The construction industry operates on such razor-thin margins that the slightest problem or issue on a job can be the difference between making a profit or loss. As a complicated industry, it allows problems to be hidden or buried under everyday operations of an already complicated business with a lot of moving parts. These problems will lead to financial losses, and sometimes these losses remain hidden, discovered only after the damage has been done, if they are discovered at all. This article covers the top 3 areas where hidden problems can cause hidden losses for construction companies.
Poor Project Monitoring and Control Originating in the Field
“Throw more labour into the field”, said the project manager as if that is the only way to fix everyday problems on site. More labour equals more overtime hours. However, even authorised overtime hours can get out of hand, and eat up a huge chunk of profitability for the construction company. Another issue that impacts the whole company, is change order management. In project management, a change order (or variation order) is a component of the change management process in which changes in the scope of work agreed to by the client, contractor and architect are implemented. 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.
It’s almost not fair how many things can go wrong on site. Project managers that possess a problem solving mentality will proactively want to do everything on 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 (solving problems) might mean losing the way (losing profits 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 his business. He was beloved by both his customers and 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 this 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 whereby 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.
Conclusion
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.
