A brief look at root cause analysis to common issues in the construction industry firms

By Gregg Schoppman, Principal, FMI Corporation

Go with your gut or lead with your first instinct. These wise words often provide leaders a gut check when con-fronted with challenging or difficult decisions. There are plenty of situations where one’s instincts are accurate and lead to the right strategies and tactics being deployed, although decision-making requires a deep understanding of the facts and time is not always a strong ally. When con-fronted with a seemingly “easy decision,” leaders are quick to act with the seemingly easy lob they are tossed. Consternation has no place when business moves at frenetic break neck speeds. However, without careful rumination of the root causes, leaders can make decisions that simply treat a symptom rather than the true cause of an issue. Great leaders make decisions based not simply on superficial information; they dig deep enough to discover real solutions. There are numerous situations in the construction industry that lend themselves to deeper reflection. 

Shop/Yard Support

“Our Yard Manager is very weak – he/she never gets us the materials, equipment, (insert item here) when we need it. I think we need a new manager…”  The quick decision would be to source a replacement equipment man-ager. Problem solved. Or is it?  Digging deeper on one of the most common issues within firms will expose a more insidious root cause. Consider a firm’s supervision—how many calls to the equipment manager occur daily?  Better yet, how many of these calls would constitute “emergency calls?” Figure 1 is a quick illustration of this phenomena.

Over a seven-week span, the ratio of calls reflected at its worst a 22:1 ratio of emergencies/planned calls to its best of 4:1. No one will disagree that emergencies in the construction industry are commonplace. However, they often become a rule rather than the exception—too often favoring reactionary behaviors in lieu of proactive planning. The costs associated with emergency deliveries, quick shipments, last minute rentals, and the overarching lost productivity on job sites can quickly erode margins. The knee-jerk reaction is to cast aspersions on the equipment manager when the real culpability lies in the reactive behavior of field leaders. 

Collections

“Our Controller/CFO isn’t doing a great job. Our collections are out of whack.”  This is a classic case of shooting the messenger. For many organizations, the Finance Department 

is the last bastion of money management. The reality is that many of these issues concerning timely collection fall squarely on the operations team. Who is closest to the project?  Who influences the invoicing process? Who handles those pesky change orders that often snarl collections? Accounting may have a stake in the process, but if the managers are “hands off” then no one is managing the money.

Cost Overruns 1

“Our estimating is horrible. We always overrun the budget…”  There are many ways to look at this comment. The answer is usually in between. For instance, does estimating get adequate feedback on a project through some sort of post-job review or is the feedback limited to anecdotal water cooler chat?  Put another way, does the project team close the loop on all project costs, including items that may have positively impacted costs (READ: Those items you beat the budget on but estimating never hears about). This doesn’t even begin to touch on issues related to “cost to complete” exercises which sometimes look more like beautiful works of fiction, but may be project managers simply manipulating cost codes. In total, there is no shortage of complications that stem from a lack of job cost integrity.

Cost Overruns 2

“We cannot make money on (insert phase code here). Maybe we should get out of that business…”  This is a profound business decision—where to play and where to exit. However, consider this scenario:

A drywall company has three labor cost codes – Framing, Drywall, and Finishing. A superintendent charges time to the framing code only to realize they are over budget in that category. The superintendent moves the time to the drywall code and then begins to overrun that budget as well. Finally, after entering the finishing stage and subsequently overrunning that budget, the company deduces that it is a poor finishing company. The firm may be strong at finishing but the cost reports show otherwise.

First, why would a superintendent charge time inappropriately?  Is it ego? Is it to avoid an awkward conversation or a write up?  Examine this root cause first. Once that is determined, leaders can make more informed decisions on what trades, niches, markets, etc. they truly have a competitive advantage and what trades are loss leaders.

The Compensation Discussion

“We must not be paying our people enough – they keep leaving…”  In an employee driven market, one could easily miss the true root causes here.  Compensation is a tricky game that seemingly never has a strong solution. However, don’t always confuse compensation for being the real reason behind employee flight.  It is an easy out. People mainly leave companies because of their relationship with their immediate supervisor and culture. Many employees will work for less when they are surrounded by a strong team that has a positive culture.  There is no question that some individuals are monetarily motivated, but it would be faulty to view everyone through this same lens. A firm can spend a great deal of money on this problem only to find they are a toxic cultural cesspool.  At that point, it is really hard to “get the toothpaste back in the tube.”

The Best Customer

“They are our best customer. We’ve worked for them for years and they give us all of their work yet we never make any money…”  The vortex is strong with this comment. Rather than looking at the share of the customer’s wallet, look at WHY they are selecting your firm?  If the answer is “because we were always low,” you might have correctly correlated your success rate to your declining margins. Many customers will accept mediocrity, especially if they have budgetary considerations. If they see no additional value, the only equalizer is cost. If your firm is not routinely examining their estimating/actual costs on a client/market/niche basis, it could be providing work for free. In that case, it is no wonder why you get all your customer’s work. Make sure you are being selected for the right reasons.

Decision-making is not easy and in a sea of data, it is tough to make informed decisions when business is moving at the speed of light. Senior leaders must take stock in their strategy and avoid these status quo responses. Without discernment, it is easy to see a flock of ducks that simply cloud our judgment as leaders.

FMI is the largest provider of management consulting, investment banking and research to the engineering and construction industry. We work in all segments of the industry providing clients with value-added business solutions. For more information visit www.fminet.com or contact gschoppman@fminet.com.