Teaching Business Survival Skills to Construction Managers

John E. Schaufelberger

University of Washington

Seattle, Washington

Construction is a risky business, and construction managers often lack the necessary business management skills to be successful. Recent research indicates that ineffective business planning and management often are the primary causes of business failures among construction firms. Interviews with successful construction firms reinforce the importance of good business planning and financial management skills. Both skills need emphasis in construction management curriculums. Effective business planning involves assessing the firm's status, internal strengths and weaknesses, and external opportunities and threats, and selecting strategies and action plans to achieve organizational goals and objectives. Effective marketing strategies are central to any effective business planning. Both effective business planning and marketing skills can best be taught with the use of realistic case studies.

Key words: Business planning, management, construction, graduate education.

 

Construction is a risky business to enter, unless one possesses both good technical and business skills. This has long been recognized by the American Council for Construction Education in its establishment of construction, construction science, and business requirements in its accreditation standards. Good cost estimating, project planning and scheduling, and project management skills are essential for success in our industry, and are taught in most construction management curriculums. Good business planning and management skills are just as important to success, but often are not adequately emphasized. Chinowsky and Meredith (1998) discussed this lack of construction firm management courses in construction curriculums and the traditional focus only on the project management aspects of construction management.

Dun & Bradstreet annually publish business failure statistics. Their 1998 report indicates that 9,801 construction firms went out of business in 1996, and 10,867 went out of business in 1997—an increase of almost 11% (Dun & Bradstreet, 1998a). The 10,867 general building, heavy construction, and specialty contractors that folded in 1997 were the greatest number to fail since Dun & Bradstreet started tracking construction failures in 1934. The construction firm failure rate in 1997 was 116 per 10,000 firms, significantly higher than the national average for all industries of 88 failures per 10,000 firms. These statistics provide a measure of the risk faced by construction firm managers and highlight their need for good business management skills.

To understand why contractors are failing, an investigation was undertaken to identify the primary reasons why contractors get into financial difficulty and to determine the business practices of successful firms. This paper reports the results of this investigation, discusses business planning concepts that should be taught in construction curriculums, and proposes techniques to teach business survival skills to construction managers.

Primary Problem Areas

To identify the primary problem areas that often result in construction firm failure, unstructured interviews were conducted with three surety brokers, a bankruptcy attorney, a banker specializing in construction financing, and five certified public accountants specializing in construction accounting. Each was asked to identify major causes of construction firm failure. All agreed that often contractors had good technical skills, but lacked good business management skills. That has been the author's experience in helping minority contractors in Seattle develop business plans. There are external factors that cause problems, such as economic downturns, but construction managers must understand that construction can be cyclical, and that they must plan response strategies for changes in the construction market. The primary problem areas identified from these interviews can be grouped into five major categories. Here we will examine only identified business management problem areas that are under a construction firm's control. Some of these problem areas had previously been identified by other authors.

Pursuit of Volume. Volume, not profitability, often is used as a measure of a contractor's success. Rarely are profit margins, return on equity, and changes in profitability used to describe the condition of a construction firm. This constant pursuit of volume may lead to accepting lower profit margins on projects because of intense competition. One reason sometimes given for the pursuit of volume is the need to cover increasing overhead costs. This does not make good business sense; overhead costs need to be adjusted to meet the demands of the market, while ensuring the firm remains profitable. This "volume is king" mentality persists through much of the industry (Rice, 1994). Growing too quickly stresses management systems by spreading management too thinly to devote proper attention to the performance of individual projects.

Lack of Comprehensive Business Plan. Contractors often do not have business plans that guide their business decisions. They simply react to the market. Business planning requires an understanding of the market, how construction procurement decisions are made, and the competitive advantages of the firm. This knowledge is essential in the selection of services to be offered, the selection of market area and focus, and the selection of people and equipment required. In addition to understanding the market, the contractor must understand the firm's financial condition and devise strategies for financial success. Lack of effective planning, marketing expertise, and financial foresight are significant problems in the construction industry (Milling, 1996).

Ineffective Financial Management. Contractors often do not understand their firms’ cost structure. Some have inadequate accounting systems that do not provide detailed cost data. In other cases, contractors do not manage their cash flow requirements properly or are not adequately capitalized and must resort to unplanned borrowing of capital. Another problem area is use of working capital to finance equipment purchases reducing the firm's ability to finance its cash flow needs. When asked about their financial condition, contractors often refer to their bookkeepers or accountants, because they have little involvement in or knowledge of the financial side of their businesses.

Poor Internal Communications. Poor internal communications between project sites and the home office plague many construction companies. Consequently, there may be little warning of project execution problems or financial difficulties. In most cases, it only takes one or two disastrous projects to bring down a company. Early warning is essential if corrective action is to be taken in time.

Unplanned Leadership Changes. Unplanned changes in leadership can be devastating to a construction firm, whether it be from retirement, illness, death, or resignation. Succession planning is essential to ensure continuity of operations. This issue needs to be addressed in the firm's business plan and is particularly important in family-owned businesses.

Business Practices of Successful Companies

The owners or managers of 13 small construction firms were interviewed in their offices to learn how they managed their businesses and their recommendations for success in the industry. All attributed their success to understanding their customers’ expectations and achieving them while earning a profit. Good business practices identified from these interviews were:

Business Planning

As can be seen from the preceding discussion, good business planning is essential to have a successful construction firm. The next issue to discuss is what approach to business planning should we teach in our construction curriculums. This section of the paper describes a systematic approach that has been used successfully by the author both in teaching students and advising contractors. It is comprehensive, yet not difficult to understand.

Business planning involves assessing the external environment to determine opportunities to be exploited and threats to be addressed and the internal organization to determine strengths to be built upon and weaknesses to be addressed. This strengths, weaknesses, opportunities, and threats (SWOT) analysis is fundamental to any business planning process. Many authors call this strategic planning or strategic management, because the output of the SWOT analysis is the selection of business or strategic goals and strategies for their accomplishment. To be worthwhile, business plans must be based on solid data, critical self-study, and creative thinking (Hensey, 1997). Often the most difficult part of business planning is developing a forecast of the future business environment that serves as the foundation for making current business decisions.

Business planning involves answering the following questions:

Answering the first question involves analyzing the financial condition of the firm using trend and ratio analysis. The results can be compared with industry norms published by Dun & Bradstreet (Dun & Bradstreet, 1998b). Quick and current ratios can be used to determine the firm's liquidity, and return on equity should be evaluated to determine the firm's profitability (Fraser, 1998). Other parameters to be evaluated are market share and sales volume, number and skills of employees, and quantity and condition of equipment. This is all part of the strengths and weaknesses analysis.

Before addressing the second and third questions, it is necessary to forecast the future environment out at least five years. This is the opportunities and threats analysis, and serves as the foundation for answering these two questions. Contractors must be careful to identify the relationship between forecast assumptions and question answers, because future adjustments to the business plan may be required if forecast assumptions turn out to be invalid. The planning assumptions selected should be recorded in the business plan for future reference.

Answering the last question involves predicting the future consequences of current decisions, assessing risks, allocating resources, and assigning responsibility for accomplishment of business goals. Business goals should relate to organizational philosophies, management techniques, marketing goals, human resource management goals, asset (equipment and real property) management goals, and financial management objectives. These goals are the basis for selecting business strategies or actions to be taken.

The first step in the planning process is the development of a broad mission statement of purpose for the firm. This statement should address who the company is and what it does. This mission statement will provide focus for the organization and establish boundaries for the development of organizational objectives and goals. It should define the business that the firms wants to be in, differentiate the company from its competitors, be relevant to all the company's stakeholders, and be inspirational to employees of the firm. This mission statement will provide a sense of purpose to company leaders and employees, a context for forecasting the future and a basis for making company policies and business decisions.

Once the mission statement has been selected, a company vision should be crafted to state succinctly where the company desires to be in the next 5 to 10 years. This vision statement describes the collective goal for the firm's employees, and sets the context for the remainder of the planning process.

Now that the company mission and vision have been defined, good business planning involves an external analysis of the anticipated future business environment. This analysis should include a customer analysis, competitive analysis, construction industry analysis, and environmental analysis. The customer analysis involves identifying the firm's major customers and potential future customers, what attributes of the firm's services are likely to be most important to customers, and what customer needs are not being satisfied currently. The competitive analysis involves assessing the threat of new entrants into the market, future demand for construction services offered by the firm, existing capacity of competitors, and the bargaining power of customers and suppliers. The environmental analysis involves forecasting future technology, government regulations, demographics, cultural norms, and economic trends.

The internal analysis needs to identify and classify the company's resources in terms of strengths and weaknesses. This establishes the current baseline for the company in terms of organizational structure, organizational culture, marketing efforts, financial management, operations (experience), human resources, fixed assets, and information systems. It serves as the basis for selecting goals for achieving the company vision and strategies to accomplish them. The goals need to be stated in quantifiable terms so that performance toward their accomplishment can be measured. Strategies should be selected that best use the firm's core strengths to exploit external opportunities while minimizing external threats. Some of the topics that should be addressed in devising company strategies are market standing, innovation, productivity, physical and financial resources, profitability, managerial performance and development, worker performance and development, and public responsibility. The firm’s employees are critical to its ability to deliver quality service to customers. This critical resource needs to be managed and nurtured with the same interest and concern as managers devote to managing financial and fixed assets.

Once the strategies have been selected, action plans are developed to assign responsibility and allocated resources for their accomplishment. The basic questions to be answered in these action plans are:

The final step in developing a business plan is establishing a monitoring and feedback mechanism. Periodic assessment of company performance is critical to success. Monthly or quarterly assessments should be made to ascertain performance in each functional area. Planning assumptions should be reexamined to ensure the are still valid. Resource adjustment may be needed to account for changing environmental conditions. Contingency plans are needed to provide flexibility to the business planning process, in the event initial planning assumptions turn out not to be valid.

The process of developing the business plan often is more important than the final product. The analysis and decision-making involved require a thorough understanding of the condition of the firm and the existing market. This process is an excellent educational experience for all participants and should include a cross-section of the firm’s employees. A comprehensive business plan makes future decision-making easier, as a context has been established by the plan. Once developed, the business plan must be communicated to all the firm's employees. This is to ensure each team member understands his or her role in accomplishing the company's collective goals.

Market Development

A major part of the business planning process is determining the relevant market for the construction firm's services and the criteria by which current and potential customers select contractors. To be successful, construction firms must tailor their services to provide value to customers if they expect future business. This was highlighted by Steinke when he wrote " A common misconception when talking about competitiveness is that being competitive means offering the cheapest price. Interestingly enough, competitiveness has less to do with price than it does with value" (Stacho and Steinke, 1997). Many clients value time and quality higher that least cost. Marketing research is needed to develop a marketing plan that supports the business plan. Basic marketing involves analyzing the market to understand customer needs (this is called segmenting the market), selecting target groups of customers whose needs match the construction company's services, and tailoring the company's services to achieve customer satisfaction.

Competitive advantage comes from offering some unique service that differentiates the construction firm from its competition. Marketing strategies should be developed to emphasize the uniqueness of the service and the value provided to the customer. Marketing tools involve market research, public relations, advertising, and customer service. The last is the most important. If quality customer service is not provided, the other tools will be of limited value. The best marketing tool is a satisfied customer. Customer response cards are a good technique for obtaining customer feedback at the end of a project.

Use of Case Studies

Recognizing what business management skills to teach is only the initial step. The challenge is to determine the most effective technique for teaching these skills to our students. Case studies often are the best vehicle for teaching them. This method has long been used in business schools. When the author started teaching construction firm management in 1995, he required students to develop case studies using actual construction company financial and marketing information. This proved unsatisfactory as few construction firms were willing to share the data, and the attempt ended in considerable student frustration. As a result two case studies were developed, one for a residential construction company and one for a commercial construction company. The case studies contain a description of each company and contain five years of financial data. Students are required to conduct an analysis of each company, develop company mission statements, visions, and strategic objectives. Once the strategic business plans have been developed, students are required to develop supporting marketing plans, and in the case of the commercial case study, develop a marketing brochure. To support the classroom discussion, short case studies have been developed for a construction management firm requiring students to go through the business planning and market analysis processes.

The use of these case studies has proven most effective in teaching construction business management skills to graduate students at the University of Washington. Our course is too intense for undergraduate students, but similar topics could be presented to undergraduate construction management students spread over two courses. Our graduate class covers the following topics in a single academic quarter:

This course requires considerable student reading in addition to preparing the case study analyses. The residential case study is handled with three separate submissions, with instructor feedback between the second and third submission. The commercial case study is treated as a single submission allowing students to apply the principles learned during the residential case study. Student feedback regarding the case studies has been very positive. Most students credit the case studies as significantly contributing to their learning construction firm management issues and processes. To supplement course readings, discussions, and the case studies, construction executives are invited to conduct seminars describing the business practices of their firms.

Conclusions

Good business management skills are essential for success as a construction manager. These skills are just as important as the technical skills of cost estimating, project planning and scheduling, and project management. Companies that get into financial difficulty often lack comprehensive business plans and have weak financial procedures. To be successful, construction firm managers must understand their customers’ expectations and achieve them while earning a profit. They need effective business plans that are understood fully by all their employees.

The business planning process must involve an analysis of existing and anticipated future opportunities for the firm and threats to its competitiveness. The company’s strengths and weaknesses must be assessed and resources allocated to improve weak areas. Company goals and objectives must be identified and action plans developed to allocate resources and assign responsibility for accomplishment of specific goals. Company progress must be monitored and evaluated periodically to ascertain progress toward accomplishment of the goals. If necessary, resources should be reallocated to reinforce weaker areas. A significant part of the business plan is identification of the specific market segment to target. Once the target market has been identified, the firm’s services must be tailored to enhance its competitiveness within the selected market.

These basic business survival skills need to be taught within our construction curriculums. Many programs may leave graduates ill-prepared to be successful construction managers. Courses should be developed to prepare our students for success in the business management aspects of our industry. Realistic scenarios, or case studies, are excellent vehicles for teaching these skills.

References

Chinowsky, P. S. & Meredith, J. E. (1998). Introducing strategic corporate management in construction education. Proceedings of the 34^th Annual Conference of the Associated Schools of Construction, 79-86.

Dun & Bradstreet. (1998a). Business Failure Report. New York: Dun & Bradstreet, Inc.

Dun & Bradstreet. (1998b). Industry Norms & Key Business Ratios. New York: Dun & Bradstreet, Inc.

Fraser, L. M. & Ormiston, A. (1998) Understanding Financial Statements, 5^th Ed. Upper Saddle River, NJ: Prentice-Hall.

Hensey, M. (1997). Strategic planning: Developments and improvements. Journal of Management in Engineering, 13 (2), 29-32.

Milling, B. E. (1996). How contractors can succeed in business by not failing. Air Conditioning, Heating & Refrigeration News, 197, (18), 5.

Rice, H. L. (1994). Profit is not a dirty word: Construction is a risky business. Doors and Hardware, 58, (12), 58.

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