Editor's Note: This is the fifth in our 2007 series of The Business Owner Toolbox written by our regular columnist, George Hedley. Each article is written to provide you with practical, immediately applicable business management tools to assist you on your path to building a successful, growing business.
I hate to fire people. Last week, I was forced to make a tough decision on one of our construction and development projects. Two years ago, we made a strategic decision to seek industrial and office building development opportunities in Las Vegas, NV. Our first priority was to find the best real estate broker in town to locate available land to purchase. We selected the No. 1 broker in Las Vegas, and over the next few months, we offered and closed escrow on four different industrial property parcels. Our real estate broker did a fabulous job for us during the site acquisitions.
Generally, when a real estate broker finds a site for you and you're pleased with their service, you continue to use them to market your completed project. Therefore, we contracted with him and his team to market our properties for sale or lease. Fast forward one year later. Our first project is now built, complete and ready to occupy. It comprises ten separate office and industrial buildings.
But, as you may know, the key to success in any real estate development and construction project is more than building a great project. It is also about generating buyers or tenants and stopping the interest carry on your construction loan. On our $8 million loan, the interest carry costs $60,000 per month. This comes right out of the developer's pocket until the buildings are sold or leased. Unfortunately, our project is now complete with no buyers or tenants. Our real estate broker has had over a year to market the project and generate some sales to no avail. Now what should I do? Hang in there with a non-performing marketing team or fire them and hire a new real estate sales team. Both will cost more time and money. Have you ever delayed making a tough decision to avoid confrontation? By waiting until it cost you money, did it get the results you wanted quicker?
On a previous development project, I learned the hard way by sitting and waiting for the wrong marketing team to make things happen. People generally won't change how they do business no matter how hard you try to encourage or threaten them. And while you wait for results from the wrong people, you run out of time, energy, patience and eventually money. Two years ago, I bought an industrial building in a good area of Orange County, CA. When the tenant moved out, I signed a marketing listing agreement with a young professional broker who had found the building for me to purchase.
While he did work hard and tried to find a tenant for over ten months, he was the wrong guy for the job. He wasn't a leasing expert in the neighborhood where the building was located. Because of my good nature, integrity and hope that he would make results happen, I hung in there with him too long without any leasing activity. This cost me over $85,000 while I tried to be friendly and gently nudge the broker to perform. I finally had to make a change and fire him. The next week, I engaged the services of a real estate broker who specializes in buildings similar to mine. Guess what? He found a tenant within three weeks. Have you ever waited too long before you made a change? By waiting, did the problem get better? Why did you wait so long to make the change?
Don't Wait until It's Too Late
Several years ago, I promoted a senior project manager to construction division manager responsible for the overall success of our construction business. He was accountable for hitting both the sales and profit goals of the division. He and his project managers and superintendents continually did a good job keeping our customers happy. They built most projects on-time and on-budget with quality workmanship. While he focused on what he was good at-project management, the sales targets were not being hit. As a result, we were not making enough total profit to cover the company overhead costs. I continually impressed upon him that he needed to increase his efforts in sales and estimating if he was ever going to make the volume numbers we agreed were achievable.
As I continued to put more pressure on him to generate more revenue, he began to make some poor choices. Rather than doing what he needed to do, he moved another project manager into business development. They started to bid construction projects out of our expertise for customers who were less than a perfect fit for us. Desperate to win contracts, he offered and accepted terms and lump sum prices that put the company at extreme risk. This eventually caused us to lose even more money. As his ship began to sink, it became evident these projects were going downhill fast. After it was too late, I finally had to step in and make some drastic changes in personnel, project bidding and contract policy. Have you often wished your people problems would go away? Ever hoped you won't have to step in and confront someone who isn't meeting your standards for performance? Do you postpone people decisions until there is no other alternative? Does this delayed behavior make things better?
A Bad Attitude Breeds Bad People
Ever have a person in your company with a bad attitude? They talk behind your back and bad mouth everything and everybody. This permeates throughout your company and eventually disrupts good people and destroys teamwork. So, do you fire them? Often company owners and managers are so busy getting projects finished and their crews organized, they hope problem people will go away or get better. They do nothing and postpone what they need to do about these poison people. I had a construction administrator who smiled and did anything I asked at a very competent level. But all the others around her continually complained she had a case of bad attitude. As the company owner, I didn't see it and told my other staffers to try and work it out. It eventually got so bad, I had good people come into my office and demand changes. Finally, I did what I had to do and fired the bad apple. Why did I wait so long? Have you ever waited too long? Did this help the situation?
It's Right before Your Eyes
For years, my bonding agent told me stories about other companies-how employees had been caught with their hands in the cookie jar. He told me how someone in accounting was approving phony invoices for equipment rentals from a company that didn't exist. The checks would go to the bookkeeper's brother who cashed them and then split the money with the bookkeeper. I heard how project managers were awarding subcontracts in exchange for materials for their personal home remodels and how superintendents were doing side jobs on the weekends using company employees and equipment charged to the company's projects. We discussed how personal items and services were being job charged to projects by project managers who approved their own invoices and expense accounts.
These stories always brought a good laugh to us as I related how it would never happen to me. Will it ever happen to you? What do you assume isn't going on right now? When I took a hard look at our financial controls, I found people doing exactly what I had joked about with my bonding agent. Now what? Fire the culprits or give them a strong warning? What would you do if you found people taking advantage of your trusting good nature? Most employees are like children in bigger bodies. When you give a little, they take a little more. When you let them come in late or leave early without docking their pay, they continue to do it, and it becomes expected as the norm. Then, when you finally put your foot down, they can't believe you are so mean and nasty. So, you give in again to win their hearts back. Ever let people off the hook because you think you can't afford for them to leave? Have you kept a bad apple rather than let them go because it is easier to work with what you've got than find a replacement?
A Subcontractor or Sub-Performer?
Ever had a subcontractor or supplier you should've fired, but didn't? Our steel subcontractor wasn't performing on a big construction project. They had continually missed deadlines and were delaying the project and costing us money. At one point, the job was stopped for three weeks waiting for a steel delivery. I asked my project manager to see his correspondence log and notices he had given the steel subcontractor. Rather than send the sub a written notice to perform, he had met with them several times, visited their shop weekly and called them constantly to try and get them to meet the schedule. He had also sent e-mails and faxes telling them the deadlines and schedule issues. But he hadn't followed the subcontract and given official written notice to meet the schedule or be terminated and back-charged.
Most subcontracts have provisions for delay problems and require a written notice to cure, notice to man the job properly and notice to perform or be terminated. It was obvious the subcontractor had taken on too much work and was trying to keep all their customers somewhat happy without being terminated or facing financial consequences. Rather than go the tough route and put them on official notice to cure or be terminated, our project manager tried to balance being nasty versus friendly to get them to perform. People don't like confrontation even if it's the only answer. Written notice is confrontational and forces positive or negative action.
When I finally stepped in, it was too late. The damage was done and we were over two months behind schedule. What should we do? Hang in there with the steel contractor by trying to get them to perform or terminate their subcontract and find another subcontractor to step in? Replacing them would take months and cost more, plus we would end up in a huge lawsuit later. Finally, we decided to follow the subcontract (what we should have done from the first sign of trouble.) Per the subcontract, we sent the steel contractor written notice to meet the schedule and deliver all the steel within forty-eight hours or be terminated. Guess what? They finally got the message and guaranteed us a delivery schedule we could live with going forward! Until they received an official written termination notice, the subcontractor continued to lie to us and do the minimum to keep the project manager appeased and somewhat satisfied. Have you ever waited too long before confronting a problem subcontractor or supplier? By waiting, did it make it better or save you money?
Now or Never
Ever kept someone on payroll while waiting for the next project to start? Recently I did just that, and it cost lots of money. Most projects never start when they're supposed to. You think the permit will be ready or the loan will be recorded in two weeks so you keep your superintendent rather than lay him off until the job starts. Two weeks turn into two months which often turn into six. A good field superintendent costs around $1,500 to $2,000 per week. Our next project didn't start for twenty-five weeks. This cost our company $50,000. How can you ever recover that amount of money?
Being a nice guy and not making tough decisions always affects your bottom line in a negative way. Why don't you manage your business like you manage your own personal finances? When you go to the store, you only buy what you need or know you will use. You never buy things based on the supposition you might need it in the future without a date certain. When you keep people around on the hope a project will start, you're spending money you don't have and might never need to spend. By the time the project was finally ready to start, two other projects finished and we then had two extra field superintendents we didn't need on payroll. Have you ever taken the easy route and postponed making a tough business decision about people? Did this help your bottom-line?
Moral of the Story
When you postpone making tough decisions or firing people, subcontractors, suppliers or consultants, it costs you time, energy and lots of money. Quick and firm decisions are hard to make, but they do get to the bottom of your business problems fast. When things go bad, they generally don't get better. Eventually you'll have to make the decisions. So, why not make them sooner than later? Here are some final thoughts and rules to follow based on the examples presented above:
1. It's about results, not activity! Some people stay busy at their job but don't get the results you expect from them. Give them clear targets to hit. If they don't hit them, give them a quick warning, coaching and a second chance. If they still don't get the results you want, fire them fast. Staying busy are excuses people use who don't hit their targets. They blame their poor performance on just about everything except themselves. They don't take responsibility or accept accountability for their actions. These people ruin a good company and take all your time to manage.
2. Attack problems! When you postpone making tough decisions, you also delay solving the problem. To delay the inevitable causes stress, grief, lost sleep and lost money. Problems don't get better. They get worse and harder to solve. Do it now, not later.
3. Go with your gut! You know what you should do. If you think something's wrong-it probably is. Go and do what you need to do right now.
4. Be pro-active with communications! Know and follow your contracts. Use them as a tool to get the results you want. When you tiptoe around problems, they only get worse and cost you lots of money. When you're not getting the results you expect, put people, subcontractors, suppliers, owners and consultants on notice that they must perform or you will replace them per the contract.
5. Fire fast! Everyone sees problem people and the damage they do. The longer you don't act, the more you irritate others. Everyone is waiting for you to do what you need to do. When you don't do what you should, you lose respect from others as your good people continue to put up with poor performers or a bad attitude.
When you aren't getting the results you need, use those famous words: "You're fired!" Immediately you'll feel relieved and the pressure will lift. You can now work on solving the problem instead of working with the wrong people. Your attitude will change from negative to positive. And your team will rally around your decision. What are you waiting for?
Construction Business Owner, May 2007