Illustration: Nancy Soulliard/ENR
Contractors these days often proclaim that times have never been better, saying, “If you aren’t making money now, you shouldn’t be in the business.”
Enjoy it while you can. Some of the corporations making money today won’t be in business 10 years from now, at least not in the same way, if recent history is a guide.
Just in the last decade, the corporate collapses include Guy F. Atkinson Co. of California (1997), Encompass Services Corp. (2002), J.A. Jones Inc. (2002), Stone & Webster Inc. (2001) and Morrison Knudsen Corp. (twice, first in 1996, and the second time in 2001 as Washington Group International Inc.). Other companies recently falling into financial trouble include the IT Group Inc., Modern Continental Construction Co., Dillingham Construction, The Austin Co. and Morse Diesel.
These big names fell hard and ended up under the control of a surety, in the protection of a bankruptcy court or sacrificing financial independence to new investors. Strong companies picked up assets cheap. Some continue to operate those assets under the old brand names, but others folded them into their own operations. For Modern Continental, which rose fast in the 1990s, little evidence remains that the company ever existed.
There’s also a human side to financial calamity. In many cases, subcontractors and suppliers lost millions, stocks plummeted and pensions shriveled. For some staff, insurance benefits evaporated, deferred compensation disappeared, careers skidded and credibility was shredded.
“At one time, all of the leaders of these companies were sitting in a room congratulating each other about how wonderful everything was,” says Hugh L. Rice, chairman of Denver-based FMI Corp., the industry’s top management consultant and investment banker.
Hugh L. Rice: Successful leaders often ‘manage themselves’ to failure.
Spurred by a committee of the Construction Industry Round Table, FMI last year set out to produce a deeper understanding of contractor failure. In particular, FMI wanted to know why big contractors fail and why the “industry has regularly witnessed smart leaders making what appear to be the same fatal mistakes that others have made.” FMI’s research staff interviewed 35 contracting and surety executives, sifted through studies of more than 80 contractors that had trouble, surveyed numerous companies, read literature on how successful businesses run aground and compared financial and historical data. Then, FMI’s Rice and Arthur Heimbach wrote a report called “Why Contractors Fail,” which is still in draft form.
In a key part of the report, FMI attempted to portray the mind of a typical contractor and describe the psychology of contractor failure. “After looking at our research, we asked ourselves if we could identify a certain mentality [of] people who run construction businesses that could be adding to the probability of them [getting] into trouble,” says the FMI report. “The answer is that we do believe that those who start and lead construction companies have certain propensities or mindsets that can set their companies on a path to success or failure.”
FMI says a typical contractor is an individual who is driven to grow, numb to risk, extremely opportunistic, overconfident and action-oriented. Along with these tendencies, contractors also often have a feast-or-famine mentality, a fear of making layoffs and the mind-set of a project manager rather than that of a chief executive. A kind way to characterize them would be to say they exhibit a heroic audacity. Another way would be to say they show exaggerated self-pride, overconfidence and excessive ego.
“Generally, if you are a contactor or know those who lead and own construction firms, most items on this list will immediately ring a bell,” says the FMI report.
Rice has seen plenty of wipeouts in his 35 years of construction consulting. He says the reasons usually given by contractors for financial disasters don’t hold up. “Normally, when naming things that cause companies to fail, [they mention that] the economy took a dive or [blame it on] the nature of industry or say it is because the jobs are risky. But there are too many examples of good companies that manage in the same field and do quite well,” says Rice.
The psychological picture painted by the FMI resuggests the ancient mythological story of Icarus. As retold by author Thomas Bulfinch, while escaping prison with his father by flying with wings and feathers partly held by wax, Icarus was “exulting in his career” when he disregarded his father’s advice and allowed himself to “soar upward as if to reach heaven…
The nearness of the blazing sun softened the wax which held the feathers together, and they came off. He fluttered with his arms, but no feathers remained to hold the air. While his mouth uttered cries to his father it was submerged in the blue waters of the sea…”
Are contractors prone to an Icarus Effect? Are they unable to keep their companies within a survivable trajectory?
“It’s an ego-driven business,” says Rice. “To be a contractor, you have to be an optimist and have to believe you can do what you are setting out to do because you are confident you can do it. When you think you are invincible, you do it until at some point you get smacked upside the head. I don’t care how good or smart you are, sometimes something will happen to you. Then, it’s a question of capitalization and whether you can absorb that loss and go on.”
The Signs of Trouble
In performing research for its study, FMI singled out some of the self-destructive attitudes at firms that had had a financial crisis. Sometimes, it could be captured in a single sentence:
“We’ll figure out how to staff it once we get the job.”
“We’ll make it happen and show them what we’re made of.”
“We’re right, and we’ll win in court.”
“All our training happens on the jobsite.”
When statements like these are made by the people at the top of the company, watch out.
In putting together a model of the paths to financial crisis, FMI emphasizes the industry’s problems with cyclicality, labor shortages and competitiveness. One special point concerns “derived demand,” the fact that contractors generally respond to work that is available and the implications that has for project timing and the inability to control things when a project starts.
Sometimes, the company culture is a laudable one that supports taking on projects for longtime clients and finishing them, but even that can prove fatal. “We had a good reputation,” says an employee of a contractor that went broke on a huge...