“Best-in-Class” organizations in the engineering and construction industry know something that you don’t. According to Engineering News-Record, the first half of 2005 started out with construction put-in-place up eight percent with several segments such as lodging and commercial office over double digit growth from last year. However, the average profit margin stayed at just 3.2 percent, underscoring the fact that many contractors are rebuilding backlog from the downturn of 2003/2004. Top ranked contractors for financial performance used a secret weapon to not only gobble up backlog, but to also improve their profitability while doing it.
In fact, according to CFMA’s 2004 Construction Industry Annual Financial Survey, “The median net income per contract for Best-in-Class firms was nearly five times greater (than that of their peer group).” What makes this even more compelling is that Best-in-Class (“BiC”) firms actually had fewer contracts per year (64 versus 70 for the typical company).
In addition to financial performance measures, “BiC” organizations receive many soft benefits including single-source work, higher percentage of repeat customers, higher employee retention rates, last look on bid opportunities, and other competitive advantages. What are the secrets they possess? What do they do so differently that allows them to perform five times better than their peers? The answer lies in their habits.
Today’s Projects
Although every project has unforeseen occurrences, project cycles are predictable. This Construction Industry Institute (CII) graph demonstrates the typical project in the industry today. Looking at the blue line, a project has a start date, progress is made toward completion, and then it has an end date. This end date is the date given to the customer and becomes contractually binding. In essence, this date is directly tied to profit margin.
However, real life doesn’t always go as planned. Take a look at the red line, which is a real life forecast. Something happened, as it always does, on the project. Because the project team was surprised and had no advanced warning of the issue, they were faced with two choices. Get the project back on schedule or finish late.
However, getting back on schedule comes at a price. Adding overtime, increasing manpower, and issuing change orders carries the risk of eating away at a fixed margin. Being late risks project profitability by paying liquidated damages, resolving claims, and having a potentially unhappy client. Bottom-line, both options are not ideal because they put your project’s planned profitability on the line.
A Design-Build Project Manager = Business Manager
According to the U.S. Small Business Administration (SBA), the average small business has average total revenue of $1.2 million. According to research conducted by McGraw-Hill, the average construction project is $2.5 million. Essentially, today’s design-build project managers are being held accountable for the profitability of a project that is twice the size of the average American small business. The best project managers have long since realized that success in project management is equal to success in business. Successful project managers do far more than merely drag their projects across the finish line. They understand that budget and schedule compliance are the bare minimums to creating a lasting impression on a customer. They realize that they need to possess a deeper set of skills and operate with a much broader outlook if they are to be “BiC” among design-builders.
Although many companies and project managers have defined themselves by technical knowledge and skill, there is an increasing awareness that successfully completing projects on time, within budget, and with delighted customers is more about the successful orchestration and facilitation of others than it is about technical expertise. Enlightened companies are aggressively seeking to recruit, train, and retain project managers with a more comprehensive understanding of how to manage a project.
The Seven Habits of Highly Effective Projects
People often refer to habits as either good habits or bad habits. It is a judgment, based upon a belief system, that allows people to determine if an activity is considered acceptable or not. In 1989, an internationally respected leadership authority, teacher, and organizational consultant, Stephen R. Covey, defined for us a clear meaning of a habit. He explained that a habit is the intersection of knowledge, skill, and desire1.
One of the secrets that “BiC” firms know is that design-build projects are proving grounds for habits. Schedule pressure, changing designs, productivity, and safety put a variety of stress on the project and it is up to our project manager/business manager to reinforce the habits that will help them achieve success.
After years of experience and count-less discussions with engineering and construction companies, we found that “BiC” design-build organizations do seven things very well over and over again. They aren’t anything new. In fact, they are so simple any company can follow them.
Habit 1 — Be Proactive
Be very proactive about project issues and changes. BIC organizations don’t simply react to the crisis of the moment. They are proactive by anticipating and planning for potential problems by putting an early warning system in place. This way, there are fewer surprises to deal with and they can focus on making the right decisions.
That early warning system should consist of a well-prepared schedule and project plan and good cost accounting or production reports that show historical performance. This can be a difficult process for some companies since they have disparate systems that are not integrated and as such, the process for updating project information is manual and has exposure to accuracy issues.
According to research presented by the Association for the Advancement for Cost Engineering (AACE), it takes anywhere from two to four weeks to find out that there is a problem on the job. Today many project managers have no early warning signs and no visibility to the projected final condition of the project. When a delay occurs unexpectedly, people are typically surprised and the only approach at that point is to be reactive rather than proactive about addressing the cause of the delay. This behavior puts schedule and profits at risk.
Habit 2 — Forecast Completion
They begin with the end in mind. They always are looking at their forecast of total cost at completion and making sure the trends show they are headed in the right direction. Unfortunately, our industry has a history of allowing project managers to become absorbed in “fighting fires” (refer to habit 1) at the expense of regular, rigorous cost-to-complete assessments. In today’s business environment, sureties, banks, and outside investors will continue to have less tolerance for profit fade, write-downs, or uncollectible claims. In order to perform this task, a company must examine not only the lagging indicators of project performance (job cost reports, actual versus estimate, schedule to date) but leading indicators as well. These are such measures as projected total cost at completion, projected completion date, and projected cash flow and profitability. Executives and project personnel need a dashboard or summary report of those few critical items (also known as Key Performance Indicators — KPIs) that quickly give them a picture of a project’s status. Here are a couple of indicators that indicate a problem is brewing:
- Profit fade on more than 20 percent of the jobs completed on an annual basis
- More than 50 percent of jobs with same cost to complete YTD with significant under-billings
- A consistent occurrence of unapproved change orders that constitute a substantial portion of job profitability
Habit 3 — Prioritize the Critical Path
BIC organizations work on the most important activities and don’t let them slip. They know which items they can address later and which ones need attention right now. They know the difference between those things that are urgent and those that are truly important.
Here is one example of an important item that never seems to get the attention it deserves — the closeout process of a job. According to an FMI/CMAA survey in 2003 of owners (buyers of construction services), this is one area they believe construction firms can improve upon. Think about retention. It often runs in excess of contractor gross profit and usually in excess of net profit. The value of retention is usually far greater than the value of the punch list. With so much at stake, how do most contractors handle closeout?
Generally, poorly. It drags on and on until eventually it erodes enough of the remaining profit and someone screams “enough!” and forces closure. Most contractors delegate this task to a superintendent or foreman who has been given the task of closing out the job of someone else. Our experience has shown that in most cases, this person has no vested interest in the project therefore, no matter how long it takes to closeout, it was never his job. The superintendent, who left the project to start another job, left a lengthy punch list because he knew he wouldn’t have to deal with it. Clearly, this creates a situation where there is no accountability (see habit 6). In order to close out jobs faster and make it a priority, plan for it just as you would with mobilization: Set milestones for project close-out and hold the entire project team accountable.
Habit 4 — Collaborate
This habit is critical to design-build firms. “BiC” firms collaborate effectively. Collaborating has to do with connecting people to solve a problem or complete a task. It’s also about getting everyone on the same page. Today, there are systems available off-the-shelf for storing project information. “BiC” firms know that making the process for getting information in and out of a system easily is paramount.
Two critical management tools must be in place for construction companies to control projects effectively. One is internally focused and the other has an external focus. The internally focused tool is the consistent approach to the management of projects, from bidding to close-out. This is the company’s project control system. If this system is undefined or rarely followed, each project will be run according to the whim of each project manager. Superintendents will know no consistency in management and there will be a learning curve for every project which impacts your overhead and general conditions.
The externally focused tool is the similarly consistent approach to collaborating with external parties on a project. Both of these tools are too often applied inconsistently from project to project. Some project managers actually solicit input from subcontractors and others to develop an accurate plan of what is needed to ensure that the job runs efficiently. Consensus is the tool for achieving buy-in to the schedule and a stronger commitment to its accomplishment.
Habit 5 — Communicate Often
Communicate often and in many ways. Different from collaboration, communication is really about how much of the information you communicated was actually heard or understood. I’m sure you’ve said it many times: “Didn’t we talk about this at the Monday job meeting?”
For example, meetings are important responsibilities of the project manager. Obviously, productive meetings are critical to a project’s success. Poorly run meetings are a reflection on the project manager and his/her company with regard to how organized a project seems to be and the degree of importance placed upon it. To be effective at communication, you must understand that there are many ways to communicate and, depending upon the person you are working with, their preference may be oral, written, e-mail, or a combination of all three.
Technology can play a crucial role here as well. Web-based project collaboration software can be useful in speeding up the process of project-specific communication. Meeting minutes are translated into specific action items that are trackable to drive accountability. In the Monday morning project meeting, action items can be verbally communicated, documented into a PM system, and automatic reminders are sent to the responsible individual. Action items not completed by the next meeting, are automatically carried forward instead of being forgotten. In addition, RFIs, submittals, digital photographs, meeting minutes, and other correspondence can be posted and addressed immediately from any location, creating an environment of enhanced communication.
Habit 6 — Be Accountable
Manage accountability on every project. The best project managers feel personally that if their project is losing money, they are losing money. The project manager is the business manager for a project. They believe that if a project has problems, it isn’t the estimator, the architect, or the owner that is at fault. Companies can create accountability by actively involving senior management actively involved in the periodic, rigorous examination of job status. This does not mean a cursory review of project costs alone, but also includes a narrative of current project status, project cost projections compared to budget, schedule updates, change order issues and management, customer concerns, subcontractor performance, cash flow status, and profit projections. It is the job of senior management to create the proper atmosphere during these reviews by not creating a forum for punishment but rather one for open and honest communication. Only then will project personnel feel comfortable enough to share both good and bad news so that corrective action can be initiated before it is too late. In our experience, this culture of “no excuses” is one of the best competitive advantages a contractor can possess.
Habit 7 — Continuous Improvement
“BiC” firms are committed to continuous improvement of the preceding six habits. They measure how well they are doing and look for ways to make it better. Popular management concepts such as Six Sigma and Total Quality Management have similar messages. To improve, you must first define the area of improvement, then measure how you are doing today, analyze the data, create ways to improve it, and control adherence to the new process.
The Discipline of “Best-in-Class” Organizations
Organizational discipline comes from processes that are standardized throughout a company and followed by all. This is the beginning of solid project management. There must be a standardized project control system that reflects the “BiC” performance for that company in their line of work. If people are left to concoct whatever individual systems they can think of to run their projects, then there is no control and management has no baseline of performance expectations to utilize as a gauge. This is not about taking away creativity or inhibiting management style, it’s about having standards of performance (which create consistent expectations for all), standardized processes (which eliminates a learning curve and improves efficiency), and a system of organization (which makes it easy to utilize the “tools” provided). During the go-go days of the ‘90s, many companies hired people from different employers and threw them at jobs just to get them built. No one worried whether or not they were following company procedures, and controls were often overlooked. Now that the market has cooled off, companies are stepping back and evaluating the benefit of a company project control system that is documented and implemented on projects. With today’s tight margins, squeezing out another point of profit by operating more effectively and efficiently without adding any overhead seems to make sense.
Deciding to Be a “Best-in-Class” Organization
What is it that makes some companies successful in reaching top profit margins and others remain mediocre? In some cases it may be more efficient processes, others the ability to sell and negotiate better terms and conditions. However, more often than not, it is one word: Culture. It could be attitude, which is certainly an integral part of culture. Creating a culture that is “margin aggressive” is the key. Set expectations where project personnel are expected to always meet or exceed profit projections. Create an entrepreneurial environment where project managers are encouraged to seek ways to improve project and company performance through a variety of avenues: services that result in a differentiated market position, customer service that results in repeat business, scope opportunities that result in additional work and compensation, negotiated terms and conditions that favor the contractor, and schedule management that minimizes time and, therefore, money.
Endnote
1 © Covey, Stephen R., The 7 Habits of Highly Effective People, Simon & Schuster 1989
As a director with FMI, Lee Smither helps construction and engineering companies sharpen their management practices and corporate performance. He specializes in project management assessment and consulting, developing and implementing strategic organizational initiatives, and designing executive development programs. Mr. Smither initiated FMI’s Project Manager Academy. He has published articles on a wide variety of topics in numerous construction trade journals such as Transportation Builder, Midwest Contractor, Construction Weekly, Journal of Construction Accounting and Taxation, and the California Association of Building Contractors Newsletter. Mr. Smither is a member of the National Association of Accountants and the ASCE Construction Institute, where is he on the national board of directors. He holds an undergraduate degree from North Carolina State University and a MBA degree from East Carolina University. In addition to serving on various local boards, Mr. Smither is a member of the Board of Advisors for the Construction Management Department at East Carolina University. He can be reached at lsmither@fminet.com.
Christopher K. Bell is a market manager at Primavera Systems, Inc., where he is responsible for technology solutions developed for the engineering and construction market. He has been active in the engineering and construction industries for over 10 years, working with both multinational E/C firms and regional design-build firms. Before joining Primavera in 2001, Mr. Bell worked as a corporate marketing manager with URS Corporation (San Francisco, CA) to develop strategic engineering alliances with client organizations. He holds a B.S. degree from Mansfield University and is enrolled in a Boston University graduate program, obtaining his Project Management Professional (PMP) designation. Mr. Bell can be reached at cbell@primavera.com.