Lecture Topic: Strategic Planning
Presenter: Doug Strohmeier
Company:
Doster Construction
Position:
Manager of Business Development
Doug Strohmeier spoke on the importance of strategic planning and how it determines, shapes, and reveals the objectives/goals of a company. I found this lecture particularly fascinating and was intrigued by several views that Mr. Strohmeier offered on the overall process of developing a company’s strategic plan. This lecture was interesting because it affirmed many of the things I learned while getting my management degree and equated it to the construction industry.
Mr. Strohmeier caught my attention with the very first view he presented. It was his two classifications of a strategic pattern - the shotgun and the rifle approaches – that first drew me in. I had never considered a strategic approach in this way, but once I heard the analogy it made perfect sense to me. The shotgun approach was referring to a company that takes on a broad range of work, not particularly specializing in any one field. The rifle approach was referring to a company that is more precise, or specialized in one particular field. Just as the analogy implies, these two approaches are vastly different, but in the right situation they are equally effective.
After hearing the shotgun and rifle analogy, I applied it to the construction industry. A construction company that takes the shotgun approach is trying to capitalize by offering a range of services over a broad spectrum. This type of company would be trying to make a little money on many different types of work; it would capitalize on convenience. It would be able to service a wide variety of needs for one particular owner, making the construction process very convenient for that owner. At the same time, the amount of work that the company generated in one project would make up for some of the inconsistencies in the work it performed (inconsistencies because the company isn’t always performing the same tasks).
A construction company that takes the rifle approach is trying to capitalize by specializing in one particular field. In order for this approach to be successful, a company must perform at its maximum potential. This type of company is trying to make a lot of money on one type of work by performing at a high level of efficiency. This company would capitalize on its expertise in a particular field. Its expertise would be extremely evident when problems were encountered; chances are, the company has already seen your problem before and knows the best way to handle it.
The second way Mr. Strohmeier caught my attention was with his view of what should comprise an action plan. He stated that an action plan should have four specific parts (goals, objectives, measurements, and timelines.) He further stated that after performing an S.W.O.T. analysis, an action plan must be formulated for each objective in order to specify how the company is to achieve each goal.
I already knew that after a S.W.O.T. analysis has been performed the first step is to formulate a plan for the direction of the company. (This is apparent before the S.W.O.T. analysis is performed, or the analysis would serve no purpose.) However, I think that his view of formulating an action plan for each objective/goal is unique. Mr. Strohmeier’s recommends that a company to set reasonable goals, outline specific objectives on how to reach the goals, set measurements for these goals, and set a time frame for these goals to be accomplished.
This process would help a company to achieve its ultimate purpose. It would force the company to completely rationalize the action plan by forcing them to look at it like a puzzle; examining the bigger picture one piece at a time. In turn, this process would force the company to think about each and every component of the plan. Ultimately, causing the company to evaluate its composition and determine what is really achievable. Following these steps in formulating an action plan will eliminate the chance of formulating an overall strategic plan that is unattainable.
Lecture Topic: Business Start-Up
Presenter: John Teeples
Company:
DE/TE Builders
Position: Owner
John Teeples outlined key issues that need to be addressed when starting a business. He discussed many start-up aspects that are essential components to establishing a successful business. Many of these topics were very familiar to me because of various undergraduate classes I had taken. But many of his views on these topics went above and beyond what I learned in classes. The thing that most intrigued me were the five items that he felt were key issues needed to be addressed when starting a construction company. They were legalities, banking, accounting, bonding, and insurance. The remainder of this section will detail aspects of these five items that I found to be most useful.
The first key issue in starting a business, according to Mr. Teeples, is to secure the services of a lawyer. A lawyer helps you decide what legal form of business is best for your company, and files the necessary documents to start a company. They also help you with specific, construction-related needs such as claims. It was his recommendation that separate law firms, each specializing in appropriate fields, be secured for these needs. I never realized that a lawyer would have to play such a vital role in getting a business of the ground. This made me realize how important it is to start a business on the right foot.
Mr. Teeples emphasized the importance of receiving a line of credit. He even went as far as to say, “beg, borrow, & promise” to get it. In my opinion this is something that will never be covered properly in class. I think that sometimes people in the construction industry take banks for granted. Any construction company takes a lot of money to operate and 9 times out of 10, it is not the general contractor’s money (it’s the banks money) allowing it to operate. The problem with construction companies is that they have to cover 100% of the cost of a project, or 100 % of the cost of a portion of a project, before they get paid. This time lapse before getting paid can sometimes be several weeks or months. For this reason, it is obvious that banks play a vital role in the building process.
Mr. Teeples also emphasized the importance of an accountant. Taxes are not at all visible when looking at a construction project, but they still play a major role in the process. He informed us that a good accountant will advise you in the method of accounting that is best for your company. This is an aspect of construction that is of extreme importance and has the potential to be easily overlooked. The method of accounting selected controls the way taxes are paid on company income. In turn, this can affect the amount of working capital available to the company, potentially creating banking issues or problems. I found very insightful for anyone considering starting his/her own business.
Mr. Teeples then detailed the troubles that a start-up construction company has with bonding. He stated that bonding companies look at start-up construction companies as “too risky.” Considering that almost all commercial construction requires bonding, this creates a major problem. I guess I looked at bonding as just another start –up cost associated with construction, not something that you have to qualify for in order to be able to start construction. He also emphasized the importance of continually checking other bonding companies to make sure that you are getting the best rate available.
The next topic that covered also came with the advice to continually check rates. I was unaware that insurance rates for an established construction company could vary significantly from company to company. I had also never really stopped to think of all of the different insurance that was needed to run a construction company. Worker’s compensation, automobile liability, umbrella liability, and builder’s risk all play a vital role in protecting a business.
Lecture Topic: Construction Banking
Presenter: Jerry Coleman
Company:
Sun Trust Bank
Position:
Manager Of Commercial Lending
Jerry Coleman spoke to our class on the topic of Commercial Banking. He discussed some of the things his bank looks for when considering a commercial loan. His comments were very poignant. He stated that the bank he works for is not a “pioneer bank;” they are never the first in on a new project, more likely the fifth, or sixth. His views reinforced what John Teeples suggested about always “checking” to make sure you are getting the best available deal. Mr. Coleman emphasized that his bank was not there to help pave the way for someone entering the construction market, but rather to help him/her through the rough spots.
He stated, “ In the construction industry you have the owner vs. the contractor vs. the architect vs. the sub contractor vs. the supplier.” This statement summarizes SunTrust’s views on commercial lending - very risky with many potential pitfalls. I guess I need to remember the construction industry is a high-risk, low-margin business. From the outside looking in, I can see how a commercial-lending institution would want to cover all the bases. This particular bank does not specialize in construction lending; therefore seeing it as a risky investment.
One of the precautionary measures SunTrust takes on any construction-loan application over $750,000 is to have an automatic construction risk review. The contractor will be required to provide plans, specifications, and a cost breakdown for the project. The bank will have a third-party consultant conduct a cost and feasibility study to help the bank decide whether to grant the loan. If the loan is approved, this same consultant will also do monthly inspections of the project while it is under construction to protect the banks interests. The borrower will be expected to pay all of the related cost. Mr. Coleman stated that most of the time, the consultant usually found ways to save money that exceeded his/her fees.
This whole process was a brand new concept to me. I think that in the bank’s point of view, this cuts the risk in half. More than likely, if a contractor needs a loan for that amount of money, it is a substantial construction project. This contractor would not have been awarded the project if he/she did not already have a proven performance track record. Then the bank seeks a second opinion from an industry expert. If is the contract is awarded, this consultant constantly monitors the project to make sure that it is staying on track. This is almost a “no lose” situation for the bank. Although I think this practice is a little conservative, I feel that the overall process in very thorough. I think this process would be very beneficial in helping establish a new relationship between a contractor and a banker. I also feel that when a contractor has a proven track record with a bank, this process might damage the relationship with that bank. One could easily interpret this process as “looking out for number one.”
The most salient concept I took from Mr. Coleman’s presentation was “cash is king.” His presentation, coupled with John Teeples, emphasized that when you want to get support from a bank on a construction project you must exude confidence and the willingness to lay it all on the line. Although each bank has a different opinion on how much cash (or equivalents there of) need to be laid on the line, one thing is very important; this is what shows the bank your commitment to the project.