Begin with the end in mind to prevent profit fade and finish construction projects strong.
Contractors often focus their attention on a project’s start but fail to emphasize the importance of finishing. They resemble a thoroughbred emerging from the gates at Churchill Downs but trip and stumble like a mule crossing the finish line.
Figure 1 shows a visual depiction of the nature of construction projects. Assume the dashed vertical line represents not only the customer’s budget but also the target finish date, and the red zone area represents two distinctly negative components that affect the project’s end: margin erosion and the customer’s perception.
Extended general conditions, overtime and costly rework all drain fragile margins. And dragging out the project’s closeout will only have a negative effect on customer relations even if the customer relationship may have been good during the project.
Margin erosion not only results from cost overruns associated with a poor finishing strategy. Too often, contractors project a reasonable profit for 80 to 90 percent of the project’s duration only to see a massive slide in the later months. Misguided profit calculations from the start often result in margin erosion. Figure 2 on page 13 illustrates the correlation of gross profit relative to the project’s completion percentage.
The red line in the graph represents a contractor’s ability to influence or enact positive change. As a project nears completion, a contractor’s ability to make changes drops considerably.
|Figure 1 The Nature of Construction Projects
Why Construction Projects Fail
Construction projects usually start with strong relationships, clear change order logs and a clean site. Fast forward to a 90-percent complete project and you will typically see lower energy and strained relationships due to poor designs, disputes, change orders, etc.
Project teams often begin projects with so much fervor that they abandon pre-job planning to demonstrate activity on a project. If only this same passion existed at the conclusion of project. Interestingly enough, customers rarely reflect on how well a contractor starts, but they always remember how it ends.
Changes in personnel that occur during the project’s closing period make the situation worse. Superintendents have to be shuffled around to other projects, and office personnel get distracted with new, fresh projects sitting on their desks.
|Figure 2 Gross Profit Relative to Percent Complete
In the absence of new projects, human nature takes over. A superintendent, foreman or manager might wonder, “If I hurry to finish this project, will I be working myself out of a job?”
And if a project experiences a hit early, managers may wait until the end to acknowledge it. Many managers say they will make it up on change orders or better manage general conditions. Cost-to-complete reports become a haven for sandbagging or the covert shuffling of dollars to cover shortfalls and overages.
Accountants, bankers and sureties cringe at the very mention of this unconventional practice. Big egos and senior management’s attitude toward errors play a role in sandbagging and hyper-optimism. Right or wrong, if senior management comes down on a manager at the very mention of a loss, managers will retreat and find a mechanism to save their skin.
Prevent Margin Erosion
Margin erosion, especially in a fragile economy, can be devastating to a construction firm. Prevention begins at the beginning of a project. Stephen Covey, author of the book The Seven Habits of Highly Effective People, says we must begin with the end in mind. Project closeout begins with the preconstruction phase. A firm should have these fundamental questions answered at the onset of a project:
- What is our definition of “complete”?
- What is the customer’s definition?
- What inspections will be required at project closeout?
- What is our anticipated personnel strategy for closeout?
- What commissioning will be required?
- What closeout documents/as-builts will be required?
Project closeout also requires a process defined as the “exit strategy” or “kick-finish.” The team should employ a pre-job planning process for the last 10 percent of the project.
As shown in Figure 3, the team should meet close to the conclusion of the project. The timing of this meeting is important. This will vary from contractor to contractor—80 to 90 percent complete usually works for most contractors, but those requiring more sophisticated commissioning and testing may see 75 percent as a better benchmark.
|Figure 3 The Kick-Finish
Firms have the ability to use this exit strategy process in two other circumstances as well:
- The Superintendent Shuffle – As personnel shifts, this process can be used to transfer critical project information.
- Multi-Phased Projects/Longer Durations – Projects that have multiple milestones or longer durations than traditional projects (greater than 12 months) benefit from interim exit strategies to instill new energy where it may have leveled off.
Table 1 is an example of a kick-finish agenda. The list of meeting agenda items will be specific to the contractor and will be more robust in certain circumstances.
|Table 1 Kick-Finish/Exit Strategy Meeting Agenda and Action Plan
The following items could be added to any discussion:
- Commissioning – Internal, trade partner, third party
- Demobilization Plan – Equipment, tools, personnel
- Temporary Utilities – Shutoffs, billing/deposits
- Closeout Documents – Certifications, O & M manuals, cleaning
- Long-Term Sales Opportunities – Warranty/service
- Financial Status – Budget concerns
Margin erosion due to poor reporting requires constant monitoring and a company perspective that places loss mitigation as the top priority. Construction firms that have a monthly process to scrutinize cost and project issues will less likely have massive losses at the finish line.
Arguably, the fundamental organizational shift can be much harder to achieve since it requires senior management to change their approach and managers to change their behavior. The organization must focus on how to overcome behavioral apathy and become a transparent and collaborative company.
Many firms will confess they are particularly weak at finishing strong. The good news is that the bar is low. Contractors have a golden opportunity to change the perception. Projects are long, arduous journeys but arriving at the finish line should not be a milestone that represents fleeting profit and a diminishing customer perception.