hire people specifically for the project, which isn't a good idea because they are relying on someone who may not understand the workings and culture of the company. Why should you lose a terrific employee just because you're working on a distant project?
2. Working in a remote location requires a particular kind of person who is resourceful, independent, and able to complete the project with little to no help.
3. Because people, supplies, and equipment must be delivered over great distances to the project, working in a remote place requires certain logistical abilities. The projects can be challenging to get to and may provide challenges for maintaining and repairing machinery, supplying spare parts, and even returning papers to head office.
4. The Estimator must be aware of additional wage costs and allowances and must accurately tender remote projects. It will cost money to get equipment onto and off the project because it might not be easy to find plant and equipment. Because it is not cost-effective to remove equipment and return it later when it is needed, it may remain idle on the project between activities. The cost and duration of maintenance and repairs will likely increase.
5. Because management visits won't be made as regularly as for projects located near Head Office, issues may go unnoticed or unattended to. Since many of my projects were located several hundred kilometres away from our headquarters, it took me a whole day to drive there. I envied project managers who could simply visit a project anytime they had a few free hours in the day because all of their projects were located in the city.
6. If the place is remote, there is frequently little opportunity of more work nearby. Naturally, if more work in the region can be completed concurrently with or soon after the project, the
Company might be in a good position to be chosen for the job, and certain transportation expenses might be split with the new project, increasing the profitability of both.
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