Business of Construction Contracting

Thomas C. Schleifer, Ph.D., is a turnaround expert and the founder of the largest international consultancy firm serving the contract surety industry. He was also an Eminent Scholar at Arizona State University’s Del E. Webb School of Construction. He joined the construction industry at age 16 and has amassed more than 60 years of experience. This combination of practical, hands-on experience as a contractor and experience assisting financially distressed companies has given Dr. Schleifer a unique perspective on the causes of business failure and how to avoid them. Aaron B. Cohen, MS, CPC, served for 10 years as the President and Owner of Apollo Trenchless, Inc. and has over 15 years of experience working as a project manager and estimator on infrastructure and utility construction projects. He held the Associated General Contractors (AGC) Lecturer position at Arizona State University where he currently teaches courses in infrastructure estimating and project controls. Currently Aaron is Director, Estimating Products at InEight, Inc. where he helps define and build software solutions for the construction industry.

• Preface xiAbout the Authors xiii1 The Construction Industry 11.1 A Brief History 31.2 What’s Ahead? 51.3 Industry Beliefs 61.4 An Example 71.5 How Many Ways? 81.6 Evaluating a Construction Organization 102 Structure of a Construction Business 132.1 Organizational Structure 142.2 Quality Decision-making 152.3 Collaboration 172.4 A Superior Process 182.5 Business Planning 192.6 Business Planning Strategies 202.7 Overhead 222.7.1 Incidental-growth Pattern 222.7.2 Overhead and Organizational Structure 232.7.3 Flexible Overhead 242.8 Supporting Production in the Field 263 Construction Business Risks 293.1 Definitions 303.2 Awareness of Risks 303.3 Business-risk Categories 313.4 Risk Management 323.5 Financial Risks 333.6 Inappropriate Industry Risks 343.7 Risk Identification 353.8 Profit Versus Value 363.9 Financial-risk Measurement 383.10 Operational Versus Financial Performance 383.11 Gross-profit Changes 403.12 Growth Risks 403.12.1 Overhead 423.12.2 Rate of Growth 423.13 Management of Growth Risks 433.14 Market Recovery Risks 443.15 Summary 464 Common Elements of Construction Business Failure 474.1 Common Elements of Business Failure 494.2 Increase in Project Size 514.3 Expanding into New Geographic Areas 534.4 Expanding into New Types of Construction 544.5 Changes in Key Personnel 574.6 Lack of Managerial Maturity 594.7 Summary 605 Increase in Project Size 615.1 Limits of Growth 625.2 Increased Risks with Larger Projects 62Case Study: Apartment Complex Disaster 645.3 Underestimation of Project Size 67Case Study: Sewage Treatment Plant Failure 67Case Study: A Road to Nowhere 705.4 Clients and Retainage 715.5 Alternatives to Taking on Large Projects 725.6 Summary 736 Changes in Geographic Area 756.1 Business in Your Normal Area 756.2 Reasons for Changing Geographic Area 75Case Study: Project in a New Area 766.2.1 Adding Insult to Injury 796.3 Risk Management in Long-distance Projects 806.4 Regional Offices 82Case Study: Regional Office 826.4.1 Getting Spread Too Thin 836.5 Establishing a Regional Office 846.6 Contingency Plan 876.7 The Wisdom of Withdrawal Planning 886.8 Summary 897 Changes in Type of Construction 917.1 Reasons for Changes in Type of Work 917.2 Lack of Experience 927.3 Subtle Differences 947.4 Recognition of Your Specialty 94Case Study: Forced Out of Business 95Case Study: A Mechanical Failure 977.5 Union Versus Merit Shop 997.6 The Importance of Knowing the Risks 1007.7 Volume Versus Profit 1017.8 Withdrawal Plan 1017.9 Summary 1028 Changes in Key Personnel 1038.1 Breakup of a Partnership 1038.2 Founders and Succession 1048.3 Inactive Founders 105Case Study: Succession 1068.4 Replacement of a Team Member 1088.5 Addition of a Key Person 1098.6 Management Dilution 109Case Study: Increase in Organizational Size 1108.7 Summary 1119 Managerial Maturity 1139.1 Importance of Management Skills 1149.2 Company Growth Phases 1149.3 Limit of Managerial Effectiveness 1169.4 Company Growth and Management Thresholds 1169.5 Telltale Signs of Insufficient Maturity 1169.6 Changes in Top Management 1179.7 Delegation of Authority 1189.8 Test of Delegation 119Case Study: Managerial Maturity 1209.9 Succession Planning 1229.10 Succession Issues 1239.11 Measuring Succession Progress 1269.12 Summary 12910 Understanding Construction Accounting 13110.1 Annual Financial Statements 13210.2 Internal and External Financial Statements 13210.3 Management Accounting Inputs 13410.4 Methods of Accounting 13510.5 Accuracy of Accounting 13510.6 Percentage of Work Completed 13710.7 Work in Progress 138Case Study: Profit Margin Decline 13910.8 How to Account for Work in Progress 14010.8.1 Contract Price 14110.8.2 Direct Costs to Date 14110.8.3 Estimated Cost to Complete Remaining Work 14210.8.4 Amount Billed to Date 14210.8.5 Notes About Accounting for Work in Progress 14210.9 Summary 14311 Construction Industry Cycles 14511.1 Market Decline 14611.2 Market Recovery 14811.3 Lessons Learned 14911.4 Company Downsizing 14911.5 Rightsizing 15111.6 Overhead Research 15211.7 Flexible Overhead 15211.7.1 Overhead Survey 153Case Study: Overhead 15411.8 Expanding Flexibility 15611.9 Equipment Ownership 15711.10 Flexibility in Project Selection 15711.11 False Beliefs 159Case Study: Profitable and Unprofitable Work 15911.12 Losing Projects 16011.13 The Importance of Experience 16111.14 Summary 16212 The Science of Project Selection 16312.1 Industry Beliefs 16512.2 Profitable and Unprofitable Work 16612.3 Profitable Project Selection 16712.3.1 Project Size 16812.3.2 Project Type 16912.3.3 Geographic Area 16912.3.4 Project Team 17012.3.5 Unusual Project Features 17012.4 Measurement of Project Risk 17012.5 Impacts of Not Taking on Losing Projects 17112.6 Flexible Overhead 17212.7 Conclusion 17213 The Project Selection Program 17313.1 The Origin of the Idea 17513.1.1 Size of Project 17613.1.2 Type of Project 17613.1.3 Project Location 17713.1.4 Project Team 17713.1.5 Project Complexity 17713.2 Project Selection Program 17813.3 Program Questions 180Section 1 – Project Fit 180Section 2 – Firm’s Experience 181Section 3 – Project Complexity 181Section 4 – Financial and Cash Flow Impacts 183Section 5 – Contract Issues 183Project Fit Issues 184Section 6 – Additional Issues to Consider (Not Scored) 18413.4 Scoring a Project 18613.4.1 Project Size 18713.4.2 Project Type 18813.4.3 Geographic Area 18813.4.4 Project Team 18813.4.5 Unusual Project Features 18913.5 Conclusion 18914 Project Controls 19114.1 The Evolution of a Construction Business 19214.2 Construction Is a Service Business 19314.3 Productivity Analysis 19414.4 Schedule 19714.5 Budget 20014.6 Earned Value Management 20314.6.1 Measuring Progress 20414.6.2 Earned Value and Cost Performance 20514.6.3 Evaluating Cost and Schedule Together 20714.6.4 Forecasting 20814.6.5 Reporting 20914.7 Conclusion 211Chapter Review Questions 213Answer Key for Chapter Review Questions 231Index 233