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Full Description
Explore this deep dive into the business side of construction, including how to structure, organize, and operate a construction organization to maximize profit
The most visible work of construction contracting happens on the job site, but some of the most important aspects of running a construction business happen behind the scenes, on the financial and operations side. Construction is the second-most risk-intensive industry in the US, and both minimizing business failures and minimizing the damage that results from inevitable failures are critical. Structuring and managing a profitable construction business requires strategic sense and up-to-date knowledge.
The Business of Construction Contracting describes and analyzes the business side of construction, with a detailed exploration of the major types of business failure and how to avoid them. It's designed for construction professionals who understand that in this industry everybody faces risk exposure, and the companies that survive and thrive are the ones who understand how to recognize the risks and respond accordingly. It offers documented research findings, rooted in years of construction business experience, that can help both new and veteran business owners find success.
The Business of Construction Contracting readers will also find:
Exploration of the concepts of flexible overhead, corporate, and financial self-analysis
Detailed discussion of topics including cash flow thresholds, construction market cycles, and more
The latest industry technologies and techniques to manage a construction business
The Business of Construction Contracting is ideal for construction professionals - including general contractors, construction managers, and specialty contractors - as well as bonding and insurance professionals, construction attorneys, and vendors servicing the construction industry.
Contents
Preface xi
About the Authors xiii
1 The Construction Industry 1
1.1 A Brief History 3
1.2 What's Ahead? 5
1.3 Industry Beliefs 6
1.4 An Example 7
1.5 How Many Ways? 8
1.6 Evaluating a Construction Organization 10
2 Structure of a Construction Business 13
2.1 Organizational Structure 14
2.2 Quality Decision-making 15
2.3 Collaboration 17
2.4 A Superior Process 18
2.5 Business Planning 19
2.6 Business Planning Strategies 20
2.7 Overhead 22
2.7.1 Incidental-growth Pattern 22
2.7.2 Overhead and Organizational Structure 23
2.7.3 Flexible Overhead 24
2.8 Supporting Production in the Field 26
3 Construction Business Risks 29
3.1 Definitions 30
3.2 Awareness of Risks 30
3.3 Business-risk Categories 31
3.4 Risk Management 32
3.5 Financial Risks 33
3.6 Inappropriate Industry Risks 34
3.7 Risk Identification 35
3.8 Profit Versus Value 36
3.9 Financial-risk Measurement 38
3.10 Operational Versus Financial Performance 38
3.11 Gross-profit Changes 40
3.12 Growth Risks 40
3.12.1 Overhead 42
3.12.2 Rate of Growth 42
3.13 Management of Growth Risks 43
3.14 Market Recovery Risks 44
3.15 Summary 46
4 Common Elements of Construction Business Failure 47
4.1 Common Elements of Business Failure 49
4.2 Increase in Project Size 51
4.3 Expanding into New Geographic Areas 53
4.4 Expanding into New Types of Construction 54
4.5 Changes in Key Personnel 57
4.6 Lack of Managerial Maturity 59
4.7 Summary 60
5 Increase in Project Size 61
5.1 Limits of Growth 62
5.2 Increased Risks with Larger Projects 62
Case Study: Apartment Complex Disaster 64
5.3 Underestimation of Project Size 67
Case Study: Sewage Treatment Plant Failure 67
Case Study: A Road to Nowhere 70
5.4 Clients and Retainage 71
5.5 Alternatives to Taking on Large Projects 72
5.6 Summary 73
6 Changes in Geographic Area 75
6.1 Business in Your Normal Area 75
6.2 Reasons for Changing Geographic Area 75
Case Study: Project in a New Area 76
6.2.1 Adding Insult to Injury 79
6.3 Risk Management in Long-distance Projects 80
6.4 Regional Offices 82
Case Study: Regional Office 82
6.4.1 Getting Spread Too Thin 83
6.5 Establishing a Regional Office 84
6.6 Contingency Plan 87
6.7 The Wisdom of Withdrawal Planning 88
6.8 Summary 89
7 Changes in Type of Construction 91
7.1 Reasons for Changes in Type of Work 91
7.2 Lack of Experience 92
7.3 Subtle Differences 94
7.4 Recognition of Your Specialty 94
Case Study: Forced Out of Business 95
Case Study: A Mechanical Failure 97
7.5 Union Versus Merit Shop 99
7.6 The Importance of Knowing the Risks 100
7.7 Volume Versus Profit 101
7.8 Withdrawal Plan 101
7.9 Summary 102
8 Changes in Key Personnel 103
8.1 Breakup of a Partnership 103
8.2 Founders and Succession 104
8.3 Inactive Founders 105
Case Study: Succession 106
8.4 Replacement of a Team Member 108
8.5 Addition of a Key Person 109
8.6 Management Dilution 109
Case Study: Increase in Organizational Size 110
8.7 Summary 111
9 Managerial Maturity 113
9.1 Importance of Management Skills 114
9.2 Company Growth Phases 114
9.3 Limit of Managerial Effectiveness 116
9.4 Company Growth and Management Thresholds 116
9.5 Telltale Signs of Insufficient Maturity 116
9.6 Changes in Top Management 117
9.7 Delegation of Authority 118
9.8 Test of Delegation 119
Case Study: Managerial Maturity 120
9.9 Succession Planning 122
9.10 Succession Issues 123
9.11 Measuring Succession Progress 126
9.12 Summary 129
10 Understanding Construction Accounting 131
10.1 Annual Financial Statements 132
10.2 Internal and External Financial Statements 132
10.3 Management Accounting Inputs 134
10.4 Methods of Accounting 135
10.5 Accuracy of Accounting 135
10.6 Percentage of Work Completed 137
10.7 Work in Progress 138
Case Study: Profit Margin Decline 139
10.8 How to Account for Work in Progress 140
10.8.1 Contract Price 141
10.8.2 Direct Costs to Date 141
10.8.3 Estimated Cost to Complete Remaining Work 142
10.8.4 Amount Billed to Date 142
10.8.5 Notes About Accounting for Work in Progress 142
10.9 Summary 143
11 Construction Industry Cycles 145
11.1 Market Decline 146
11.2 Market Recovery 148
11.3 Lessons Learned 149
11.4 Company Downsizing 149
11.5 Rightsizing 151
11.6 Overhead Research 152
11.7 Flexible Overhead 152
11.7.1 Overhead Survey 153
Case Study: Overhead 154
11.8 Expanding Flexibility 156
11.9 Equipment Ownership 157
11.10 Flexibility in Project Selection 157
11.11 False Beliefs 159
Case Study: Profitable and Unprofitable Work 159
11.12 Losing Projects 160
11.13 The Importance of Experience 161
11.14 Summary 162
12 The Science of Project Selection 163
12.1 Industry Beliefs 165
12.2 Profitable and Unprofitable Work 166
12.3 Profitable Project Selection 167
12.3.1 Project Size 168
12.3.2 Project Type 169
12.3.3 Geographic Area 169
12.3.4 Project Team 170
12.3.5 Unusual Project Features 170
12.4 Measurement of Project Risk 170
12.5 Impacts of Not Taking on Losing Projects 171
12.6 Flexible Overhead 172
12.7 Conclusion 172
13 The Project Selection Program 173
13.1 The Origin of the Idea 175
13.1.1 Size of Project 176
13.1.2 Type of Project 176
13.1.3 Project Location 177
13.1.4 Project Team 177
13.1.5 Project Complexity 177
13.2 Project Selection Program 178
13.3 Program Questions 180
Section 1 - Project Fit 180
Section 2 - Firm's Experience 181
Section 3 - Project Complexity 181
Section 4 - Financial and Cash Flow Impacts 183
Section 5 - Contract Issues 183
Project Fit Issues 184
Section 6 - Additional Issues to Consider (Not Scored) 184
13.4 Scoring a Project 186
13.4.1 Project Size 187
13.4.2 Project Type 188
13.4.3 Geographic Area 188
13.4.4 Project Team 188
13.4.5 Unusual Project Features 189
13.5 Conclusion 189
14 Project Controls 191
14.1 The Evolution of a Construction Business 192
14.2 Construction Is a Service Business 193
14.3 Productivity Analysis 194
14.4 Schedule 197
14.5 Budget 200
14.6 Earned Value Management 203
14.6.1 Measuring Progress 204
14.6.2 Earned Value and Cost Performance 205
14.6.3 Evaluating Cost and Schedule Together 207
14.6.4 Forecasting 208
14.6.5 Reporting 209
14.7 Conclusion 211
Chapter Review Questions 213
Answer Key for Chapter Review Questions 231
Index 233
