Managing the Profitable Construction Business

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