Special thanks to Marc Hendrikson, CPA, CCIFP, a commercial banker specializing in the construction industry, for his insight and help with researching this article.
The construction industry operates on such razor-thin margins that the slightest issue or problem on a job can be the difference between making money and losing money. The construction industry is also very complicated, and this complexity allows problems to be “hidden” or buried in the everyday operations of an already complicated business with a lot of moving parts. These problems can lead to financial losses, and sometimes those losses remain hidden, discovered only after the financial damage has been done if they are discovered at all. The following article the top 3 areas where hidden problems can cause hidden losses for construction companies.
Poor Project Monitoring and Control Originating in the Field
Everyday problems in the field can often be fixed by “throwing more labor” at the problem, which can lead to overtime hours. Over the course of a project, overtime, even when it’s authorized, can easily get out of control, eating up a huge chunk of profitability. Another problem that typically originates in the field but impacts the whole company is change order management. We could write a book on all the ways that change orders can lead to “hidden” losses, but the most significant problems with change orders all seem to boil down to one major factor: work is performed on an unapproved change order, incurring extra expenses that were not accounted for in the original contract. Later on when it’s time to settle up, that legitimacy of that change order is called into question, and the resulting invoice is disputed or declined.
So many things can go wrong in the field that it’s almost not fair. Industrious workers and managers that possess a problem-solving mentality will proactively want to do everything in their power to fix the problems, all in the normal course of just doing their jobs. Sometimes these fixes come with a hefty price tag, and winning too many battles (i.e., solving problems) might mean losing the war (i.e., losing money on the overall project).
Poor Organization and Financial Control Originating in the Office
We once had a conversation with the owner of a busy, plumbing subcontractor about business. He was beloved by both his customers and his employees with a well-earned reputation for delivering outstanding work. Unfortunately, he also had an equally well-earned reputation for being lackadaisical when it came to the financial side of his business, a character flaw that was compounded by keeping a very messy office (drawings, documents, random tools and construction gear strewn about) and an extremely disorganized accounting department with very little financial control over the company’s finances. During our conversation, he said (only half-jokingly), “I’ve got a bunch of money coming in, and I’ve got a bunch of money going out. I just hope that at the end of the day, more money ends up coming in than goes out!”
Without strict financial control and a capable, disciplined accounting department, it’s easy for things to slip through the cracks. And every time something slips through, the bottom line takes a hit. There’s a good reason why the title of the person that’s in charge of accounting is the “controller.” That’s because they have to be able to control things! Too often, the accounting department gets an undeserved bad rap, described derisively by others in the company as “bean counters” or worse. Well, if it was my company, then I’d want the person watching all of the money going in and out to be the toughest S.O.B. in the whole operation! Let the people pleasers and the nice guys work in sales – when it comes to accounting and office managers, I want TOUGH.
Credit management in the construction industry is so specialized, and so challenging, that it practically stands apart in the business credit world as it’s own specialized discipline. Having a strong credit and accounting team is an absolute must for any construction business that wants to achieve financial success.
Bad Communication, Company-Wide
In order to solve a problem, you have to know about it first. And generally speaking, the earlier that problems are dealt with, the easier they are to fix. This means that effective communication is a must for any successful company, and when communication breaks down – or when the communication level wasn’t very healthy to begin with – small problems go unnoticed or unattended to, becoming big problems that can have a significant impact.
So why does communication about problems on a construction project break down? Sometimes, the lack of communication is the fault of the people that are closest to the problem, but maybe not for the obvious reasons. We’ve seen cases both in the field and in the office where an employee “hides” a newly discovered problem in the earnest belief that they will be able to correct the issue before it affects things. If they’re successful, then no harm, no foul. But if the small problem they initially hide spirals out of control into a big problem, then good intentions really don’t matter – the damage is done.
While casting blame is an easy (if sometimes foolish) exercise, it’s not always fair to blame the lack of communication about a problem on the employees in closest proximity to the problem. Sometimes, the real reason behind a communications failure isn’t a lax, inattentive employee, but rather the company’s toxic workplace environment that discourages people from alerting management to any problems they might discover, for fear that the management would be more apt to “blame the messenger” instead of rewarding them for sounding the alarm.
The best owners and managers in any industry recognize their own weaknesses, or a weakness that exists in their organization, and manage it by hiring people whose biggest strengths are in the very areas where those weaknesses exist. On top of that, the best of the best learn from their mistakes and use those hard-earned lessons to make their businesses stronger, smarter, and more profitable. Of course, stuff happens, problems are to be expected on any construction project, and people make mistakes. Avoiding problems and mistakes is obviously important, but one of the biggest keys to improving your company is learning from the problems that arise and the mistakes that are made, taking each incident as an opportunity to make the company better.
Last but not least, it’s incumbent upon the management of a company to foster a collaborative workplace culture that rewards the activities that will help the company meet its goals (like proactively communicating problems), and discourages activities that can hurt (like blaming the messenger). Sometimes changing a company requires a long, hard look in the mirror, a difficult conversation with a colleague or peer, or another similar course of action that’s equally uncomfortable. But if you make it through to the other side, you and your company will emerge stronger and better for the effort.