Prepare for Black Swan Events in Construction

In the later part of the first decade of the 21st century, the U.S. experienced one of the most devastating economic disasters in the form of the mortgage lending crisis. Lives, jobs, savings accounts and retirements were all upended in what was termed a “black swan event.” Nassim Taleb, author of “The Black Swan,” discussed how this seemingly once-in-an-era event, while shocking and catastrophic, was predictable. If only we had the crystal ball, right?

When you describe how this happened to the most unlearned financial mind, it seems like we should’ve seen it coming a mile away. If it is too good to be true, it might be disastrous.

There are similar “tipping points” that occur within a construction organization. Malcolm Gladwell, another brilliant author, uses this phrase to describe that moment that unleashes a floodgate of action. In the first example, there was probably not ONE mortgage that pushed the industry over the edge. However, when the confluence of events — rising inflation, rising interest rates, enormous consumer spending, etc. — all reached their pinnacle at the same time, there was a tipping point.

In a sea of data, it is easy to sink to the bottom in roiling waters. Put another way, sometimes when you are in the forest, you can’t see the tree that you run right into. Many leaders fail to see trends — some because they aren’t looking for them, some because they don’t want to see them, and some because there are individual events that occur in a seemingly random pattern but supply the undertone for a black swan event.

The Unknown Market

You’ve built in your hometown for what seems like your entire life, and you know how to build. A client asks you to go to Anywhere, U.S., taking your services on the road for the first time. Or maybe you’ve outgrown your current market, and expansion is the desirable strategic move to grow the business. Traveling to “parts unknown” is a normal rite of passage for many businesses. It is also a surefire recipe for disaster if there is a lack of due diligence.

There are a million reasons why failure can occur: unknown trade partners, unknown design standards, unknown municipalities and unknown labor rules, for example. One of these by itself might cause margin erosion, but when a firm fails to evaluate all the variables, they can quickly coalesce into a maelstrom.

The Unknown Customer

It goes without saying that every customer began as an unknown customer at some point in their history. The customer in this case is the one who enters your world as the “white knight.” They may represent a newer niche or sector, one that your team or even your market has not seen before.

You should never accept candy from a stranger, and at a minimum your business development team should conduct adequate vetting about credit worthiness, end user feedback, trade partner feedback, legal track record, etc. 
It is easy to fall in love with a someone who promises to be everything you needed or wanted, only to find out they were a wolf in sheep’s clothing.

The Unknown Associate

You have your suspicions.

• This manager/superintendent might not be right for your team. But you needed the people.
• This person’s resume looks like a patchwork quilt over the last three to five years. But you needed the people.
• You even heard from a trusted voice — a customer or trade partner — about this person not being right. But you needed the people.

People change, and maybe you will be the business to help this person “settle down.”

Several months in, you finally see the signs manifesting in the form of client attrition, margin erosion and possibly a decline within the internal culture of the firm. You saw it coming, but you threw up the blinders.

The Unknown

Harken back to 2020 and the pandemic. Sure, it wasn’t the best of times, but many contractors might say they performed really well.

For instance, if you were in the distribution sector, you saw amazing growth and, most likely, profitability. It was as if you tapped into a secret that no one else in the world knew about, only to find that materials like switchgear, bar joists and roofing insulation were all in short supply because, well, everyone was building in the distribution sector. Throw in disrupted supply chains worldwide, world conflict and labor shortages in manufacturing, and you ended up having that cathartic moment of “How did I not see this coming?”

Business leaders think things like a S.W.O.T. (strengths, weaknesses, opportunities and threats) analysis only matters during strategic planning. In reality, the external opportunities and threats often get brushed aside as factors that are uncontrollable and will simply affect everyone equally.

For instance, everyone is susceptible to labor shortages as a threat. However, businesses need to think of themselves as running a machine with levers to control the flow through their business: Pull this lever, and the corollary happens downstream. Knowing there would be shortages would not have prevented the shortage, but it would have created a myriad of options for the business to consider as alternatives.

Looking at the list of unknowns now creates a feeling of “Well, isn’t this obvious?” To hire a questionable character and think it will end well seems a bit ignorant.

We are also doing the same thing that businesses did after the Great Recession. Hindsight is always 20/20, and we like to think we would never fall in the trap of a bad hire, bad contract or bad market.

We are also human and we will all make mistakes. The key theme to consider as a leader is to gather the data and look for those trends and patterns, even when they appear as disparate points with no semblance of connective tissue.

Be the one who says “I know so” rather than the one who hears “I told you so.”