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Why Contractors Fail – Inadequate Cost & Project Management Systems

November 17th, 2011 by Bob Biehl

As discussed last month, the past few years have been a nightmare for the construction industry.  Companies are going out of business left and right; and competition for what little work that is out there has been fierce.  What should a construction company owner do?  If the answer is to keep the doors open and run the business in the best possible way, the owner should pay attention to the reasons that contractors fail.  I define failure, for purposes of this discussion, as going out of business. It is has been my experience that
contractor failure can be attributed to many factors.  Today I am going to focus on inadequate cost & project management systems as a factor in contractor failure.

For purposes of this discussion, I am not referring to accounting and job cost software when I refer to cost and project management systems.  I am referring to the relationships between estimating, project management/construction, accounting and job wrap up/analysis systems.

All too often, construction companies treat the components of the construction circle, as defined above, as separate silos that are independent of the each other. Successful contractors understand the dependency of each component on each other and how that dependency can lead to a more profitable company.

The following are examples of the dependent relationships between the components of the construction circle.  If these relationships are not managed properly, it can lead to failure:

  • Estimating always has current cost data from accounting to ensure an accurate bid based upon the plans and specs.
  • Project management/construction has the current estimate/budget in the job cost system to manage the project costs.
  • Project management gives accounting accurate cost to complete numbers on each project to allow accounting to prepare an accurate work-in-process schedule.
  • Accounting provides project management relevant and useful reports to project managers on a timely basis to allow the project managers to manage the cost of each project.
  • Accounting regularly updates the job cost software for proper labor burden and indirect job cost rates so project managers have accurate job cost records.
  • Estimating, project management, accounting and the management team are all analyzing each project in regular job meetings and at the end of each project to determine:  What went right? What went wrong? What, if anything, will be done differently on the next project?

As Director of Construction Industry Services at GBQ Partners LLC, I found that successful construction companies have processes and controls that maximize the power of the construction circle.  I have often facilitated meetings with estimators, project managers, the CFO and management team of my clients.  In that meeting, we open the lines of communication and discuss how to move from a traditional construction circle to
a circle where all components are dependent on each other – see diagram.

By moving from the continuous construction circle to the dependent construction circle, a construction company can improve its chances for success and profitability.

Does your Company know your costs?  Sounds simple but, it is my experience that
most contractors do not really know what their true costs are.  Next month we will explore the importance of knowing your costs and how not knowing can lead to contractor failure.

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