Category: Projects

References

There must be a fair amount of movement in the construction job market as I have had over a dozen requests to provide references in the last couple of weeks. I do not have an issue with providing them, but I like to be forewarned by the candidate they have given my details as a potential referee.

Usually the reference request is from a recruitment agency and they have a set list of questions. But to me, the most important one is would I employ the candidate myself. I might not particularly like the person but if they have the ability, experience and willingness to be a key team player, then no problem. I never want to hinder someone’s search for employment but if I am unaware they are looking, and give me the opportunity to give them some straight advice, the reference they get might not be what they are expecting. Last week I was asked my opinion on a candidate who had not let me know their intentions and the role they had applied for was completely beyond their capability. They did not make it to interview and I would have told them they were aiming too high.

References are usually sought from someone who the candidate reported to. If I was asked to provide a reference for myself I would do it in reverse. That is I would offer the insight from someone who I had hired and reported to me, from cadet to project manager it makes no difference. Potential employers would not appreciate this tactic but if I were hiring, I would gain valuable insight in speaking candidly to a candidates’ direct reports. They have worked closely with the candidate and know them probably better than anyone. This might give some of my previous hires great satisfaction as sticking pins in effigies of me seems like hard work!

Into the Unknown

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Well I finally bit the bullet and decided to go solo. I have always relished the idea of working for myself and now I am on my own away from the corporate comfort blanket and all the other nonsense that entails.

Setting up your own business is very straightforward and I have one simple goal, that is to enjoy what I do day to day. It is not about making enormous amounts of money, it is about being happy.

To date I have not canvassed anyone, cold called companies or called upon colleagues and friends in the construction sector. Simply because I have been too busy dealing with clients who have sought me out. There are a lot of distressed projects and many builders and subcontractors who simply need some assistance.

In Australian capital cities there has been a boom in high rise apartment developments. With any boom there are casualties. Developers unable to make final payments to builders because apartment sales contracts have fallen through, subcontractors being strung out by builders, everyone blaming each other for their losses on projects. When you roll your sleeves up and get into the nitty gritty of the problems it usual is caused by companies taking work on without understanding risk and then they employ staff who do not know how to manage risk.

So I get approached to “fix” a project and very quickly identify it is not the project but the way the company is organised to handle projects in the first place.  The project may never achieve its tender margin but sometimes the damage can be reduced. Fixing the business is the key and usually it all relates to the contract that was signed and the way the procurement is managed.

I was hoping to get away from the sixty hour working week in the corporate world but the potential workload may keep me even busier – if I am not careful!

Premdale Consulting 2017

The Bottom Line

TC 1 and 2I was asked recently by a subcontractor how they could increase their bottom line. They had fallen into the trap of believing increasing revenue would increase profit. In fact by increasing revenue they were going broke quicker.

Whether it is the overall business or an individual project the principle is the same. Revenue is usually determined on a fixed price contract and costs are controlled by the business and on projects, the on-site team.

The table below set out the difference in increasing revenue or reducing cost:

Current Required Difference %
Increase Revenue
Revenue 10,000,000 13,636,364 3,636,364 36.4%
Costs 9,500,000 12,886,364 3,386,364 35.6%
Gross profit 500,000 750,000 250,000 50.0%
Margin % 5.0% 5.5% 0.5%
Reduce Costs
Revenue 10,000,000 10,000,000 0 0.0%
Costs 9,500,000 9,250,000 (250,000) (2.6%)
Gross profit 500,000 750,000 250,000 50.0%
Margin % 5.0% 5.5% 0.5%

My subcontractor friend is not an accountant. COGS, EBIT, work in progress, accruals etc are a foreign language to him. He simply wants to make more money.

In this example I demonstrated how to increase his annual gross profit by $250K. So I explained based on the above if he reduces his costs by 2.6% he will increase his gross profit by $250K. To achieve the same by increasing his revenue he needs a 36.4% increase ie another $3.636M, along with more risks on variations not being approved, more clients who may pay slowly and this does not allow for maybe more overheads to handle the increased turnover.

This sounds simplistic because it is. Costs are variable and under our control, but we have to fight for every cent of revenue not included in the contract.

Zero Overheads

v-30-PreviewSimple premise – reduce overheads, become more competitive, then win more work. So what overheads does a construction company essentially need. Perhaps if the projects were set up with the right resources we would not be as reliant upon a head office. The project becomes, in effect a stand alone business and if it needs anything from head office it has to pay for it. Simple. But in reality , if the project runs this way it will incur costs never envisaged in the cost plan and instead of wearing head office overheads, it just bleeds dollars and drags the business down anyway. It is all down to how the budget is managed, reported and controlled.

So we need to be competitive in the tender process, run the project pretty lean and not rely on additional resources from head office. The answer is smart people, good communication and the best IT we can buy.

Let’s start with IT. We  love to blame it, cannot function without it, do not embrace it and do not use it to its full potential. The IT department is an overhead that needs to charge the project for providing services and hardware.  First thing we can do is to stop buying hardware. Bring your own phone, ipad, tablet, monitor and simply connect to the company’s access points. Companies don’t provide cars any more so why provide computer hardware. All IT provide is the core software and managing internal communication. Everyone has a mobile phone so why is it most staff have two, one for work and one for personal.

Site office space is always a problem as we never seem to have enough. We need to understand space should be determined by function not status. Give everyone access to an open plan area and meeting rooms for meetings, not for egos. Site offices are expensive. We do not need a dedicated office for a project director who visits once a month, whilst others are working on top of each other.

But this is just simple good housekeeping. We need to look at all the functions that the project could manage themselves and ensure those they cannot are paid for. We all think very seriously before calling in external legal advise, yet pick up the phone at the drop of a hat if we have in-house counsel. Internal lawyers (if the company has them) are our best friends and having access to them is a true luxury. But we need to be aware not only do they have a cost, the resource is limited and whilst we are tying them up they are not available to our colleagues on other projects.

It is interesting to consider say fifty years ago we employed all the major trades for us to construct buildings and did not have internal support such as legal, marketing, green advisers, real estate novelists etc. Now we have various none core support divisions and we subcontract the construction.

Of course our support teams are vital and we need to make full use of their expertise, we simply need to remember we have to pay for them.

 https://gkeating.com/

picture courtesy of http://graphicriver.net/

Bleeding Dollars

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So how does a project start hemorrhaging dollars? I aspire to the old fashioned school of thought which states very simply “you make your money before you start on site, once you start construction you have to prevent losing money”.

Managing the risk with the client should be resolved in the tender process, what are we prepared to sign up to? Can we accept the draconian terms and condition the client wants? Have we allowed the gung ho business development manager too many long lunches, convincing himself in a haze of narcissism and red wine, that we can deliver a project on time, on budget but beat the rest of the tender pack by a country mile. Hopefully a company’s internal checks and balances and counteract this over-enthusiasm, stand up to the client and if need be, simply walk away. Often the client manages to wrap the contractor tightly within the contract, but the contractor is too loose with their subcontractors.

OK, we have won the job. The business development manager accepts the accolades and moves on to their next conquest. The cost planners have covered themselves with a multitude of caveats. The accountants are expecting the profit at tender to increase. All we as a construction team have to do is deliver. The first task is to sign up the subcontractors. So often we get a relatively inexperienced administrator to put “packages” together, to add to those issued at tender. These packages contain a scope of works, drawings, specifications, etc. The administrator fields the queries from the subcontractors. Eventually a short list of subcontractors per trade is prepared. How many times have we heard the cries of joy as a substantially lower price from a subcontractor is paraded around the office, until someone with the word ”commercial” on their business card slows it all down by actually reading what the subcontractor has offered. Often, the enthusiasm of the team is tempered by the Grinch aka: “The Commercial Manager”.

Next step – the deal with the subcontractor. There is no point in screwing someone in to the ground only for them to go broke mid-way through the project. Their price has to be based on a fully detailed scope of works with no “gaps” between their trade package and others. But all too often this is where many increased costs originate. The reason is that all too often, the wrong person has issued the package. Issuing tender packages requires construction knowledge, commercial acumen and rigorous internal review. Inexperienced administrators do not have the requisite experience or negotiating skills.

We are now underway on site. Every subcontractor has a signed subcontract so why do we not implement it. We have time requirements for claims, procedures for variations and extensions of time, so why do we not apply them. The reason we do not is often this task is left to an inexperienced administrator. We have a subcontract document, no doubt prepared by internal or external legal eagles, and often the people managing it do not understand it.

The hemorrhaging has commenced. Poorly written scopes of works, lack of contractual and commercial knowledge, now compounded by a third factor. That being the team’s self-denying something is going wrong. Somehow they believe by not reporting bad news, it will make it all go away. It does not.

The way to manage risk is through focusing and identifying, analysing, prioritizing, and managing risks to eliminate or minimize their impact on a projects objectives, profit target and success. We need the same rigor applied throughout procurement and construction that should is be applied at tender stage. This requires experienced construction professionals, and this usually means they have been burnt previously.

 

Picture courtesy of betanew.com

http://www.gkeating.com

 

 

 

 

Censorship in the workplace

CensorIt is fair to say that almost all bloggers have a day job, but carry out their blogging activities in their own as opposed to the company’s time. But that does not allow employees to blog about certain aspects of the business in which they are employed. But how far can companies go in restricting what bloggers put out on their sites.

Most companies have policies regarding computer usage and confidentiality. But some companies are raising the levels of what an employee can say or blog to a point where they want to vet everything an employee has to say. Often it is an individual manager that wants to control their staff above and beyond what the company guidelines provide for.

So what does an employee do if they are faced with a controlling manager. Simple. If the blog does not refer to, imply, make reference to or in ay way breach the company guidelines, tell the manager where to go. If that results in a stoush and if it is allowed to continue, then it is not the kind of company you want to be employed by. Time to “Ramble On”

Risk

riskBack in the sixties I received Waddington’s game of Risk as a Christmas present from my beloved, long departed parents. My favorite place on the board was Kamchatka. That was certainly a long way from home in Liverpool. I had never heard of Kamchatka and even today it is a place name not often mentioned in the media. The tactics were not complicated: build up your armies; protect your borders; and own as much as the board you can. Of course to own the board you had to roll the dice.

Okay enough of reminiscences from days long ago. We work in an industry full of risk. We take on projects that have been won my optimists, reported upon by pessimists and delivered by pragmatists. We do it because we have a passion for construction, but all too often that passion is tested in the extreme by the sudden realization that the risk we discussed at the start of the project, has increased exponentially.

As the economy gets tight, with a shortage of development cash, clients/developers want hard dollar, fixed price contracts with us builders. Then they want to push the responsibility of design onto the builder. Simply the project is a design and construct, fixed price contract. We then screw down the design consultants and the subcontractors in an effort to shift our risk on to them. But it does not work. Subcontractors are signed up on incomplete scopes of works, based on minimalist consultant documentation, and at the end of the project we are fighting with the client, consultants and subcontractors. The project team becomes tired of the battles and we limp towards practical completion watching the dollars hemorrhage from the budget. Add to this we have reduced the programme and contract sum in give backs to the client simply to win the job. So we are fighting time and money from day one on site.

But we as an industry keep doing it. Is it some masochistic trait within builders, are we deluded in believing we can achieve the impossible, that is making money on a hard dollar design and construct job.

We have to learn the lessons from previous forays into this model and simply not accept risk that we know will hurt us. We try to minimize the risk in draconian subcontract documents, but then we run a further risk in ending up in court with security of payment issues to subcontractors.

We all prefer the alternatives such as construction management contracts etc. and we can also reduce the risk by simply saying to clients, who want to screw us – thanks but no thanks.

http://gkeating.com

Meters for All

fv_howitworks2It appears that the bigger an organisation becomes, the longer the job titles of management develop. Here in Australia we have not succumbed to having vice-presidents as in the USA but we have executive project directors or executive general managers. These titles can morph into wonderful handles such as Executive General Manager – Sustainability and Green Star Initiatives. Seriously someone gave me their business card recently at some junket and that is what it read. pretty soon this person will have to have special business cards made to fit his title.

I am unsure if these expanded titles are bestowed upon employees in lieu of pay rises but to make them feel important, to be one of the chosen elite, to have perceived importance and status.

One future development, I would support, would be to have business cards replaced with electronic lapel labels. They could be called iTags. The iTag could be worn proudly with the person’s name and title and would wirelessly update your phone/iPads contacts.

A further refinement could be that when we have meetings these electronic iTags would change their display to how much per minute the person costs the company and up on the electronic inter active white board there would be a running total of how much the meeting was costing.

This caused me to recall my time at a now long defunct company. Is it too far-fetched to consider every employee just like a running taxi meter?. Perhaps not, because when one of these Executive Senior General Head of Whatever asks the site foreman a question which is so dumb a fresh-faced apprentice could answer, we would all see that  these “promoted to the level of their own inefficiency”   managers are probably contributing nil and costing twenty times more than the person to whom they asked the question.

http://gkeating.com

Lost Profit

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It is often said “we learn from our mistakes”. But why, in the construction industry, do we keep making the same mistakes? When will we have truly learnt our lessons? How many times does a project not deliver the profit that was envisaged when we signed the contract?

There are many reasons for not achieving the target profit but there is a common thread. That is poor commercial management. For some reason builders focus so much on delivery of product without putting as much emphasis on the delivery of profit.

It sounds simple but there are three key issues

  1.  If the project team did what it set out to do
  2.  Got paid for everything it was entitled to
  3.  Only paid out what it was obliged to pay

1         If the project team did what it set out to do

We build to the drawings, specification and scope of works. Therefore, we purchase subcontracts, consultant services, and materials in the same manner. But we do not. We allow consultants to over design and under deliver. Subcontracts have gaps between trades. Materials such as concrete and reinforcing always exceed what was in the cost plan. The reasons for this is inexperienced staff, who simply do not fully know how to build and manage subcontractors and/or consultants.

2         Got paid for everything it was entitled to

We sign a contract so why don’t we understand it, use it, and extract every cent out of it. Often the member of the project team responsible for the day-to-day management of the finances is a relatively junior, young and less experienced individual. The big guns from head office only get involved when the project is starting to haemorrhage substantial dollars. The inexperienced site based contract administrator often does not want to “take on” the client or has not been given the authority to do so. They are reluctant to highlight potential/actual losses and can be overruled or intimidated by an over bearing wily project manager.

3         Only paid out what it was obliged to pay

If we start with the premise that the project team does not grasp these three key issues we need to have in place some method of monitoring them and being able to take corrective action before it is too late. That means setting projects up with robust reporting protocols. That does not mean head office go through the monthly report and try to act like the Spanish Inquisition with the project team. It means identifying before we start on site the areas where we know there will be issues. We need to ask the simple question: is this project team really up for this job to maximise our profit or is it a simple case of this team will deliver a good project but yes they are commercially weak.

I have lost count of the amount of times I have had to explain to people responsible for project profit what the terms committed cost, certified cost, margin on revenue, margin on cost, work in progress, accruals, discounted cash flow, aged trial balance. I have even had to explain the difference between a certificate and an invoice; revenue and profit; forecast cost to complete and forecast final cost.

So we need to train these young “Harry Potters” who peer at their computer screens all day, send off curt circulatory emails to all and sundry, but they hardly walk the job, engage with subcontractors and generally live their lives in a bubble. If you want to manage costs you have to be able to manage people.

by Gerry Keating

http://gkeating.com

No Subcontractors Thank You

CranesI recently struck up a conversation with a stalwart of the construction industry here in Brisbane. He had worked for the same company for over forty years. He started out as an apprentice, became a leading hand, foreman, site manager, and now a senior member of the construction management team. So we did what most of us construction survivors do, we exchanged war stories.

A common theme soon developed – most construction companies have forgotten how to be builders. Forty years ago we had a stream of apprentices who were the company’s future. Senior managers rose from the ranks based on ability and experience.

But the key point was that builders used to employ their own tradespeople to carry out the work with a very few specialist subcontractors. Nowadays a project manager is measure on how he can organise a rabble of subcontractors. If he is inefficient and disorganised, it costs the subcontractor. Using your own labour means if you are not organised it costs a fortune. To be organised you need to know how to build.

It could be argued that most construction companies set up a project with the minimum of their own staff, subcontracts out every trade, hire the cranes, hoists, scaffold, and they don’t even own a wheel barrow.

Of course the reason is simple. The client pushes the risk on the construction company, and in turn they push it on to the subcontractor. You cannot back charge your own labour force but it is easy to do it to the subcontractor. This style of project management is run on the same format as a shepherd herding sheep. As long as they are all moving in the right direction, just leave them to it. So the project manager herds the subcontractors and they build it.

This may be the norm in commercial and residential construction but is not the same story in the resources sector. Companies on mine sites tend to employ more of their own labour to carry out what would be subcontract trades. This is mainly due to the control exercised on the construction companies by the mine owners. However, due to the magnitude of these resources projects, there may be several joint venture construction companies who find themselves being treated by the mine companies in the same way a construction company would treat their subcontractors. They don’t like it, because being a subcontractor these days is the end of the food chain, having the biggest risk of not being paid but with all the responsibility that goes into a two hundred page subcontract.

So back to the construction stalwart. He is disillusioned with the industry he has given forty years to, he despises the short slightness of people who won’t employ apprentices, he shakes his head at Google Glass wearing, iPad toting project managers, wants to punch the light out of the Harry Potter lookalike who pays the subcontractors. But he still is cheerful as he can always look at his mark on the landscape that is he can take his grandchildren to see and touch not the jobs he managed but the buildings that he built.

by Gerry Keating

https://gkeating.com/