It's tough to build something on time and exactly as specified. It is even tougher to make money doing it. It seems like the deck is stacked against us. A project in progress is like a leaky vessel that oozes money out of every crack. Cracks can appear in a construction project before the project is even underway and spread as the project goes along. Let's look at the cracks through which the contractor's money literally pours out.

Leaky Cash Cracks

1. Buyers view construction services as a commodity when choosing the low bidder.
2. Competition puts downward pressure on profit margins which are slipping into low single digits.
3. Contractors provide a complex service over an extended period of time for a fixed price.
4. Projects are produced by a team of subcontractors over which there is limited direct control.
5. A chain is only as strong as its weakest link. Similarly our projects are at the mercy of the subcontractor with the most problems.
6. Subcontractors are dependent on a labor pool plagued by shortages, limited training, and immigration pressures.
7. Many construction materials are imported and subject to shortages and kinks in the supply chain.
8. Contractors finance ongoing operations relying on the credit worthiness and good faith of owners and designers for timely reimbursement.
9. Profits are subject to the vagaries of weather, labor shortages, and volatile material prices. And contractors are restricted by their fixed price contracts from passing inflation on to the buyer.
10. Contractors have limited access to relatively cheap public capital while their cost of capital is priced by the money markets with added banking fees.

These industry conditions place limitations on contractors that few recognize. Profits are limited by the cumulative experience of the contractor's management team. And projects outside the scope of this expertise usually lose money. Profitable projects are limited to a contractor's normal geographic area because work attempted outside that area is rarely successful.

Our Difficult Business Model

There are financial risks buried in our construction contracts and the first step is to recognize them.

• Our contracts originate with the project owners or designers. Over time the majority of project and financial risks have been placed on the contractors’ shoulders, rather than on the shoulders of the owner of the asset, where the financial risk belongs.
• Decades ago contractors began to compete with one another, bidding down the selling price of the work, sometimes to an even lower level than some project owners were prepared to pay in the first place. This business model depressed margins to an unsustainable level and rendered contracting services a commodity in the mind of the buyers. This unsustainable business model was the birthplace of profound financial risk.
• Eventually contractors who had become accustomed to acquiring work through fixed price performance contracts were introduced to various new contracting methods. After decades of experimenting with novel contracting processes, the risks still remained primarily with contractors. Contractors continue to compete for the work but with a shorter list of competitors selected by project owners. Not much changed as buyers continue to influence the pricing of the work (not the seller).
• The majority of the inherent financial risk in the construction process remains with the contractors. This imbalance continues unnoticed, or at least unacknowledged by project owners, designers, sureties, bankers, or even contractors. This model is accepted as the industry standard including the financial flaws hidden in every construction contract. 

Reexamine Your Beliefs

This construction business model has become hardened by history, and there seems to be little that modern contractors want to do about it. My hope is that I can encourage construction professionals to at least protect their businesses.

• Shift focus from "top line" revenues to "bottom line" profit objectives.
• Look before you leap by identifying the profound financial risks hidden in every construction contract and navigate them with care.
• As your company grows, professionalize your risk assessment in advance of contract execution.
• Put together a risk assessment team you trust and listen to their recommendations.
• Check your ego at the door. You might be able to build anything, but you can't build everything for a profit.