The Contractor’s Dilemma

Contractors must recognize how immediate needs should be weighed in accordance with long-term strategy. Some seemingly beneficial business decisions provide short-term benefits, such as payroll, cash flow or debt payments, but damage the firm’s long-term ability to be a strategic leader in the market

Today, a new dilemma is taking place in the world of construction. In this dilemma, the contractor is presented with a potential project. The project offers low profit projections, but it allows the company to keep the crews busy, and it may be the only opportunity for revenue in the near future. The dilemma, however, lies in the possibility that the contractor may be presented with a more profitable opportunity after accepting the lower-paying job and will not have the resources to pursue the new opportunity. How should contractors proceed not knowing what the future holds?

The decision to take on low-profit work can be deceptively easy to make, especially when the perceived best alternative is the mere possibility of a more profitable job. One might also defend such a decision by pointing out the effect on short-term morale. In a hyper-competitive scenario, few can deny the psychological gain from achieving a win. However, the leadership of the firm must look at the impact beyond the short term. With a low-margin project, the risk profile becomes larger. Estimating mistakes, safety mishaps and production inefficiencies are amplified, and the project can quickly become unprofitable.

It is also important to recognize the impact that an unprofitable project may have on a firm’s human capital. While employees may initially be excited to have a project to work on, high-risk, low-profit work can result in employee burnout in the long term.

As businesses wrestle with the dilemma of determining whether to take on low-paying work, anxiety often takes root, and emotions can guide the decision-making process. Especially in an industry hit by an economic downturn, it is easy for business owners to worry that the sectors they work in will still be slow to rebound. For those struggling with such concerns, it is important to remember that in an industry that will yield more than $800 billion worth of put-in-place construction, there is no shortage of work.

Instead of taking on projects with a high risk of becoming unprofitable, contractors should evolve into new markets and develop new delivery methods. Those who pursue only profitable projects will be able to develop the skills necessary to take on higher-paying types of work. Those who accept low-paying work and refuse to evolve their competencies will continue to confine themselves to unprofitable markets. There is too much frustration experienced over what firms cannot control, such as the market. This energy should be spent deciding how the things the firm can control can be adjusted to accommodate the market’s emerging needs.

Patience is crucial when determining the construction firm’s strategy and type of work that will be pursued. Currently, the market’s economic uncertainty causes customers to become hesitant and their demands to become volatile. It is common to see delays in starts as project owners monitor interest rates, fuel costs and political dynamics. Though decisions made may take six to 12 months from bid day to come to fruition, it is important to remain focused on the company’s long-term goals and to remember that those accepting less-profitable work are likely facing similar delays.

Regardless of the type of work taken on by the organization, jobs require efficient execution. The decision to accept low-profit work or to pursue higher-paying work must account for both the prospect of future work and the firm’s ability to maximize profit through safe and ethical means. Superior contractors have a long-term vision and develop organizational tactics that support that vision. More importantly, they have the ability to evaluate short- and long-term risk on an ongoing basis and to make corrections to their plans as they discover that such corrections are needed.

Poorly run businesses believe that the ability to wait for and win high-profit work is the result of luck. Best-of-class organizations create strategies that allow them to find high-profit work every time. They leave the dilemma to the weak.