Managing the Profitable Construction Business

THOMAS C. SCHLEIFER, Ph.D. has 45 years of industry experience and was founder and President of the largest international consultancy firm serving the contract surety industry. He was an Eminent Scholar and Research Professor at the Del E. Webb School of Construction at Arizona State University. Dr. Schleifer, is known as "a turnaround" expert because of the number of companies that he has rescued from financial distress.KENNETH T. SULLIVAN, Ph.D. is an Associate Professor of Civil and Environmental Engineering at Arizona State University. He is Director of the Facility Management Research Institute and Co-Director of the Performance Based Studies Research Group.JOHN M. MURDOUGH, CPA is Principal of Pittman & Murdough, founded in 1989. Mr. Murdough is a well-known and respected construction accounting and business strategies specialist.

• Foreword xiiiPreface xvAcknowledgments xixHow to Use This Book xxiPart 1 xxiPart 2 xxiA Teaching Text xxiAbout the Authors xxiiiPART 1 1 1 Managing with Confidence 31.1 Lessons Learned 31.2 Objectives of This Book 41.3 Managing Areas of Risk 41.4 Recognizing Signs of Potential Trouble 51.5 Layers of Management 61.6 Owner versus Top Management 71.7 Disciplining Performance 71.8 Boards of Directors 81.9 Accountability 91.10 Selecting the Members 91.11 Importance of Credit 101.12 Volume versus Profit 111.13 Employee Benefits and Compensation 121.14 Borrowing 131.15 Business Planning 13Chapter Review Questions 17Critical Thinking and Discussion Questions 172 Elements of Contractor Failure 192.1 Capitalizing on Experience 192.2 Increase in Project Size 202.3 Unfamiliarity with New Geographic Areas 212.4 Moving into New Types of Construction 232.5 Changes in Key Personnel 262.6 Lack of Managerial Maturity in Expanding Organizations 28Chapter Review Questions 29Critical Thinking and Discussion Questions 303 Increase in Project Size 313.1 Limits of Growth 323.2 Increased Risks with Larger Projects 323.3 Case Study 333.4 Case Study Review 373.5 Underestimating the Size 373.6 Owners and Retainage 393.7 Allocating Time 393.8 Alternatives to Taking on Large Projects 393.9 Conclusion 41Chapter Review Questions 41Critical Thinking and Discussion Questions 424 Change in Geographic Location 434.1 Defining “Normal Area” 434.2 Reasons for Changing Geographic Area 434.3 Case Study: Long Distance Project 444.4 Review of the Long Distance Project Case Study 464.5 Managing the Risk with Long Distance Projects 474.6 Case Study: Regional Office 484.7 Review of the Regional Office Case Study 494.8 The Need for Personal Attention 504.9 Opening a Regional Office 504.10 Regional Office Contingency Plan 514.11 Conclusion 53Chapter Review Questions 54Critical Thinking and Discussion Questions 545 Changing or Adding to Type of Construction Performed 575.1 Reasons for Changes in Type of Work 575.2 Challenge: Lack of Experience 585.3 Challenge: Differences That Appear Subtle 605.4 Resolution: Know Your Specialty 605.5 Background to Case Studies 615.6 Case Study 1 615.7 Case Study 2 625.8 Example: Union versus Open Shop 645.9 Know the Risks 655.10 Volume versus Profit Alternative 655.11 Withdrawal Plan 665.12 Conclusion 67Chapter Review Questions 67Critical Thinking and Discussion Questions 686 Replace Key Personnel 696.1 Identifying Key People 696.2 Partners 706.3 Founders and Succession 716.4 Inactive Founders 726.5 Succession Case Study 726.6 New Management Team 756.7 Adding Key Personnel 756.8 Management “Dilution” 766.9 Summary 77Chapter Review Questions 78Critical Thinking and Discussion Questions 787 Managerial Maturity 817.1 Start-Up Construction Companies 817.2 Importance of Management Skills 827.3 Company Growth Phases 837.4 Limit of Managerial Effectiveness 847.5 Company Growth and Management Thresholds 857.6 Telltale Signs of Insufficient Managerial Maturity 857.7 The Challenge of Management Changes 867.8 Delegation of Authority 877.9 Test of Delegation 877.10 Managerial Maturity Case Study 887.11 Summary 90Chapter Review Questions 91Critical Thinking and Discussion Questions 928 Accounting Systems 938.1 Accounting and Information Management 938.2 Types of Systems 938.3 Who Is Responsible? 948.4 Accounts Payable 958.5 Disputed Invoices 968.6 Case Study 968.7 Recording Liabilities 988.8 Accounts Receivable 998.9 Timely Data Entry 998.10 Summary 100Chapter Review Questions 101Critical Thinking and Discussion Questions 1019 Evaluating Contract Profitability 1039.1 Measuring Performance 1039.2 Accounting for Profit 1049.3 Selection of Systems 1059.4 Percentage of Completion 1069.5 Estimated Profit 1079.6 Case Study 1079.7 Percentage of Completion Method of Accounting 1089.8 Construction— Work In Progress Method 1109.9 Over- and Underbilling 1139.10 Impact of Total Revenue 1149.11 Cost Control 1169.12 Timeliness 1169.13 Cost Control versus General Ledger 1179.14 Tracking Costs 1179.15 Working without Information 1189.16 Summary 119Chapter Review Questions 119Critical Thinking and Discussion Questions 12010 Equipment Cost Management 12310.1 Ownership Costs 12310.2 How Much to Own 12310.3 Reasons to Buy 12410.4 Competitive Position 12410.5 Calculating Equipment Costs 12510.6 Time and Usage 12510.7 Replacement Costs 12710.8 Equipment Costs Charged to Projects 12710.9 Idle Equipment 12810.10 Cash Flow 12810.11 Equipment Obsolescence 12910.12 Equipment Obsolescence Case Study 13010.13 Replacement Cost Incurred Daily 13110.14 Summary 133Chapter Review Questions 133Critical Thinking Questions 13411 Other Industry Concerns 13511.1 Introduction 13511.2 Growth and Risk 13511.3 Market Driven 13611.4 Controlling the Need for Volume 13611.5 Rate of Growth 13711.6 Flexible Overhead 13811.7 Mobility of the Industry 13911.8 Diminished Profits 14011.9 Employee Benefits and Compensation 14011.10 Motivation and Loyalty 14211.11 Internal Company Disputes 14211.12 Debt 14311.13 Business Planning 14411.14 Recommendations 145Chapter Review Questions 145Critical Thinking and Discussion Questions 145PART 2 14712 Financial Management Issues 14912.1 Keys to Success 15012.2 What Financial Statement Are Supposed to Convey 15012.3 Three Major Functions 15112.4 Financial Statement Basics 15212.5 Balance Sheet 15312.6 The Holding Tank Concept 15512.7 Assets 15612.8 Current Assets 15612.9 Property and Equipment 15712.10 Other Assets 15812.11 Liabilities 15812.12 Equity 15912.13 Income Statement 16012.14 Financial Statement Sets 16112.15 Summary 163Chapter Review Questions 163Critical Thinking and Discussion Questions 16413 Financial Analysis and Indicators 16713.1 Working Capital 16813.2 Calculating Target Backlog 16913.3 Calculating Target Annual Income 16913.4 Maximizing Working Capital 16913.5 Liquidity 17113.6 Current Ratio 17113.7 Quick Ratio 17213.8 Receivables to Payables Ratio 17213.9 Leverage 17313.10 Financial Capacity 17313.11 Additional Indicators 17413.12 Break-Even Point 17413.13 RScore 17613.14 Change Percentages 17713.15 Summary 177Chapter Review Questions 179Critical Thinking and Discussion Questions 18014 Projection and Budgets 18114.1 Terms 18114.2 The Projection Process 18214.3 The Pre-Projection Process 18314.4 Key Operational Factors 18414.5 The Projection Process 18514.6 Putting the Projection to Use 19114.7 Short-Term Cash Flow Projections 19214.8 Summary 193Chapter Review Questions 193Critical Thinking and Discussion Questions 19415 The Effective Use of Credit 19515.1 Introduction 19515.2 The Primary Creditors 19515.3 Banking 19615.4 Bonding 19815.5 Leasing 20015.6 Summary 202Chapter Review Questions 203Critical Thinking and Discussion Questions 20416 Making Decisions in Volatile Conditions 20516.1 The Effects of Market Cycles 20516.2 G & A Stair-Steps 20716.3 Using Cycles Positively 20916.4 Consecutive Cycles and Fighting Tendencies 21016.5 Summary 210Chapter Review Questions 211Critical Thinking and Discussion Questions 21217 Success Factors for a Changing Industry 21317.1 What a Client Wants 21317.2 A Client Perspective of the Contract 21517.3 How Contracts Are Awarded 21717.4 How Contracts Are Won 21817.5 Relationships and Contract Divergence 21917.6 The Client’s Vexing Problem 22117.7 Goals of Alternative Delivery Methods 22117.8 Successful RFP Response Strategies 22417.9 Effectively Using Risk Analysis in a Proposal 22517.10 How to Develop a Winning Proposal 23017.11 Successful Interviewing Strategies 23117.12 Summary 233Chapter Review Questions 233Critical Thinking and Discussion Questions 23418 Performance Measurement 23718.1 What to Measure 23818.2 Setting the Client’s Expectations 23818.3 Risk-Based Preplanning 23918.4 Measuring Project Performance 24218.5 Measuring Past Performance 24418.6 Performance-Based Client Relationships 24418.7 Measurement and Leadership 24518.8 Summary 248Chapter Review Questions 248Critical Thinking and Discussion Questions 249Appendix: Answer Key for Chapter Review Questions 251Index 253