Beliefs are firmly held convictions that go largely unexamined but nonetheless influence our decision making without us being aware of them in the background of our thinking.
In last week's message, I listed ten beliefs that influence construction professionals’ thinking about the business of construction that surfaced over 40 years of research. I asked readers to report if they thought the ten "beliefs" were true or false. The early one-week results came in like this:
- Risk of failure is always at your door...Most contractors thought this was false.
- Some projects are not profitable… Many contractors thought this was false.
- A failure to make a reasonable profit on most projects erodes a contractor's ability...Most replied false.
- Most contractors do not utilize financial statements effectively to run their business...Most said true.
- CFOs are not admitted to top management decision making...Most said true.
- The construction industry has dangerously limited access to working and growth capital...Most didn't think about it.
- Contracts impose an unfair burden of risk on contractors...All agreed with this.
- No long-term, professionally developed succession plan...Most said this was true.
- No truly outside (independent) board of directors...Most said true.
- Growth is not always good...Most said this was false.
Psychologists tell us human nature is such that every stimulus we experience elicits a response. If someone accosts us in anger, we tense up, recoil, and strike back. This is how the human brain works instinctively and supports survival.
Research reveals that every stimulus that elicits a response from us is first filtered and processed by one or more beliefs. As our beliefs change, so do our responses and experiences. This simple shift changes everything in our lives, moving us from the passenger seat into the driver’s seat. It allows us to identify where we are and to navigate to where we want to go (in terms of our own objectives and definition of success).
STIMULUS -BELIEF- RESPONSE
Industry Belief #1. The Risk of Sudden Failure Most respondents said no.
It has been a central purpose of my decades in construction to examine commonly held industry beliefs and test them for accuracy and effectiveness. Back in the 70s I founded a firm that completed abandoned projects resulting from construction companies that suddenly ran out of money and failed. Almost overnight the firm grew to a national concern that completed hundreds of construction projects a year, and I began to study in earnest the frequency and causes of construction business failures.
- Most of the contractors that I dealt with were competent, experienced construction professionals who were surprised that they had collapsed.
- That fact made me realize that decisions were being made based on a set of beliefs that could not be accurate.
- These failed construction organizations were not incompetent or rare. The research revealed that construction businesses suffered the highest failure rate in American industry, second only to restaurants.
As our survey from last week reveals, despite overwhelming statistics, most construction professionals today do not believe that contractors are at a high risk of sudden failure.
The discovery of these industry beliefs altered my career path. I became determined to research the beliefs that influenced construction professionals’ decision-making and test them for accuracy and effectiveness. Much of my teaching for the past 30 years has centered around that theme.
Industry Belief #2. Some Projects Lose Money
- The response to this belief indicates that most construction professionals believe that they make money on just about all of their projects.
- Contrary to this belief, research reveals that the industry grossly underestimates the amount and frequency of losing projects.
- Research reveals that this is because of belief #4 - Most contractors do not utilize financial statements effectively to run their business...and they admit it.
Why don't contractors typically utilize financial statements to manage their business?
- Profit and loss statements on a project-by-project basis in construction are notoriously subjective because of indeterminate "cutoff" dates (the inability to timely and precisely match expenses incurred to revenue streams).
- The nature of contracting makes cash flow more vital than project-by-project profitability. The continuum of contracting is created by moving seamlessly from one project to another while billing and expenses lag behind. This unique construction industry business model has caused construction professionals to shift focus from individual project-by-project profitability and focus more on front loading cash flow to smooth over the bumps.
- Most construction firms are not public companies, so they are not required by regulations to file audited financial statements on a quarterly basis. This leads to a more relaxed approach to financial reporting and a more intense focus on ongoing business rather than what many contractors see as "ancient history".
The next series of messages will continue to examine the role of construction industry "beliefs". Don't miss it.