All projects look good when relationships are fresh and the money is still in the coffers. Ironically, the projects that garner the most attention sometimes seem to be the ones that have the least statistical evidence to support a firm’s strategy. Generally, these are the projects that a particular firm has no business taking on, but because of strong emotional ties, the contractor remains convinced it is a good decision.
Despite however it has been done in the past, today’s best-in-class firms are utilizing more of a scientific approach to align the appropriate projects with their firms and their strategies. The use of go/no-go (GNG) project selection tools takes the subjectivity out of finding the right projects and clients and improves a firm’s ability to secure higher margin endeavors. The use of these tools also increases the dialogue within the firm to avoid vacuum decision making or misalignment with a firm’s strategic and business plans.
The framework of a go/no-go tool must blend strategy and historical evidence. For instance, the firm must use criteria that helps define its success, coupled with a blend of factors that enable the firm’s strategic plan.
For example, Brand X Construction’s “sweet spot” is defined at $7 million in project revenue. This is an important characteristic to understand, as it helps create a picture of the ideal customer or project. Notice this does not say “average project size.” It is important to conduct a thorough study of where a firm excels and where it does not.
The strategic growth niches also help define categories that are worthwhile targets. Without them, the firm might acquiesce and simply engage in identical work. While it may be currently profitable, it may also be myopic and fail to include a balance of long-term strategy.
It is also important to note that every firm will have specific criteria that are exclusive to their GNG. Some general GNG categories to consider might include project size, potential margin, size of the bid list, location, client information, market, project delivery method, backlog, estimating backlog and blend/ratio of direct costs.
These categories simply provide guidance on potential areas that might tie to a firm’s strategic plan. Within the confines of the list, “potential margin” might provide some level of subjectivity. Assuming a firm has a set pricing policy, the scoring criteria might provide a range. Additionally, the category of “blend/ratio of direct costs” might have scoring that varies based on the percentage of direct labor to subcontractors, or some other metric.
For instance, a firm may perform better when it self-performs specific trades, compared to the work that is brokered to trade contractors, hence leading to scoring indicative of this comparative advantage.
However your specific categories are comprised, it is important to provide connectivity to both the historical performance and the strategic plan. Furthermore, it is imperative to keep the list manageable. For instance, grading projects across too may parameters will simply dilute the effectiveness of any main category.
With the categories defined, the firm now must create the grading criteria. Keeping with the theme, Brand X Construction has determined the following categories for its GNG: niche area, project delivery method, location, client and profit potential.
Within each of these categories, the firm creates a specific set of scores for each, with 1 being the lowest/least desirable and 5 being highest/most desirable:
GNG category: Niche area
2. Tenant improvement
3. Adult living facility
5. Life sciences/health care
The purpose of the framework is to remove subjectivity and develop a decision-making model that aligns strategy and performance. In the case above, the firm has defined the most desirable opportunities as ones within their fields of expertise, as well as potential projects that are defined within their long-term, strategic plan.
Keep in mind, every firm has a finite number of opportunities with a finite number of resources. Chasing every project is not strategic. The following are some additional notes about scoring within the GNG framework.
- Not every category needs to have 5 grades. For instance, it is possible that “location” might default to 1 (out of range) and 5 (within 100-mile radius).
- The grading may change over time. Year after year, firms possess the data to grow to new limits. For instance, margin potential may be altered to reflect more/less competitive markets or improved project performance.
- Within a firm, there may be multiple options. For instance, a firm that has business unit that does work for public entities and private clients may have different scoring criteria. Part of the firm may view a larger bid list as acceptable (public), whereas the other (private) maintains a higher level of scrutiny on their potential targets.
- Not every decision is perfect. Decision making is based on the information available at that time. It is not the fault of the process if a bid list was thought to be three bidders, only to be increased by ten at a later date.
Grading opportunities allow proper decision making and create objective, fact-based discussion amongst project teams. It is also important to note that a firm should determine the right guardrails. The best way to determine your company’s limits would be to examine the last 6 to 12 months of historical data and compare that to actual margin performance.
Grade the historical data with the information available on bid day. Even if 20 bidders showed up, grade it based on what was known at that time.
Secondly, assuming projects were completed, evaluate their final margin at completion. There are probably plenty of underperforming projects that might have failed under the GNG limits. This data will provide potential targets that blend all of the factors together.
Based on this historical analysis, a clear trend emerges. Potential projects that would score 16 or 17 represent a distinct delineation and also a potential correlation between high-performing and low-performing projects.
GNG decision making can be as scientific as it needs to be to best support the contractor. The end game is not to create another piece of paper, generating some arbitrary score. Rather, the intent is to promote companywide decision making to a level that is based on historical performance.
So many organizations sit on project data such as this, but fail to mine it effectively to drive the right decision making.
Is your organization mining its projects with the latest technology or a blunt pick ax?