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1 IMPACT OF KEY MANAGEMENT PRACTICES ON OVERHEAD TO DIRECT COST RATIO FOR SPECIALTY CONSTRUCTI ON CONTRACTORS By MATT STEVENS A DISSERTATION PRESENTED TO THE GRADUATE SCHOOL OF THE UNIVERSITY OF FLORIDA IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF DOCTOR OF PHILOSOPHY UNIVERSITY OF FLORIDA 2012
2 2012 Matt Stevens
3 ACKNOWLEDGMENTS My wife, Gloria Ann, is to be thanked first and fore most. I greatly appreciate her quiet encouragement. She supported me at times just through her silence and lack of demands on my time. Other times, she cleared my thinking with questions and insights. We have known each other for many years and were married during my PhD coursework. She is the reason I did not drown in all this. My gratitude is also for my children, Olivia Kathleen and David Matthew. They have been very patient with me. Each possesses special qualities. My children are not average. What parent would n o t say that? However, they work hard and are independent in their decisions. What parent would not want that? My hope is the continuous learning I have pursued encourages them to do the same and those special qualities become even more pronounced. My committee is my leverage point in this important academic pu rsuit. Drs. Ian Flood, Ray mond Issa, Edward Minchin and Yuan Chow were insistent on improving the proposal, research methodology, data collection, analysis, conclusions and recommendations each time we met. They were encouraging when they needed to be but also stern when it was needed. Last, I want to mention the University of Florida and the Rinker School of which I will always be a part. They provided the processes and the components including superb professors to make this possible. I think in more dep th and breadth than I did 5 years ago. My family, my committee and the University deserve much credit. They inspired and directed me in many ways.
4 TABLE OF CONTENTS page ACKNOWLEDGMENTS ................................ ................................ ................................ .. 3 LIST OF TABLES ................................ ................................ ................................ ............ 7 LIST OF FIGURES ................................ ................................ ................................ .......... 9 LIST OF ABBREVIATIONS ................................ ................................ ........................... 10 LIST OF TERMS ................................ ................................ ................................ ........... 11 ABSTRACT ................................ ................................ ................................ ................... 13 CHAPTER 1 INTRODUCTION ................................ ................................ ................................ .... 15 Problem Statement ................................ ................................ ................................ 15 Aim of this Research ................................ ................................ ............................... 16 Objectives ................................ ................................ ................................ ............... 16 Overview ................................ ................................ ................................ ................. 17 Outline of Dissertation ................................ ................................ ............................. 17 2 LITERATURE REVIEW ................................ ................................ .......................... 20 Overview ................................ ................................ ................................ ................. 20 Construction Contractor Organizational Effectiveness ................................ ............ 20 Specialty or Subcontractor Construction Issues ................................ ..................... 21 The Work Acquisition Process ................................ ................................ .......... 21 Elucidation of the Misalignment ................................ ................................ .............. 22 Cause s of the Misalignment: Conflicting Perceptions ................................ ....... 23 ................................ ............................ 25 Good News or Bad News? ................................ ................................ ............... 27 Conceptual Framework and Organization of Construction Contracting Processes ................................ ................................ ................................ ............ 28 Information Management ................................ ................................ ........................ 31 Causes of Contractor Failure ................................ ................................ .................. 32 Misalignment of Management Practice Research ................................ ................... 34 The Build Work Pr ocess ................................ ................................ ................... 35 The Get Paid Process ................................ ................................ ...................... 35 The Keeping Track Process ................................ ................................ ............. 36 Or ganizational Effectiveness ................................ ................................ .................. 36 Practices and Processes Defined ................................ ................................ ........... 38 State of Practice Research in Construction ................................ ............................ 40 Limited Research on Specialty Contractors ................................ ............................ 42
5 The State of Accepted Practices for Specialty Contractors ................................ ..... 42 Focus on Non Survey Outcomes in Construction Research ................................ ... 43 Peer Comparison ................................ ................................ ................................ .... 43 Measuring Correlation, Succ ess and Failure ................................ .......................... 44 Importance Performance Analysis (IPA) ................................ ................................ 45 Practice Databases ................................ ................................ ................................ 47 Next Practices ................................ ................................ ................................ ......... 48 3 STRATEGY AND METHODOLOGY DESIGN ................................ ........................ 54 Solicitation for Participating Companies ................................ ................................ .. 57 Financial Performance Measure ................................ ................................ ............. 57 Survey Data Capture ................................ ................................ .............................. 61 Statistical Analysis and Treatment ................................ ................................ .......... 61 Hierarchical Multiple Regression ................................ ................................ ............ 63 4 ANALYSIS OF RESULTS ................................ ................................ ....................... 64 Descriptive Statistics ................................ ................................ ............................... 64 Ratings of Practices ................................ ................................ ................................ 65 Results of Disparity Measure ................................ ................................ .................. 71 Multiple Regression ................................ ................................ ................................ 73 Linear Regression of Compliance to All Practices ................................ .................. 78 Size of Data Set ................................ ................................ ................................ ...... 79 Analyzing the Four Major Categories of Practices ................................ .................. 80 Scatter Plot Diagram ................................ ................................ ............................... 80 Two Way Analysis of Variance ................................ ................................ ............... 81 ANOVA ................................ ................................ ................................ ................... 83 Pearson Correlation ................................ ................................ ................................ 83 5 CONCLUSIONS ................................ ................................ ................................ ..... 86 Research Objectives Addressed ................................ ................................ ............. 86 Good Operating Practice Selection ................................ ................................ ......... 87 Measure the Value of Selected Practices ................................ ............................... 89 Allowing for Self Selection of Importance by Specialty Contractors ........................ 89 Measuring Performance ................................ ................................ .......................... 90 The Ultimate Value of Selected Practices ................................ ............................... 90 The Value of 4 Categories of Practices ................................ ................................ ... 91 Good Operating Practices ................................ ................................ ....................... 92 Application of Model Results ................................ ................................ ................... 92 Opport unity to Advise Prescriptively to the Construction Industry ........................... 93 Future Research Recommendations ................................ ................................ ...... 93 APPENDIX A SURVEY INSTRUMENT OF 154 PRACT ICE STATEMENTS ................................ 95
6 B PEARSON COORELATION OF PRACTICE STATEMENTS ............................... 122 C SAMPLE INDUSTRY FINANCIAL DATA ................................ .............................. 155 LIST OF REFERENCES ................................ ................................ ............................. 160 BIOGRAPHICAL SKETCH ................................ ................................ .......................... 169
7 LIST OF TABLES Table page 2 1 General Waste Percentages in Construction ................................ ...................... 26 2 2 Causes of contractor failure reported by SIO. ................................ ..................... 33 2 3 Analysis of Construction Research Focus ................................ .......................... 49 2 4 Literature Review Content Summary of Construction Research Focus .............. 51 3 1 Analysis of Various Financial Measures of Construction Firms .......................... 59 3 2 Example Income Statement Format for Specialty Contractors ........................... 60 4 1 Descriptive Statistics of Cases in Study ................................ ............................. 64 4 2 List of Participating Companies and Their Results Sorted by % Difference to Peer O H/DC Ratio ................................ ................................ .......................... 65 4 3 Ten Highest Rated Practices in Terms of Importance (Descending order). ........ 67 4 4 Ten Lowest Rated Practices in terms of Importance (Descending order) ........... 68 4 5 Practices Rated Highest in Performance (Descending order) ............................ 69 4 6 Practices Rated Lowest in Performance (Descending order) ............................. 70 4 7 Practices with Highest Disparity of Between Importance and Performance Ratings Highest on Top ................................ ................................ ................... 72 4 8 Practices with Lowest Disparity of Importance Rating minus Performance Rating Lowest on Bottom ................................ ................................ ................. 73 4 9 Variables En tered / Removed ................................ ................................ ............. 74 4 10 Model Summary ................................ ................................ ................................ 74 4 11 ANOVA Between Variables ................................ ................................ ............. 74 4 12 Coefficients of Predictor Variables ................................ ................................ ...... 75 4 13 Coefficients of Predictor Variables Continued ................................ .................... 76 4 14 Two Way Analysis of Variance Table Between Categories of Practices ............ 82 4 15 Analysis of Variance ANOVA Between Categories of Practices ................... 83
8 4 16 Pearson Correlations of Categories of Practices ................................ ................ 84 C 1 Participating Contracting Organization Description ................................ .......... 159
9 LIST OF FIGURES Figure page 1 1 years ago as measured in constant (inflation adjus ted) dollars. ......................... 18 2 1 ................................ ............... 30 2 2 Efficient construction contracting processes are comprised of good operating practices. ................................ ................................ ................................ ............ 40 2 3 Importance Performance Matrix. ................................ ................................ ........ 46 3 1 Research Strategy and Methodology Design Step s ................................ ........... 54 4 1 5, 6 or 7) Practices against The Performance of Them (X scale). ...................... 77 4 2 against Their Performance of Them on X scale. ................................ ................. 79 4 3 Scatter Plot Diagram of Categories of Practices to Peer OH/DC % Difference .. 81 A 1 Example from Study Contractor financial analysis of income statement ........ 121
10 LIST OF ABBREVIATION S AROI Annualized Return on Investment BIM Building Information Modeling CPM Critical Path Method DC Direct Cost GO P Good Operating Practices IPA Importance Performance Analysis NAICS North American Industry Classification System OH Overhead OH/DC Overhead to Direct Cost ROI Return on Investment TQM Total Quality Management
11 LIST OF TERMS A/R D AYS O UTSTANDING Accou nts receivable days that it took for client to pay billing. A/P D AYS O UTSTANDING When supplier, subcontractor, or service provider wa s actually paid B USINESS M ANAGEMENT P ROCESS Those practices that encompass the supervision, monitoring and management of the construction business organization including personnel management, home office administration, strategic planning and overall management of global processes of projects. C URRENT A SSETS TO T OTAL A SSETS R ATIO Current Assets divided by Total Assets. Th e relative liquidity of a company's total assets is important to most financial analysts. Th is ratio is used to measure this overall relative liquidity C URRENT R ATIO Current Ratio equals Current Assets divided by Current Liabilities D IRECT C OST Those co sts that are typically due to project or field operations. This category of cost customarily comprises of labor, material, equipment, subcontract and general conditions expenses K EEP T RACK P ROCESS Practices that are considered 1) Financial Management 2) Me asuring of Compliance to Process es and practices N ET E XCESS (B ILLINGS ) OR C OSTS Costs plus Estimated Earnings in Excess of Billings divided by Estimated Earnings O VERHEAD General and Administrative Expenses typically associated with home and branch offi ce operations and not with field or project operations. P EER OH/DC % C OMPARISON The difference Expressed in percentage of OH/DC between the participating specialty contractor and the peer average. This may be thought of overhead efficiency. P ROJECT M ANAGEM ENT P ROCESS Practices that are focused on a construction
12 Scheduling 4) Labor Management 5) Contract Requirements Adherence. P RODUCTIVITY It is defined as an input to output Ratio. Can be 1) Revenue dollars per employee 2) Hours per unit installed 3) Gross profit per employee hour, Q UICK R ATIO Cash plus Accounts Receivable divided by Current Liabilities W ORK A CQUISITION P ROCESS PRACTICES THAT ARE C ONSIDERED 1) QUANTITY ESTIMATING 2) COSTING OF QUANTITY ESTI MATE 3) MARKETING 4) SELLING 5) BIDDING 6) PROPOSING W ORKING C APITAL Current Assets minus Current Liabilities. A measure of the relationship between the current assets and the current liabilities less material inventory of a contractor. High working capit al is essential if a contracting organization is to pay its bills early or on time
13 Abstract of Dissertation Presented to the Graduate School of the University of Florida in Partial Fulfillment of the Requirements for the Degree of Doctor of Philosophy IMPACT OF KEY MANAGE MENT PRACTICES ON OVERHEAD TO DIRECT COST RATIO FOR SPECIALTY CONSTRUCTI ON CONTRACTORS By Matt Stevens December 2012 Chair: Ian Flood Cochair: R. Raymond Issa Major: Design, Construction and Planning Currently, ther e are n o wide ly accepted standard industry management practices for specialty construction contractors. The literature review revealed little research has been performed to determine a set of operational or business practices and their ef fect on overhead t o direct cost ratio. Specifically, t here is no confirmed set of practices t hat are correlated to specialty contractors Instead, despi te these practices having crucial impact on project safety, cost, production quality, schedule s bu siness health, specialty contractors have had to learn and adapt their construction practices based on their trial and error experience s Total Quality Management (TQM) and Lean Production Methodology (LPM) do not go far enough to guide a construction firm in its operations TQM and LPM lead to a framework and stop short of capturing specific practices. To redress that gap in the industry this research strives to identify a set of practices correlated with lower overhead to direct cost ratios in specialty c ontracting. The term used here describes the specific task a A methodology was developed to standardize specific measurable and efficient
14 opera ting practices. Several industry sources contributed specific practices that were used for hypothesis testing This type of research is a new line of inquiry into the specialty contracting industry sector The results of the study indicate d that the practi ces valued by the firm must be continuously executed. The financial correlation results indicated that the level of disparity between importance and performance predicts whether a firm exceeds peer performance or not There are some universal practices tha t are rated highest by all participating contractors. However, some variance s exist in specific practices for each subcontracting firm depending on its characteristics. This study concludes that specialty c ontractors must consistently and continuously exec ute if they are to exceed their peer overhead efficiency average The prescriptive process derived in this study is the next step for specialty contractors who are pursuing TQM and Lean construction goals have to focus on
15 CH APTER 1 INTRODUCTION Problem Statement Currently there are no standardized business and project practices that specialty contractors can study, capture adopt and implement when they start their business. To ensure successful startups, or business turnaro und a standardized set of construction business practices is needed. The same is true when a profitable firm desires to improve performance. Historically, m ost practices are learned through observation of others, and experience based on trial and error T his has led to business destruction in the construction contracting industry evidenced by the fact construction business es are second in bankruptcy statistics only to restaurants (Clough and Sears 1994 ; Dun and Bradstreet 2011 ) The construction industry has no theory of organizational production. There exist no guiding principles or practices for contractors to use in conducting their business (Ballard and Howell 1997). This research intends to determine guiding principles for specialty contractors to co nduct their business. For hundreds of years, construction has played a significant role in the population. With that, the qualities of personal and professional lives improve Therefore, construction plays a key role and its efficacy is of critical importance for Overall, there is limited professional research literature about practices for construction contractor s even though a si gnificant portion of construction in this country
16 is performed by these firms (Arditi and Chotibhongs 2005). Additionally, o n site management practice research is Thomas and Horman 2006). Th is study seeks to identify good operating prac tices (GOPs) for specialty construction contractors project safety, cost margins, production quality, efficiency, and thus, produce overall business health Aim of this Research T he aim of this research is to identify and determ ine the most significant of the selected practices (OH/DC) ratio Certainly some will be highly correlated to positive organizational outcome s and others will be negatively correlated. To discov er and communicate both types helps the industry. The value of this effort is t o create better construction service providers. Th e intent is to continue the standardization of practices within the construction industry. It should lead to a more profession al industry. If the selected practices can be accurately correlated, practi ti oners will accept th better construction business processes. Additionally, c onstruction service buyers will have one m ore tool with which to gauge the quality of prospective construction service providers. Objectives Four objectives have been deemed to be valuable outcomes for this research on specialty contractors They represent the following major goals : Determine co mmon practices that positively influence overhead efficiency in managing project costs. Determine common practices that are negatively correlated to overhead efficiency in managing project costs. Create a linear model for the value of and compliance with the selected practices
17 Determine an approach to applying this research to construction specialty contracting organizations. Each objective is targeted to add to the greater understanding of the specialty construction business. Overview During the rec ession that started in 2008 construction firms eliminated marginal employees, leaving core employees who were generally more cross trained. With all the advances in professionalism, methods, technology, and human resource training, an increase in producti vity similar to other industries should have occurred in construction However, this has not happened. Instead, with the exception of a brief upsurge in 2009, possibly a ttributable to the American Recovery and Reinvestment Act of 2009 (ARRA), p roductivity has steadily declined since 2005, and it is currently measured to be lower than it was in 1997 ( Figure 1 1 ). This decline in the output (revenue dollars per employed construction person) to input (number of people employed) ratio in all companies classifie d as construction contracting organizations is difficult to comprehend. How can construction productivity be lower today than it was fifteen years ago? Outline of Dissertation Chapter 1 introduces the problems to be examined in the construction contracting discusses the relationship between specific business practices and financial results.
18 Figure 1 1. er than 15 years ago as measured in constant (inflation adjusted) dollars. Source : U. S Bureau of Labor Statistics and U.S. Department of Commerce. Chapter 2 contains a literature review of the research in the areas of organizational effectiveness, specia lty contracting issues, and measurement of business performance relevant to the present research. Chapter 3 gives problem statement and explains the research objectives. It also explains the research strategy adopted in this study and describes the resear ch design and methodology, including data collection methodology and data analysis approaches. Chapter 4 describe s the general approach of evaluation used to analyze the data. Data analysis techniques included the Importance Performance Analysis, Regressi on Analysis, Pearson Correlation ANOVA and Factor Analysis. This will include an overview, application, and validation of the methodology used in this study. Chapter 5 reports the statistical results of the data analysis and discusses application of thes e data to business practices to increase organizational effectiveness $110,000 $115,000 $120,000 $125,000 $130,000 $135,000 $140,000 $145,000 $150,000 $155,000 $160,000 Constant $ per Employee U.S. Construction Labor Productivity
19 and minimize or eliminate those activities that decrease effectiveness This will include an overview, application and validation of methodology. Chapter 6 assert s conclusions based on the data and its analysis. Further research recommendations are offered.
20 CHAPTER 2 LITERATURE REVIEW Overview To create a framework for research, a review was undertaken of previous research including current topics, related trends and methodologies. In this first step, no studies were found that research includ ed all the following: multiple practices, their importance, to the performance of them and their effect on financial outcome for a specialty construction firm. Although t here is limited research o n the topic of specialty contractors, review of the literature revealed four areas of particular importance to determine good operating : (1) Contractor Organizational effectiveness (2) Specialty or sub contractor constru ction issues (3) G ood operating practices or processes for specialty construction contracting firms (4) Financial correlation s to practices or process es in the construction industry Construction Contractor Organizational Effectiveness Researchers have taken many paths and used several perspectives to understand construction contractor organizational effectiveness and several m odels criteria, and indexes have been created Some studies have taken a predicti ve approach performance. These fo cus on selection of the highest value contractor organization for a future project. (Waara and Brochner 2006 ; Hartmann 2009) A listing of criteria has been part of this. In other studies, the focus has been determining the probability of a fa ilure. ( Suarez 2004; Dikmen et al. 2005; Marsh and Fayek 2010; Mahamid 2012)
21 Other s have sought to quanti fy organizational flexibility The reason is clear; the to effectively manage the constant change in the industry (Lim et al. 2011) These are based on a generalist view. The question remains: what specific actions or tactics (not philosophy or general processes) should a construction organization execute for organization al effectiveness ? Specialty or Subcontractor Construction Issues It is well accepted that for specialty contractor to survive, the firm must acquire its resources economically and utilize them efficiently and effectively. Resources such as : management talent, craft labor, material and e quipment make up the majority of project and organizational costs and make up the most of the means of production Constant vigilance concerning these resources, their whereabouts their use and the overall cost of use in producing work must be normal exec utive behavior and practice. Given that construction was one of the least profitable businesses in 2010 (Bloomberg Business Week, 2011) this is a highly critical focus This resource utilization can also be described as asset productivity. Fixed assets current assets and personnel are resources. Making them more productive in terms of installed work and administrative compliance is the focus. There are four specialty contractor processes examined: work acquisition, building work, get ting paid and last ly keep ing track. Each of these is sequential and make for a business cycle ( F igure 2 1 ) The Work Acquisition Process Acquiring work is crucial if a contractor is to build work. After many attempts and no success in being awarded a project, client billings and payment s do not materialize and a contractor may cease to exist.
22 There are two large sub processes of any bidding or proposal process. The first is the decision of whether to bid or not ( Brook 2004) If a contr actor bids and then wins a project beyond its capabilities to build or at a price that does not cover its overall cost, then damage to finances occurs (Lar yea and Hughes 2011). Elucidation of the Misalignment Construction service buyers with an inordinate focus on compliance to the letter of contract requirements, regardless how much money this costs the contractors and their subcontractors, may remain unengaged in constructability issues or the smooth transfer of information between them and the contracto rs. They feel little responsibility for the process, remaining content to demand results without their cooperation to assist in getting it done. Legacy specifications and plan details may lack necessary updates. They may inconsistently process submittals. Consequently, product submittals and request for information (RFI) responses may be late, which impacts negatively on crucial segments of the construction process. There may be no iterative method by project parties to ensure that a complete and constructi ble set of plans is created. by Email, spending minimal time in face to face meetings. This pattern runs contrary to recommendations by experts in the field. Pocock et al (2006) state: The single most frequently listed obstacle to constructability was a lack of open communication between designers and builders. Owners in particular can create opportunities for more open communication by selecting appropriate contract type s, project delivery methods, and project partnering,
23 and by requiring a formal process that incorporates construction experience early in the project. Ballard (1993) notes an example of an owner keeping design cost below a specified percentage of the total installed cost. Although the practice is not endorsed by designers and contractors, it may be happening consistently in projects and would explain the lack of time (which is billable by designers and a cost to project owners) spent on constructability iss ues. Conversely, when productivity is the primary focus by the project team, the progress each month. Productive construction materializes in billings that are higher t han cost incurred. The current research has been undertaken with the belief that employee productivity must be focus of contractors for their business to survive. When the overarching emphasis is on minimizing project owner involvement with little care for contractor efficiency, quality production is sacrificed. Causes of the Misalignment: Conflicting Perceptions One significant cause of this misalignment lies in conflicting expectations among stakeholders in the construction process. A recent study emplo yed an expert panel to examine roles and responsibilities of owner managing contractor (OMC) processes (Elbarkouky and al Fayek 2011). The investigators looked at whom owner or contractor should execute forty six typical tasks in the contracting process. S ix experts zation and two from EPC contracting firms were queried in a fuzzy logic based process. Results identified 40 tasks that were agreed as to
24 g no consensus was reached regarding who should be responsible for these six tasks: (1) (2) Integrating the execution schedule with the cost estimating and cost control; (3) Determining esti mate basis for facility components; (4) Keeping records of the summary of charges as reflected by cost accounts; (5) Finalizing the front end engineering design (FEED); (6) Preparing the design requirements standards. (1)The organizational chart, (2) integration of e xecution and cost (2), and the two design responsibilities (5) and (6) are especially noteworthy, because these tasks are pre project planning activities. The value of this type of planning is high and therefore critical (Laufer 1987; Menches et al. 2008; Hanna and Skiffington 2010). The nature of the misaligned issues points to an unsettled relationship between the construction service buyer and construction contractor on critical areas affecting productivity. Similarly, other research found that these st akeholders disagree about 46% of the duties that a Construction Manager should un dertake (Arditi and Ongkasuwan 2009). Furthermore, this may signal conflicting expectations between prime contractors and their subs. Prime contractors not given necessary det ails about the project characteristics or the business structure governing it, will not be able to give their subcontractors any better information. Logically, subs would receive the same conflicting expectations. Research published in 2011 states: her partnering, design build contracting, project management, nor construction management provide a mechanism to structure work beyond allocating by discipline or craft or to manage work itself. Rather, all rely on the critical path schedule to establish w hen work will take place and on (Howell et al. 2011 )
25 The other forces at work in this situation include multiple changes in the industry: more regulation, increased litigation, and pr oject owners becoming more sophisticated and dem anding (Owers et al. 2007). Compressing schedules to deliver projects in less 1993). There is a trend in the construction industry toward increased client demands and project complexity in the construction industry (Wong 2004; Dossick and Schunk 2007). Whether the primary focus in the industry trends toward emphasis on productivity or production is a choice, which will have significant consequences. The researcher has observed the following in his engagement with the industry, to avoid owners who have an unrealistic focus on production, contractors with high craft ski ll and project savvy will seek clients who are concerned with creating projects that are realistic in design and well built at the end. This is a controllable action. These construction firms may be mostly silent about the issue, quietly choosing to work w ith owners who understand the dynamic. Their attitude is that they should not have to explain these principles to a client. It would be a long conversation and one that probably will not change minds. So, they see little need to waste time discussing the i ssues. Instead, they quietly target productivity enlightened clients. A case in point is this anecdotal example: One specialty contractor, with whom this author became familiar during the course of this study, has a large metropolitan area market, yet he presently works with only sixteen of thirty general contracting/construction management firms. He reasoned that the productivity of all of
26 his employees is critical if his company is to continue to survive, and the remaining fourteen of the thirty do not s hare his business philosophy. In conducting this study, it has been observed that contractors will offer productivity focused owners and designers better pricing and more attention to their projects. This is a rational approach. Consistent with this obser vation it is noted that several studies have concluded that at least a third of labor is wasted in non productive activities ( Table 2 1 ) In our low net profit business (3% average), contractors who are 10% more productive will double their net profit befo re tax. Attaining that productivity goal may be attainable since productivity studies has measured waste including non productive labor time at significant levels. Contrastingly, if project owners and their design teams want projects done with little wear and tear on them (production), while at the same time contractors want productivity, conflict ensues. Long term, the industry cannot afford excessive focus on production. Unproductive contractors squeeze margins and take gambles in small ways. This is reci pe for a chaotic project, unhappy owner, and cynical public. Obviously, contractors are tied to the economic reality that if productivity is not accomplished, then their firm may cease to exist. Table 2 1. General Waste Percentages in Construction Contr acting Management Areas Quality Costs / Non C onformance 12% of TPC* Lack of Constructability 6% of TPC* Poor Materials Management 11% of Labor Excess Consumption of Materials on Site 10% of Material Working Time used for Non Value Activ ities on Site 66% (Labor) *Total Project Costs (adapted from: Koskela (1997).
27 Good News or Bad News? The pessimist might see these trends in the construction industry as a sign of worse things to come. On the contrary, it may be good news for contractor s. Any firm that seeks to work smarter will be rewarded by the market. In fact, if a construction company produces at the same rate now as it did in 1997; it has a greater competitive edge ( Figure 2 1 ) In 1997, employees produced more than $130,000 of put i n place construction when measured in constant dollars. In 2011 by the same measure, productivity per person was less than $130,000. For the industry, this troubling data could be the start of a productive discourse about the construction process and peop le. Are the culture, conditions, technology, and processes making people more effective? What are the counter balancing developments that have decreased productivity more? What are the areas we can control as an industry? What are the ones we cannot? The a nswers should guide a conversation about improving the industry. It goes without saying that highly productive firms have the greatest potential for profitability. Therefore, for the construction organization, these data signal that the time has come to st art strategically aligning firms to be more productive. Doing this with great effort and care insures its future. This research suggests that this should be our highest strategic priority. For industry improvement, defined, iterative planning with an incr eased amount of time in the post bid/pre mobilization phase would be a good place to start. Owner and designer engagement in the process is a must. If a schedule of values has a pay item for a front end planning process, so much the better.
28 The Total Qual ity Management (TQM) community recommends standardization to improve processes. This is well accepted wisdom in all industries however it does not go far enough. Each participant in the construction industry does not build alone. They interact with each ot her to construct. So, having an agreed upon and standardized set for all to use is logical. This dissertation asserts what the industry needs instead is to improved con struction performance. This paper asserts that specialty contractors need to focus on improving things under their control. The construction contractor cannot control what the construction services owner may or may not do. They can only control what occurs inside their contracting organization. Therefore, the current research focuses on the individual practices that a specialty construction organization may codify and execute on a daily basis to build work and to manage the firm. The goal is to find correla tions between practices and financial outcomes. Conceptual Framework and Organization of Construction Contracting Processes Construction processes center on two simultaneous and interdependent activities: conversions and flows. Conversions are those activ ities that transform an input to an output. Without conversion, shelter and infrastructure would never be installed and construction contractors would never be paid. Flow is the rate of supply of needed inputs (Koskela 1993). These might include: Capable a nd motivated people Material Information Technology Knowledge and experience Cash
29 Managing these assets well, and a specialty contractor builds work well. Managing the tangible assets (people, material, technology and cash) well, and the contractor will need less use of them. He or she will not have to build up a large buffer of each to manage the organization. Field operations cannot install work efficiently without all required inputs. Optimum flow of resources must be supplied during a project at the pace and in the needed amounts during the project to achieve best results. Without flow of input there is nothing to convert. Construction processes have a sequential nature that requires that work be done in an ordered fashion. Primary items, especially planning and information flow, accomplished in a detailed and complete fashion will result in superior conversion that evidences itself in lower labor per unit cost, safe installation, etc. (Thomas and Horman 2006). In construction contracting, it is crit ical that these processes be measurable if one is to manage the organization efficiently and have a way of evaluating results. These processes can be grouped in categories according to their place in the business cycle: work acquisition, building work, and getting paid. The fourth aspect of the cycle, tracking progress, must be continuously applied to each of the three steps in the cycle. The
30 Figure 2 permission from Stevens, Matt. The Construction MBA. McGraw Hill: New York, 2012 page 16) reason is simple: the business is more complicated than ever before (Owers et al. 2007). Just as the overall business cycle is characterized by a logical sequence, so must all of the processes within each category be done in a logical order as well. Work acquisition processes include estimating, bidding, pricing, marketing, selling, and business development. Once a project is acquired, the building work stage includes many processes of actually doing the job. However, from a management perspective planning, forecasting, scheduling, communicating, measuring, and adjusting the next processes or practices must also be done in a logical sequential order tha t emerges from the nature of the work. Depending on the particular project, a variety of craft and project management skills are required. Getting paid refers to the accounting aspect of the project, including all matters financial from billing to depositi ng client payment. There is a long string of practices. Each of which is usually dependent on predecessors.
31 Tracking these three overall processes and the numerous practices that make them up is crucial. Compliance has to be monitored, measured and consta ntly managed. To not do so is to trust a contracting business to its employees who do not have the risk sensitivity and ambition a company owner typically does. Improving operating practices will speed up the work cycle. The work cycle can be likened to a outcomes (Collins 2001). Higher compliance to each step makes for a faster cycle. Tracking creates an opportunity to coach employees and improve their skills and the practice itsel f. Information Management In construction contracting, accurate transmittal of information is crucial to take the design intent, negotiate contractual demands, get the project built, and convert the project into accounts receivable. Flow of information i s critical in the construction contracting business (Koskela 2000; Thomas and Horman 2006). If the information is complete and trustworthy, the cost of conversion will be below revenue received, yielding a net profit. Only sufficiently detailed and accurat e information can keep mistakes to a minimum. Mistakes are a cost that can result in expenses exceeding contract billings, yielding net loss instead of profit. In Lean production methodology, information and material flow is crucial (Thomas and Horman 200 6). Without accurate information and the right material, construction stalls. If information is accurate, it helps the manager make better resource allocation decisions. However unlike material, it is not tangible, a great amount of information does not le ad to storage problems, congestion at the worksite, or damage to it due to its proximity to worker, machinery, or other material.
32 Horman and Thomas (2005) tell us that having an inventory of material residing on a jobsite provides a buffer that is a pos itive factor in construction productivity, and for work to be installed Information can be thought of as instructions of how to build a construction project. Some information is furnished by the client before the bid, such as plans, specifications and bid instructions. Other information is available after the bid, are a necessary part of the building process. However, they are not complete. Complete imperfections to t he plans, specifications, etc. are known. Also at closeout, the capability, willingness and co mpliance to processes of all professionals involved are understood. The challenge is to ascertain as much information at the beginning of any project or construction business situation, so that better decisions are made. Practices that capture information have to be executed at a high level before and during the project. Causes of Contractor Failure Causes of contractor business failure are multifactorial (Schaufelberger 2003; Mahamid 2012). The Surety Information Office (SIO) in 2007 summarized the caus es of failure in Table 2 2 The multiplicity of causes involved suggests that a wide ranging assessment and diagnostic tool covering all the relevant factors is necessary to study them. Such is the nature of the assessment tool developed and utilized in th e current research project, which will be elucidated in Chapter 3. Numerous studies have been performed to explore the dynamics of contractor bankruptcy. Some focus on econometric factors, such as external business conditions
33 (Russel and Zhai 1996). The Du n and B radstreet Corporation estimates 60% of con struction company bankruptcies are due to economic factors. The surety industry has used a contractor evaluation method involving scoring internal financial ratios. Use of the Z and R score has been common. This is a results oriented methodology using yearly financial outcomes based on audited reports. Table 2 2 Causes of contractor failure reported by SIO. Causes of Contractor Failure Financial issues: Slow collections Low profit margins Insufficien t capital/excessive debt Bank line of credit used excessively Estimating or procurement problems Failure to maintain solid accounting and management systems to track costs / Billing Lack of adequate insurance Improper accounting practices Managem ent Issues: No business, risk management, or continuity plans Poor project management Key staff leaves company Staff inadequately trained on company policy and operations Insufficient or incapable personnel at upper management or project level Inadequate cost and project management systems Unrealistic Growth/Overexpansion : Change in type of work performed Expansion into a new geographic area Significant increase in the size of individual projects Unfamiliarity with architect, owner, o r subcontractors Uncontrollable/Other : Economic down turn and high inflation Weather delays Poor site conditions and/or building plans Labor difficulties (lack of skilled labor) Material and equipment shortages or cost increases Unreasonable Onerous contract terms
34 Misalignment of Management Practice Research Koskela (2011) describes a general decline of management research since 1959. He asserts that a co opting of the process to one more aligned to social science. Production techniques research has largely gone away. The ability to make things more efficiently with higher quality and less cost has not been the focus of management research in the past 50 years. This is a gap. A common theme in management res earch than improving it (Koskela 2011 ). Lim et al (2011) assert that the means for achieving construction organizational capability has been under re searched Research that is science based is needed in specialty construct ion. Defining scientific research can be interpreted many ways. Thomas Kuhn started an active debate in 1962. In the discipline of specialty contracting, analysis of industry source data and internal company information would be a substantial way to scient ifically research construction. Our literature review found minimal use of industry data and internal company information in research. Part of scientific research is to compare known standards to experimental outcomes. This is not common in construction re search. The use of industry averages and other objective confi rmation is limited ( Table 2 3 ) Scientific methodology must be employed if the construction research is to have two critical characteristics for acceptance by academics and practitioners: a) val idity and b) reliability (Lucko and Rojas 2010). This type of research is common in other disciplines. It must be a focus, and continued good scholarly work is needed in construction if academic programs are to keep their prominence in elite universities ( Halpin 2007).
35 The Build Work Process Labor productivity is one of the critical issues of specialty contracting firms. The ability to build work efficiently with labor th e n is paid by the hour and not by the piece creates a critical need for special syste ms that are unlike those of a typical general contractor or construction management firm. Two major obstacles in the construction structure and process are that there are no contracts between specialty contractors whose installation timeliness and quality greatly affects each other. The second is the inability to get involved in the construction design early on to make certain that constructability is adequate (Tsao et al 2000) The Get Paid Process It is generally accepted that e xcellent payment manageme nt is key for a contractor to survive as a business entity. Effectively collecting payment from clients for work completed before it is needed to pay wages, salaries, equipment firms, suppliers, subcontractors and other s who furnish needed products and se rvices cannot be overemphasized. The industry term is cash flow. Construction service buyers are unusual in payment practices, unlike most other industries; it is customary to hold back a percentage of each payment as retainage to assure prompt performance i n dealing with defects or other issues at the end of the project. This is embodied in most construction contracts. A typical percentage is 5 to 10% of each payment. According to (2004) the range of retention release of all contractors on a proj ect is from 30 to 900 days. The average for specialty contractors is 167 days from completion of the project, almost six months. This delaying practice places an unusual burden on specialty contractors since field payroll must be paid weekly and it is a substantial percentage of project costs
36 Crews are the means of production for this type of firm and need to be paid to keep the work going Misalignment of owner, general contractor and subcontractor answers concerning progress payment timeliness, and re tention release indicates conflict ing ideas concerning this critical component of business operation Most subcontractors are paid late (Arditi 2005). The Keeping Track Process Financial and s afety measurement comprise the two largest components of this process in most contracting organizations. However, the business has gotten more complex and hence the tracking process must include more metrics including those activities which are categorized as work acquisition and building work. Tracking can be class ified in two ways: proactive and reactive (Bassioni 2005) Proactive tracking can be defined as those activities which are behaviors. Reactive tracking is monitoring results. Organizational Effectiveness Organizational effectiveness (OE) is a relatively n ew term in construction re search. It was widely ignored before the 1990 s in construction research (Dikman et al. 2005 ) Since that time there have been a few examinations specific ally about the organizational effectiveness of construction firm s Some rese archers (Maloney and Federle 1993) propose d a model of how superior OE should be executed. They did not describe specific actions that a firm should undertake only the approach that should be utilized. Others such as Sinha and McKim ( 2000) interwove sever al common business management approaches such as total quality management, business process reengineering and benchmarking to seek a common thread of thought. The "unifying
37 theory" is elusive. This is to be expected. Construction has a complicated value chain of many different stakeholders and a dual challenge of managing projects and the overall firms (Dikman et al. 2005) Construction contractors are rewarded or penalized based on two organizations within their companies : 1) The project organization 2) The home office organization. Each has an effect on the overall yearly result. It is this complexity in construction that creates a very fluid environment. Sometimes these two organizations conflict in actions and goals. Examples are the sharing of common assets such as equipment or craft persons. A project manager would want the best people on his job however; the organization is building many jobs that are just as important. This causes complexity. Peters and Waterman (1982) make an attractive argument in that the firms that do well "manage ambiguity" as well as a half dozen other areas. This type of thinking summarizes a "goals" theory. Construction appears to best operate on a system basis The system outlines steps needed then executes those steps in a sequence by design that produces optimal performance. Deming (2000) ask ed interdependent components that work together to try to accomplish the aim of the system He then assert ed direct the efforts of all R esearch in the area of organization effectiveness has been ongoing for decades in the general business environment; however there is little agreement on its definition Schools of thoug ht abound attempting to defin e the construction industry Th is task is difficult (Dikman 2005). The models which have emerg ed have caused much debate. However, one thing is clear. This is an area that must continue if the construction industry is to have a healthy and
38 stable population of construction contractors delivering value i.e. safety, quality, cost and schedule adherence. Some studies suggest a ccomplishments or ratings determine the level of organizational effectiveness. This is results oriented m ethodology. This is characterized by an observational or empirical approach. Project participants either report back or a third party observes outcomes. At the end of the project, there are conclusions made about the project. Examples include construction company performance models (Kim et al. 2006 ; Lim et al 2011 ; Ling et al 2012 ) conceptual frame work (Bassioni et al. 2005), factor analysis (Mahamid 2012 ) Delphi studies (Yeung et al. 2009 ) and competiveness ratings ( Tan et al. 2011). T hese overall m o dels that attempt to guide the contracting community abound in research Bassioni et al. (2005) attempted to define a general frame work of organizational effectiveness Several studies have advocated a more robust set of critical success factors. ( Bassioni et al 2008; Cox et al 2003; Skibniewski and Ghosh 2009 ) The critical success factors research lists several dozen areas that prove to be helpful to org anizational effectiveness. Some are based on conditions that the company finds itself. Others are outcome based that prejudged to be repeatable Several more are conce ntrated on processes. However, the void of individual practice or method research is larg e Thomas and Ellis (2007) note d: defines a process that a contractor should follow Additionally there is no production theory for construction (Koskela 1999) Practices and Processes Defined In the 2002 ed ition of the Oxford American College Dictionary,
39 Practice is defined as a noun: 1. the actual application or use of an idea, belief, or method as opposed to theories about such application or use. (i) The customary, habitual, or expected procedure of some thing. Process is defined as a noun : 1. a series of actions or operations conducing to an end. It is important to note that practices are controllable by the contractor. Construction processes consist of many tasks ( Figure 2 1 ) These are human enabled Variations in on time practice execution is high and thus impacts follow on activities. Each task may have up to 7 precondit i o ns before it can be complete d They (Koskela 2000) This set of precondit i ons and the task itself creates a large number of activities to monitor for the executive. An uncompleted task has a ripple effect to follow on tasks (Liu et al 2011). Hence, it is critical that they can be monitored and thus, measur able if one is to manage the organization efficiently. The process and the underly ing practices have been less studied in the construction industry ( Table 2 3 ) P ractices involving the use of technology in construction have resulted in several actions that improve d outcomes (Caldas et al 2009) Overall, management practice research has not been widely pursued by construction scholars Since the causes of failure are multi factorial, it follows that the a nswer lies in multiple practices
40 Figure 2 2 Efficient construction contracting processes are comprised of good operating practice s approach. By collecting, testing and correlating practices, the research in this area can help construction organizations be more enduring. It is important to note that these contracting organization and are thus uncontrollable. State of Practice Research in Construction Practice studies and lessons learned programs (LLP) contain overlap in their foc us Each is attempting to capture and memorialize a better approach or method. However, lessons learned programs go one step further; they also capture those practices not to execute. This concept of not doing something has significance in construction due to its competitive bid nature and cost sensitivity Outside of construction, Collins (2001) in his book Good to Great concludes that the great companies spend time on understanding what activities 1) not to do and also 2) to stop doing Koskela (1999) echoes Quantity Survey Process Uses Extensive Checklist of Possible Tasks and Products Needed Uninterrupted Time to Focus by Estimator Mark What is Counted / Make Notes on Plans of Unusual Features Double Checks Work with Several Methodologies to Catch Errors Start Request for Information Process with Client About Unclear Design Areas / Client Expectations etc.
41 LLPs take several forms to capture practices. Charrettes or structured workshops held to collect lessons learned are one and have been in use since 1996 (Gibson and Whittington 2010) Seve ral other structures have been used such as meetings, interviews, electronic means, paper forms, word of mouth and outside consultant s (Caldas et al. 2009 ) General business reading and distillation of common business nue (Ogunlana and Sukhera 2003). Validation of the practice usually follows. Value a nalysis has been executed by several means including meetings, use of subject matter expert s electronic surveys and informal conversations (Caldas et al. 2009). Once a pr actice is confirmed as and t here is little debate. Pre construction planning is a well accepted has been the subject of several studies. Menches et al. (2008) specifically modeled project characteristics, plan ning and performance in the electrical contracting industry. Each of these factors was quantified and predictors were discovered. However, p roject outcomes were limited to self reported and did not quantify safety, quality, cost and schedule results The relationship between work acquisition activities including markup decisions, management of resulting captured projects and financial performance was examined. It was concluded that large deviations in markup affects backlog. This deviation results in an unpredictable work flow which results in disruptions the amount of work is overcapacity, employees rushing to complete their tasks make mistakes and thus cause extra expense. When th e amount of work is substantially below capacity, the overhead expense percentage of the revenue rises. Both of these situations create a pronounced
42 effect on net profit before tax. A quantified model was proposed (Kim and Reinschmidt 2006). Caldas et al. (2009) explored lessons learned programs and outlined a collection implementation cycle. The o rganizational learning process, commitment and company characteristics were analyzed but no outcome based measure was part of the data (Kululanga et al 2002 ) C losely ali gned is the use of charrettes to collect best practices (Gibson and Whittington 2010). These methodologies have been effective in collecting practices to study. Limited Research on Specialty Contractor s A review of major literature data bases ha s yielded little that is specific to subcontractors or specialty contractors As an example of the paucity of research, Arditi and Chotibhongs (2005) state that subcontractors have not been included as part of productivity studies The National Electrical Contractors Association (NECA) has been active in sponsoring specialty contractor research. Their foundation, Electri International is their grant making arm and has been active in facilitating research specific to electrical contracting firms. Many areas have been explored. The current listing of research references no specific multiple practices study for this specialty contractor group Other professional groups who have sought to add to the body of knowledge for specialty contractors are the Constructio n Industry Institute (CII) the Lean Construction Institute (LCI) and the Design Build Institute of America (DBIA) The State of Accepted Practices for Specialty Contractors There is a lack of management practice research concerning specialty constructio n contractors. Little effort has been expended to research and codify
43 practices in specialty contracting. To date, there has been mostly a general framework that suggests that planning the work, organizing the work, staffing the work and then tracking the results against plan yields optimal organizational effectiveness However, how to specifically do that is not clear to the specialty construction industry. There is a very small amount of observable or measurable practices asserted by research professional s. W hat has been researched is general in nature. Critical subcontracting issues have been identified. Safety, p ayment, productivity, insurance, bonding, and partnering have been explored (Arditi and Chotibhongs 2005) Wong et al. (2008) created a group o f algorithms and models to predict project labor demand over the life of a project (2008). In the human resources area, a subcontractor employee motivational model was developed (Cox et al 2006). Focus on Non Survey Outcomes in Construction Research Sever al recent studies focused on non survey outcomes of construction project and business models. Ogulana et al. (2003) utilized productivity, direct cost and indirect cost Research was conducted on a specific practice, The Last Planner System, and its effect on work flow variation and labor productivity. It compared work periods, the level of planned work for that period and the resulting productivity (Lui et al. 2011). Others have used predicted versus actual results as their comparison for test i ng a labor p rojection model (Wong et al. 2004 ) Peer Comparison The use of peer comparison of construction firm performance is minimal. With the exception of safety research, the use of industry data is not used often. Outside of safety statistics, t he most commonly k nown financial data is produced by Risk
44 Manage ment Associat ion ( RMA ) and Construction Financial Managers Association ( CFMA ) Other information is difficult to find on an industry basis such as common practices database for construction organizations. This researcher could not find one. Table 2 1 shows the analysis and how often these components were used in construction industry refereed journal publications Measuring Correlation, Success and Failu re Studies have used different measures to judge correlation, success and failure of a process, practice or model. Surveys of participants appear to be the most prevalent methodology Technology practices were studied by using a survey methodology to gauge effectiveness. A total of 110 organizations comprised of owner s engineer contractor s and suppliers were asked their opinion of a lessons learned methodology on a 5 point Likert scale ranging from very effective to detrimental. It was concluded that it wa s difficult to prove the value of an individual lesson. However no company financial reports were sought to correlate the value of the lessons learned (Caldas et al 2009) Kim and Reinschmidt (2006) studied the effect of capacity utilization and net pro fit. The behavior s correlated were marketing and bidding activity. Workflow variation and labor productivity were analyzed in a study to seek connections to week ly written project planning ( Liu et al. 2011) Menches and Hanna (2006) captured and tested 64 management practices Their methodology judged successful projects by the compliance to practices. grade resulted from what percentage practices were actually completed There was no objective measure such as a cost or schedule metric with w hich to compare and analy z e the effectiveness of compliance
45 Using company internal numbers gives an accurate picture. It can show improvement easier by using a trend line over a period of time. Ogunlana et al. (2003) studied performance enhancement of a single company created by implementing generic policies of human resources and financial management at the same time Comparison was done by using a singular implementation and charting the results Bassioni suggested that financial performance be measure d along with softer metric Comparison of company performance to peers in terms of total stockholder value has its merits in publicly held companies. (Collins 2001) However, most co nstruction firms are not publicly held. The participating companies were no exception. Importance Performance Analysis (IPA) Martilla and James (1977) This gave th e customer a voice in where the company placed its emphasis. Customer centric improvement was the outcome. They developed Figure 2 1 (Abore and Busacca ( 2011 ) pon identifying key value drivers. It is critical that practices research carefully collect each observable method and test each practice with a limited group of knowledgeable partic ipants It is also cr i tical that research used objective metrics such as a financial ratio to clarify effects of practice(s).
46 Figure 2 3 Importance Performance Matrix ( Adapted from : Martilla and James 1977) Figure 2 3 clearly delineates and prioritizes improvement actions W hen practices reside in the performed poorly and important quadrant in the lower left hand they should be the primary focus. It is generally accepted that i mproved performance of important practices lead to improved results The upper r ight hand quadrant displays unneeded effort and expense expen ded and could be directed elsewhere. As noted previously, the cost side nature of construction makes this a concern and should be addressed. The lower left hand quadrant is unimportant to manage. It is neither important n or is the orga nization investing t ime on it. The upper right hand quadrant important practices performed well must be maintained in performance standards. Losing focus here means overall organization effectiveness declines.
47 Platts and Gregory (1990) suggested that there should be a co nnection when using this approach in operations to tie an audit to strategies that a manufacturer pursues. Slack (1994) asserted that business and using this approach may be an efficient method to improving contractor operations. Practice Databases Construction firms typically do not distribute practice knowledge well even across the ir own organization (Caldas et al 2009). It is self evident that construction industry does not have the same knowledge company to company. The need is evidenced by both quantitative and qualitative data about the construction industry and its performance. No practice databases exist in industry for testi ng against financial result. Much has been done by safety researcher s, such as Hinze (1996 ) among others. The approach used in safety is simple and clear. Variables are chosen carefully and measured statistically. Typically, Recorded Incident Rate (RIR) is the dependent variable while the independent variables are measured for effect Non construction organizations have published practices databases Good Agricultural Practices (GAP) (2012) is defined by the Food and Ag riculture Organization (FAO) of the United Nations Good Laboratory Practice (GLP) (2012) was a regulatory mandate by the United States Food and Drug Administration (US FDA ) formulated in 1978. This was in response to several scandals involving false or su perficially created test reports. These professionals have submitted approaches that solve or minimize common problems experienced by organizations across the world.
48 Leadership is crucial for the creation and dissemination of lessons learned and practices databases (Caldas et al. 2009 ) This leadership seems to not be robust in construction research. Next Practices Prahalad (2010) suggests that the new frontier in research is to understand emerging trends and tailoring products and services to those opportu nities. Prahalad notes complexity in the world will increase as ever growing populations of people seeking a better quality of life. There are beneficial connections between these factors and subsets. Some, not all, are profitable for businesses to pursue. The Construction Industry is a major part of any democratic economy. Seeking better process es and quality of life Very little c onstruction research has been oriented towards next practices. Hen ce this is an opportunity for the academic community to make an impact in more
49 Table 2 3 Analysis of Construction Research Focus Author(s) / Year Specialty Contractors Studied Value of Practice Confirmed Objectively Industry Average s Used Compliance Measured Ammar et al. 2003 x x Arditi and Chotibongs 2005 x Ballard and Howell 1994 x x Ballard and Howell 1997 x x Bassioni et al 2005 Burleson et al 1998 x Caldas et al. 2009 Court et al. 2009 x x x x Cox et al. 2006 x Dikmen et al. 2010 Dossick and Schunk 2007 x Elazouni and Metwally 2000 x Elbarkouky and Fayek El Mashaleh et al. 2006 x Frodell 2010 Hartman et al 2009 Horman and Thomas 200 5 x Kim and Reinschmidt 2006 x Koskela 2000 x Kululanga et al.2002 x Ling et al. 2012 x x Liu et al. 2011 x x Lyons 2008 Laryea and Hughes 2011 x Lim et al. 2011 x
50 Table 2 3 Continued Author(s) / Year Specialty Co ntractors Studied Value of Practice Confirmed Objectively Industry Averages Used Compliance Measured Mahamid 2012 Marsh and Fayek 2010 x Menches and Hanna 2006 x x x Menches et al. 2008 x x x Ogunlana et al. 2003 x x Russell an d Zhai 1996 x x x x Senouci and E Rayes 2009 x Shi and Halpin 2003 Tan et al. 2011 Thomas and Ellis 2007 x Tiller 2012 Tommelein 1998 x Tommelein et al. 1998 Tommelein and Weissenberger 1999 x Tsao et al. 2000 x Wong 2004 Wong et al. 2008 x x Waara and Brochner 2006 Waters et al. 2007 x x Yang et al. 2010 x Yeung et al. 2009
51 Table 2 4 Literature Review Content Summary of Construction Research Focus Author(s) / Year Comments Ammar et al. 2003 Study of electrical contractor organizational size and its correlation to profitability Arditi and Chotibongs 2005 Study of a limited number of subcontractor issues: payment, productivity, safety, insurance and bondi ng. Ballard and Howell 1994 Study of stabilizing construction work flow and its effect on productivity. Ballard and Howell 1997 Percent plan complete methodology and workflow studied Bassioni et al 2005 Conceptual framework for measuring busin ess performance in construction with 2 case studies Burleson et al 1998 Cross training and multi skill work strategies in construction. Caldas et al. 2009 Lessons learned process studied. No correlatio ns to financial results were attempted. Court et al. 2009 A study of a set of onsite construction practices and their effect on labor productivity and safety in one MEP construction firm. Cox et al.2006 Subcontractor Motivation Model and how it appl ies to construction. Dikmen et al. 2010 Delphi study of business failure risks. Model then tested by applying to actual failures Dossick and Schunk 2007 Study of proactive scheduling practices and delay / claim management by subcontractors Elazou ni and Metwally 2000 Computerized system of selecting the correct subcontractors and the right mix of bid packages. Elbarkouky and Fayek Owner and contractor project responsibilities El Mashaleh et al. 2006 Firm performance correlated to technolo gy. 3% of participants were subcontractors Frodell 2010 philosophy.
52 Table 2 4. Continued. Author(s) / Year Comments Horman and Thomas 2005 The right sizing of buffers in material flow Kim and Reinschmidt 2006 Case study of markup and capacity model using two firms. Koskela 2000 Material flow and its benefit to construction Kululanga et al. 2002 Organizational learning process, commitment and characteristic Specialty contract ors were not isolated in results. Ling et al. 2012 Multi dimensional mathematical model predicting competitiveness in China Liu et al. 2011 Single company case study of pipe installation. Weekly written planner is correlated to the best productivity weeks. Lyons 2008 Multi dimension approach to managing risks in major infrastructure projects. Laryea and Hughes 2011 Study of risk Identification, assessment and response in project bids Lim et al. 2011 Assessment of organizational flexibility Mahamid 2012 Marsh and Fayek 2010 Fuzzy expert system as a scoring mechanism to assist surety underwriters to determine bonding capacity. Menches and Hanna 2006 Practices captured, model created and tested with Electrical Contractors. Menches et al. 2008 Study of quality and compliance of structured pre job planning practices for electrical contractors Ogunlana et al. 2003 Policies effect measured by using a system dynamics process. R ussell and Zhai 1996 Stochastic methodology using financial and macroeconomic data to predict bankruptcy Senouci and E Rayes 2009 Crew scheduling and profit correlation model
53 Table 2 4. Continued. Author(s) / Year Comments Tan et al. 2011 A fuz zy approach to assessing prime contractors competitiveness in Hong Kong. Thomas and Ellis 2007 Contractor pre bid planning principles. Tiller 2012 Organizational structure and management systems explored and described in construction. Tommelein 1998 Tommelein et al. 1998 Parade of Trades game. Study of impact of variability of work flow. Tommelein and Weissenberger 1999 Study of buffers used in industrial and commercial steel manufacturing and installation. Tsao et al. 2000 Work structuring of door installation in a prison project from the Wong et al. 2008 Labor demand projection model. Waara and Brochner 2006 Contractor selection criteria using pric e and non price factors. Waters et al. 2007 Case study of capturing, identifying, organizing and communication of organizational knowledge in an electrical contracting business. Yang et al. 2010 Delphi study of selected critical success factors util izing 6 practitioners.
54 CHAPTER 3 STRATEGY AND METHODOL O GY DESIGN Chapter 2 reviewed previous research for the purpose of understanding the body of knowledge concerning specialty contractor practices. No research was found that address ed a large gro up of subcontractor practices, their importance and performance and their value against peer overhead efficiency. Approaching the data collection strategy and analysis methodology is served well ability are most critical in research (Rojas and Lucko 2010). If both of these end results are primary then the research will truly serve its purpose: adding to the body of knowledge. This study will attempt to find correlations between a specific set of 154 practices, their importance, their performance and their effect on overhead efficiency of managing direct project cost against peer averages. If a set of data is valid and reliable predictors can be found. The process followed is shown in Figure 3 1. Figure 3 1. Research Strategy and Methodology Design Steps The first step was the development of a list of common construction organizational business practices. A large list was accumulated by using several means at the same time One was a literat ure review of academic, and industry information. Another was Research, Capture and Develop a list of specialty contractor organization al practices Develop a measuring tool to evaluate the relative value of each practice Seek participation from industry organizations Collect, analyze and synthesize data
55 the experience of the researcher A third was to interview other industry professionals Also, a fo u rth became available during the early stages of the study, which was a database of practices. It was offered by the management advising firm, Stevens Construction Institute, Inc The second step of the strategy and methodology process was the development of a tool that measured relative value of these practices Several techniques were considered including case study analysis and a Delphi panel. It was concluded that the use of a n Importance Performance survey with industry practitioners would be an effective tool. The researcher created one containing a double 7 point Likert scale one addressing addressing Each scale was ordinal and numbered 1 ( low ) to 7 ( high ) The survey participant answer ed questions using both scales at the same time for each business practice statement. An analysis of the results produ ced an IPA matrix and graphically show ed both a relative value (importance) of a business practice for each construction firm surveyed and the performance of each practice This was important when comparing each participating organization against s overhead efficiency As part of the measurement process, an outcome was measured. The researcher sought an objective one. Many were consider ed such as a combined metric including safety, cost, quality and schedule. Complications were many with this appr oach including data collection and algorithm construction. In addition a value survey of the considered; however, this idea was dropped because it is considered very difficult to collect the data from third parties a nd to construct an unbiased survey. Many surveys have been done in academic research of
56 construction firms. Part of the concern was that if one of the client s did not participate, that data set for the contractor would be worthless. The obje ctive measure that was determined to yield greater accuracy in measuring financial normality was United States banking data. The source of this information was Risk Management Associates, Philadelphia, Pennsylvania ( F igure B 1 ) Many financial measures wer e considered The information for cost was also collected to complete accounting and kept separate. The third source of information was the internal company financial statements of participating companies for use in calculating return on net worth pe rfor mance. To align the goal of this research with the strategy and the methodology design outside parties were also invited to participate in the research creation. This was contra ctors during the early part of the process. Great refinement was accomplished by using professionals knowledgeable in specialty construction contracting business practices As a result several questions were change d and a few were eliminated. The number of practice statements decreased from 165 to 154 by this process. The remaining numbers of practice statement s were edited for clarity and purpose. Determining the practice statements to be included in the survey was the largest time investment. In the rese value has taken many years. Not only were third parties engaged as mentioned above, but extensive literature review was conducted to capture as any possible construction operating practices and rese arch methods as possible Due to this effort, changes were made that led to a better overall outcome.
57 Solicitation for Participating Companies All 24,800 subscribers of electronic were solicited for participation in the study. The newsletter has been published uninterrupted since 2005 and covers topics of interest to construction professionals such as strategic planning, productivity, management succession, estimat ing, project management, sustainability, human resource management and financial management. A solicitation notice was embedded in a link in the July and August, 2011 editions. Once each firm signaled interest, they were contacted directly by the researche r with follow up documents to communicate the full details of the study including timeline and responsibilities of all parties involved. Nine companies agreed and were suitable to participate in the study The y were from diverse trade disciplines They re presented mechanical ( 2) electrical (2), concrete restoration (1) drainage (1) roofing (1), earthwork/utilities (1), and self performing general contractor (1 ). Approximately half were located in major cities of 1 million or more inhabitants (5 ). A substa ntial number employed 50 or more people (4). The researcher sent a confidentiality agreement to each participating firm Once signed, t hese companies disclosed their financial statements. Once in possession of the researcher, a 37 page financial analysis was performed on each firm. As part of the incentive to participate, an executive summary was returned to each company. Financial Performance Measure Accurate measure of outcome is critical when measuring correlation. Financial outcomes were chosen as the measurement. Financial reports (Balance Sheet and Profit and Loss statement) are the most accurate ga u ge of a health
58 available to the researcher. They reflect the business health of a for profit business. The free market determines a s pecialty contractor s value by bidding or tendering. It bids based on its prices and its costs based on its efficiency. As shown in Table 3 2, m ultiple financial outcomes were considered in this study. Thought was given to using these measures in combinat ion and creating a value or index number based on that combination. Also, several measures were considered to be used alone and be designated as the sole criterion for determining performance. Each concept has benefits and drawbacks. Most for profit firms manage their business equity, outstanding debt obligations, etc., between companies especially one with large revenue. Therefore, measurements, such as return on net worth or return on assets were less credible. It was concluded that for evaluating the financial performance of specialty contractors, one key outcome is essential to accurately measure organizational effectiveness: overhead to direct cost ratio. Overhea d cost is the expense to pay for the overall management of the firm. For example, a typical overhead item is the salary expenses for office personnel including executives and office administrators. Some of this is not project related at all, such as an est necessary to have a flow or backlog of future work. These persons help cost and bid projects to be built in the coming months or years. They spend minimal time on active project the company is constructing. Other typical co sts considered as overhead are items for the home office, such as rent, computer expense, furniture and vehicles that
59 Table 3 1 Analysis of Various Financial Measures of Construction Firms Common Financial Measures Total Overhead to Revenue This ratio gives an indication of total overhead's effect on profitability, since the operating profit margin equals the gross profit margin less the total overhead to revenue. Also, the total overhead to revenue ratio is a convenient indicator to watch for trends. An increasing overhead ratio indicates that either sales dollar volume is falling relative overhead cost are increasing, or both. A decreasing ratio may accompany the normal disruption that occur as revenues expand, straining overhead capacity. This rati o can be calculated easily from banking data. Net Profit Before Tax Companies may manage their finances for tax purposes shifting expenses from year to year. This results in inaccurate net profit before tax results relative to performance. Gross Pro fit Categorization of Direct Cost and Overhead expenses are not standardized. There is no Generally Accepted Accounting Practices for Construction Contractors. Gross Profit comparison to peer companies is not accurate. Return on Assets Assets (cash, eq uipment, accounts receivable etc.) may fluctuate depending on economic stresses on the firm Gross Profit Per Man Hour Have the same issues as the gross profit analysis. Many specialty contractors subcontract out parts of the work leading to an inefficient measure. Also, there is no peer averages available in the construction industry. Return on Equity Equity may be increased or reduced each year Company may seek to increase equity greatly in year to the next to satisfy demands by outside interests such owner qualification requirements and surety demands. Overhead to Direct Cost Ratio Measure attempts to seek efficiency measure of overhead (office efficacy) in m anaging direct cost (project expenses). Although, c lassification of overhead expenses and direct costs is not standardized. less overall error is contained in this measure in the Importantly it directly measures the two largest co st categories of any contractor and the interaction between them.
6 0 staff may use in the execution of their work. In other words, it is meant for all projects a company has contracted fo r. Direct costs are those expenses for one particular project. Typic al expenses are shown in Table 3 3 such as project related labor, material, expense percentages shown are typical in the specialty contracting business. Direct Tabl e 3 2 Example Income Statement Format for Specialty Contractors Income Statement 2XXX Revenue % Revenues $10,405,952 100.0% Direct Costs Material 3,330,859 32.0% Subcontracts 1,273,286 12.2% Labor 1,795,614 17.3% Equipment 1,439,028 13. 8% Other direct costs 433,565 4.2% Total direct costs 8,272,352 79.5% Gross profit 2,133,600 20.5% Overhead Interest expense 30,694 0.3% Other variable overhead 521,045 5.0% Officers' compensation 96,000 0.9% Other fixed overhead 723,098 6.9% Total overhead 1,370,837 13.2% Operating income/(loss) 762,763 7.3% Other income 117,926 1.1% Other expenses 0 0.0% Extraordinary items 0 0.0% Net income/(loss) before taxes 880,689 8.5% costs in total account fo r the majority of costs paid for by this type of firm. To be clear, typically 75% or more of all expenses are project related. This makes them the largest percentage of costs paid by the firm.
61 l and processes. If these are well organized and efficient in managing project costs, then it can be concluded that less overhead is needed per dollar of direct costs. If the reverse is true and the home offices are not efficient then more expense (more p eople who will need more vehicles, technology etc.) In summary, o verhead expenses are overall in nature and direct costs are specific and targeted for a specific project The interaction of these two costs variables can be directly linked to specialty co ntractor performance. The ratio of Overhead to Direct Cost was chosen as the dependent variable in which to measure good operating practice importance and performance. T he Overhead to Direct Cost ratio of participating construction firms was used as an obj ective measure for company performance. Survey Data Capture Each participating firm furnished a list of middle managers with contact information including an email address. From that information, a survey link was forwarded via email to individual employe es in each firm. The d ata collection tool was the online survey service Zoomerang It is a well accepted service provider in several industries and educational institutions such as the University of Florida. No problems were reported by participating comp any employees in the use of the survey system and none were experienced by the researcher in receiving the data. Statistical Analysis and Treatment The survey utilized the Importance Performance Analysis (IPA) methodology to discern each practice s value and performance by each firm. This simple statistical method was used as the starting measurement. From the two Likert scales of
62 importance and performance disparity (a numerical result) was calculated between the importance and performance rating numbers There are several reasons for this. Primarily, when querying companies of different trades, markets, geographies etc. it is im portant to use self selection criteria (importance of each practice) An outsider can only guess what company practices are eff icient and effective however; long term members of a construct ion organization know best which practices work or are highly important to organizational success Subtracting the importance from the performance rating many times results in a negative number That difference measures a simple human tendency: people know well than what they do. The size of that disparity was assumed to have a correlation to the financial performance of the firm. Another is on an individual basis that contrasts each practice a gainst other practices. Factor Analysis is an example of this and high value practices did emerge from its use. A third treatment is on a group basis. The 154 practices were grouped into four categories : 1) Work Acquisition Management ; 2) Project Manageme nt ; 3) Financial Management ; and 4) Business Management. Analyzing these four categories of practice did produce insights into the relative value as compared to each other and the prediction of exceeding or not exceeding Peer OH/DC % Calculating Pearson C orrelation for each category of practices to Peer OH/DC % shows the relative strength of the relationship between two variables Thi s study utilizes SPSS 20 as its primary analysis tool. There were others used was employed as a preliminary check on data quality and for some graphical charting where SPSS was lacking.
63 Hierarchical Multiple Regression Exploring the practices and their effect on OH/DC ratios of each specialty construction firm m ore fully can be accomplished several ways. One way is the use of Hierarchical Multiple Regression Analysis. Six additional groups of practices will be analyzed. They are the highest rated, lowest, highest performance, lowest performance, most disparity, a nd least disparity. Any practices on multiple lists were only used wherever they first appear ed. Parametric statistics (Pearson Correlation, Analysis of Variance, Factor Analysis and Multi linear Regression) were used in this research to determine the char acteristics and interactions of the data. One of the assumptions that parametric statistics are based on is the assumption of a normal distribution curve. A statistical test was conducted to confirm normality.
64 C HAPTER 4 ANALYSIS OF RESULTS The overall strategies and methodologies have been addressed in C hapter 3. The purpose of this research is to test a set of practices and gauge their relative value in contributing to higher overhead efficiency. A variety of s tatistical analysis tools available in SPS S 20 ( 2012 ) were used to evaluate this value. Descriptive Statistics Descriptive statistics have a number of uses : 1) Describe the characteristics the sample used ; 2) Analyze the variables for any violating of the underlying assumptions of the research be ing conducted ; and 3) Address specific research questions of the study. Each purpose assists the resea r ch er in becoming more certain of the strengths and weaknesses of the study ( Pallant 2011) Each participating firm ranked ( Table 4 1) the same number of questions (154) however, rated each differently The minimum rating, mean and standard deviation show ed their difference in perception. Table 4 1. Descriptive Statistics of Cases in Study Descriptive Statistics of Results N Statements Minimum Maximum M ean St andard Deviation ISE 154 2.33 6.75 5.1899 0 .92822 BFE 154 2.60 6.00 5.0935 0 .60225 CDoug 154 3.00 7.00 5.7727 1.06962 GMA 154 1.00 7.00 5.8669 1.26677 EDrain 154 3.00 7.00 5.6992 0 .78037 BDuron 154 3 75 7.00 5.9149 0 .81492 RLand 154 4.17 7. 00 6.2074 0 .48978 SDirt 154 4.28 6.92 5.9703 0 .50887 ERidge 154 4.67 7.00 6.4359 0 .49846 Valid N 154 *Firm did not meet or exceed peer OH /DC peer averages
65 Table 4 2. List of Participating Companies and Their Results Sorted by % Difference to Pe er OH /DC Ratio Organization Average Importance Rating of Practices Average Performance Rating of Practices Average Disparity Between Importance and Performance Above or Below Percentage of Peer OH/DC % Difference BFE 5.09 4.46 0.64 +69.60% Eridge 6.44 5.44 0.99 +56.81% Bduron 5.96 4.67 1.29 +55.25% Sdirt 5.97 4.90 1.07 +43.92% GMA 5.87 5.36 0.51 +36.01% ISE 5.19 4.60 0.58 +24.39% Rland 6.21 5.16 1.05 +15.02% Edrain 5.70 3.80 1.90 8.50% Cdoug 5.77 4.38 1.40 17.76% Some numbers are affected by rounding. Ratings of Practices The survey asked each participant for their rating of the importance and performance of each practice. T ables 4 3 through 4 6 re port those numbers in several formats : 1) 10 highest rated in i mportance ; 2) 10 lowest rated in importance ; 3) 10 highest rated in performance ; and 4) 10 lowest rated in performance
66 Importance of practice denotes it s effect on efficiency. The top two most important practices we re safe ty related since they had a significant difference to mean rating over the rest. The remaining eight denote a general business culture that is timeless. Each of these 10 practice statements reflects specific behaviors that are critical for construction org anizational efficacy. A small statistical difference is in each of the remaining eight practices, so it may not be appropriate to make any strong conclusions about their value. There is no pattern to the lowest rated practices. All listed reflect both tra ditional management activities. The two equipment focused practices demonstrate the lack of equipment intensive contractors in the study. However, it is interesting to note that the list contains no rating below the median a 4 rating possibly suggestin g that these practices have a high value with most contractors. In general terms, the highest rated importance practices concern general areas of the specialty contracting business. Business relationships are evident in the top 4 of 5 in Table 4 3. Crafts manship might be viewed as quality and client satisfaction. The remaining results could be interpreted as cost and risk containment methods. Planning installation process. Table 4 4 lists a group of the lowest rated practices by survey participants. It appears that there are several reasons why these practice are lowest rated. T hree practices are equipment related Several firms appear to need little or no equipment in th eir business when building projects. Others practice ratings may be lowly rated practices in performance may signal some lack of importance. Eskildsen and Kristensen
67 (2006) noted that t here is an interrelation of criticality and compliance in most manager What is deemed important is done well and often. The same may be true for those practices which are rated highest in performance. Table 4 3 Ten Highest Rated Practices in Terms of Importance (Descending order) Practice Number Mean Rating D ifference Above Mean Rating of All Practices Practice Statement 99 6.55 0 .75 Every company employee is safety minded. We police each other well. 98 6.54 0 .74 Our safety culture is one of eliminating or minimizing unsafe conditions and behaviors. 8 5 6.43 0 .63 Managers are given the authority to get their job done. 129 6.43 0 .63 We generate significant repeat business. 34 6.40 0 .60 We involve our Foremen / Superintendents in pre job planning. 95 6.40 0 .60 Our Managers can build trust with clien ts. 130 6.39 0 .59 Craftsmanship is viewed as a core competency of our company. 27 6.39 0 .59 We maintain positive relationships with subcontractors and suppliers in our negotiations. 38 6.39 0 .59 We use project specific strategies to keep labor / equi pment productivity high. 12 6.38 0 .58 We sometimes refuse to bid unsuitable work.
68 Table 4 4 Ten Lowest Rated Practices in terms of Importance (Descending order) Practice Number Mean Rating Difference Below Mean Rating of All Practices Practice Sta tement 121 4.93 0.86 Our equipment administration tools track equipment location. 58 4.89 0.90 We keep change orders separate on our cost reports from the base contract. 106 4.89 0.91 Our bonus system can comprise 10% or more of an Employee's t otal compensation. 119 4.79 1.01 Our equipment administration tools project overhaul dates. 136 4.79 1.01 We have yearly reviews of purchase order and contract language (both client and supplier). 4 4.77 1.03 We use a checklist to review each job site before each bid 41 4.76 1.04 We use a CPM Mapping Process with all project parties to create the schedule on paper first. 57 4.62 1.18 We start our laborers earlier than our journeymen (or operators) each day to achieve a fast start. 125 4.59 1.21 We collaborate only with those who can help us. 9 4.50 1.21 We estimate projects in the same sequence we build them.
69 Table 4 5 Practices Rated Highest in Performance (Descending order) Practice Number Mean Rating Difference Above Mean Rat ing of All Practices Practice Statement 128 6.10 1.35 We prefer resolution of problems rather than litigation. 27 6.05 1.30 We maintain positive relationships with subcontractors and suppliers in our negotiations. 129 5.93 1.17 We generate significa nt repeat business. 130 5.78 1.03 Craftsmanship is viewed as a core competency of our company. 95 5.78 1.03 Our Managers can build trust with clients. 146 5.66 0 .91 We consistently demand and receive current insurance certificates from our suppliers and subcontractors. 148 5.65 0 .90 Detailed budgets are available anytime to the Project Managers on their jobs. 34 5.64 0 .89 We involve our Foremen / Superintendents in pre job planning. 12 5.58 0 .83 We sometimes refuse to bid unsuitable work. 6 5 .51 0 .76 We meet weekly to update and coordinate upcoming bids.
70 Table 4 6 Practices Rated Lowest in Performance (Descending order) Practice Number Mean Performance Rating Difference Below Mean Rating of All Practices Practice Statement 126 3.82 0 .93 We have a formal process to communicate project status monthly to Senior Executives. 122 3.79 0.96 We review our "internal" equipment rental rates yearly and change those rates, if necessary. 4 3.75 1.00 We use a checklist to review each job site 58 3.71 1.05 We keep change orders separate on our cost reports from the base contract. 56 3.67 1.08 We proceed on changed work only after written acknowledgement from the client. 57 3.61 1.15 We start our laborers earlier than our journeymen (o r operators) each day to achieve a fast start. 123 3.48 1.28 Our estimating software integrates with our project management and accounting software. 121 3.41 1.34 Our equipment administration tools track equipment location. 119 3.31 1.44 Our equip ment administration tools project overhaul dates. 106 3.30 1.45 Our bonus system can comprise 10% or more of an Employee's total compensation.
71 Results of Disparity Measure Disparity is a measure of misalignment. What behaviors people know to be import ant are sometimes not often followed This study assumes that there is a misalignment of how critical a practice is and the execution of that practice. In this research, statements that are highly disparate between Importance and Performance often are oppo rtunities for improvement. However, if the practice is lowly rated on importance, the IPA matrix will place it in the Low Priority quadrant and it would not be improved until quadrant A practices are addressed. Each practice in Table 4 5 reflects the busin ess cycle shown in Figure 2 1 except gap between its critical nature for organizational effectiveness and its performance. As e xamples, change orders continue to be an area of conflict between construction service buyers and contractors. Much software is not integrated to help the contractor increase the speed of his business cycle or project and requires double inputting of the same information. In another practice listed, the current software used in the industry as represented in practice 116 does not deliver needed cost projection at the end of a loo k ahead ing track Table 4 7 shows two distinct trends: 1) The importance rating of the highest performing companies doe s not trend higher ( It appears indeterminate ) and 2) The size of the disparity between the importance and performance of all practices generally trends with the percentage difference with peer OH /DC ratios.
72 Table 4 7 Practices with Highest Disparity of Between Importance and Performance Rating s Highest on Top Practice Number Mean Disparity Difference Above Mean Rating of All Practice Statement 56 2.17 1.12 We proceed on changed work only after written acknowledgement from the cl ient. 123 2.09 1.04 Our estimating software integrates with our project management and accounting software. 48 1.95 0.90 Our Foremen / Superintendents create a weekly (or monthly) look ahead plan in writing. 50 1.83 0.78 We project our equipment ne eds in writing at least a week ahead. 116 1.80 0.75 Our job cost software projects cost at completion for best / worst cases. 107 1.76 0.71 Our bonus / incentive system follows our strategic plan. 117 1.74 0.69 Our Managers completely understand o ur cost reports. 126 1.71 0.66 We have a formal process to communicate project status monthly to Senior Executives. 149 1.68 0.63 We measure cost to complete accuracy by Project Manager. 88 1.68 0.63 We do recognize and replace unsuitable employee s in a timely fashion. Practices that are low in disparity could be interpreted as practices this group of contractors executes well according to the perceived importance. Since disparity is the result of subtraction of the importance rating from perfor mance rating, it does not mean that a practice is important or performed often. However, it is important to understand
73 that these practices as shown in Table 4 8, are followed the most often relative to their importance. Table 4 8 Practices with Lowest Disparity of Importance Rating minus Performance Rating Lowest on Bottom Practice Number Mean Disparity Difference Below Mean Rating of All Practice Statement 6 0.50 .0.55 We meet weekly to update and coordinate upcoming bids. 1 48 0.44 .0.61 Detailed budgets are available anytime to the Project Managers on their jobs. 146 0.37 .0.68 We consistently demand and receive current insurance certificates from our suppliers and subcontractors. 131 0.36 .0.68 Field experience is glorified in our company 134 0.36 .0.69 We have a limited number of qualified vendors we use. 27 0.34 .0.71 We maintain positive relationships with subcontractors and suppliers in our negotiations. 3 0.34 .0.71 Job site is physically visited before each bid. 31 0.30 0.75 We name staff within a week of winning the job. 128 0.14 0.90 We prefer resolution of problems rather than litigation. 9 0.06 0.98 We estimate projects in the same sequence we build them. Multiple Regression This section examines the relationship between the dependent variable (Peer OH/DC % Difference) and the 154 practices Standard Multiple Regression was utilized.
74 All practice variables were entered simultaneously and were analyzed in their predictive power of the dependent variable. They are then labeled model I. This block of 7 bes t explains the variance in Peer OH/DC % Difference. The regression sum of squares is the cumulative difference between the expected and the observed of the predictor variables. The residual is the unexplained difference which is 0.000. The test of unexplained variability is embodied in the F test. It is ratio of within groups and between groups variation. If the value of F is larger than 1.0, there is significant interactio n between the four categories. However, F is non existent since there is no within groups analyses These are single variables. The only calculation is between variables. From that, there is no significance to calculate ( Table 4 11 ) Table 4 9 Variables Entered / Removed Model Variables Entered Variables Removed Method 1 S156, S96, S17, S9, S70, S20, S38 b None Enter a. Dependent Variable: Peer OH/DC % Difference b. Tolerance = .000 limits reached. T able 4 10 Model Summary Model R R Square 1 1.0 00 a 1.000 Table 4 11 ANOVA Between Variables Model Sum of Squares df Mean Square 1 Regression 3135.963 7 447.995 Residual 0 .000 0 Total 3135.963 7 a. Dependent Variable: Peer OH/DC % Difference b. Predictors: (Constant), S156, S96, S17, S9, S 70, S20, S38
75 The coefficients make up the regression model. The unstandardized coefficient is the value predicted for the dependent variable. The standardized coefficient is the predicted value for the dependent variable assumed to have a mean of 0 and a standard deviation of 1. It is important to note, a ll variables are expressed in the same units and therefore have different effects depending on their value. The standard error is 0 .000 due to no difference between the average disparity and each (predicto r) value. Beta ( ) Weights depend on other independent variables in the overall regression model so, they do not have a significance based on their value. The confidence interval for ( ) is the same value for the lower bound and upper bound ( Tab le 4 12 ) Zero order correlation coeff icients (also known as Pearson correlation ) are for the dependent variable which is Peer OH/DC % Comparison. There is no Z in this computation, therefore it is 1.000. The c ollinearity statistics confirmed substantial i ndependence between the predictor variables. VIF for each is less than 10 and tolerance is more than 0 .1 ( Table 4 13 ) Table 4 1 2 Coefficients of Predictor Variables Model Unstandardized Coefficients Standardized Coefficients 95.0% Confidence Interval for B Std. Error Beta Weights Lower Bound Upper Bound 1 (Constan t) 24.254 0 .000 24.254 24.254 S9 8.349 0 .000 0 .398 8.349 8.349 S17 8.815 0 .000 0 .326 8.815 8.815 S20 1.794 0 .000 0 .103 1.794 1.794 S38 9.884 0 .000 0 .442 9.884 9.884 S7 0 11.461 0 .000 0 .613 11.461 11.461 S96 7.503 0 .000 0 .288 7.503 7.503 S156 1.192 0 .000 0 .049 1.192 1.192
76 Table 4 13 Coefficients of Predictor Variables Continued Model Correlations Collinearity Statistics Zero order Partial Part Tolerance VIF 1 (Constant) S9 0 .504 1.000 0 .386 0 .942 1.061 S17 0 .212 1.000 0 .303 0 .865 1.156 S20 0 .129 1.000 0 .075 0 .527 1.897 S38 0 .496 1.000 0 .245 0 .307 3.255 S70 0 .640 1.000 0 .525 0 .736 1.359 S96 0 .406 1.000 0 .262 0 .826 1.210 S156 0 .320 1.000 0 .032 0 .430 2.323 Linear regression examines the correlation between an independent variable (disparity of Importance Performance rating) and a dependent variable (Peer OH/DC % Difference). The results are two outputs in SPSS: 1) A graph a nd 2) An equation as shown in Figure 4 2. From a visual inspection, it appears that there is a high correlation of Peer OH/DC % Difference to low disparity of compliance to highly valued practices. ult of a Linear Regression. Figures 4 2 and 4 3 show the graphical result of the calculation. The equation is expressed as y = b(x) + c. The dependent variable (y) changes when the corresponding variable (x) changes one unit. The constant (c) is the interc ept on the y axis. The linear regression equation for highly rated practices is y = 1.7183x + 0.6964 So for every one unit change in y, it changes 1.7183 units in (x). In the case of this set of 154 practices, the intercept of (y) is at 0 .6964 or 69.64% This means that with p erfect compliance to this unique group of highly rated practices a construction organization can exceed its peer OH/DC average, at most, by 69%.
77 The Pearson correlation is 0 .6546. This means that the disparity of importance perform ance rating explains approximately 6 5% of the variability in results. Conversely, 3 5% of the variability is attributable to other factors. The regression line intercepts the 0% Peer OH/DC % Difference at approximately 40% Importance Performance disparit y. For this specific set of practices, 40% disparity of Importance Performance rating correlates to average Peer OH/DC %. Figure 4 1 % of Important (rated 5, 6 or 7) Practices against The Perfo rmance of Them (X scale). Specialty Contractor Peer OH/DC % Difference is on Y scale. y = 1.7183x + 0.6964 Pearson Correlation = 0.6546 -30.00% -20.00% -10.00% 0.00% 10.00% 20.00% 30.00% 40.00% 50.00% 60.00% 70.00% 80.00% 0.00% 10.00% 20.00% 30.00% 40.00% 50.00% 60.00% Peer OH / DC % Difference Disparity % of Practices for those Practices Rated 5, 6 or 7 in Importance Rating Highly Rated Practices' Disparity Between Importance and Performance Ratings Plotted against % Peer OH/DC Ratio
78 Linear Regression of Compliance to All Practices To measure the effect of complying with highly rated practices, another linear regression must be examined. It is the l inear regression of Importance Performance of all practices to Peer OH/DC % comparison. The linear regression equation for all practices is y = 2.755x + 0.7054 So for every one unit change in y, it changes 2.755 units in (x). In the case of this set o f 154 practices, the intercept of (y) is at 0 .7054 or 70.54 %. Perfect compliance with this unique group of highly rated practices, will allow a construction organization to exceed their peer average by at most, 71 %. Since the (c) is 0 .7054, there is litt le difference between the optimal effect of highly rated and all practices This is statistically the same as the (c) for the highly rated (5, 6, 7) important practices. There is no difference in result when pursuing the highly important practices and all practices. However, the beta of 0 .2755 is greater meaning that for each unit of change in disparity % between Importance and Performance the larger the effect. The Pearson correlation is 0 .3471. The disparity of importance performance rating explains ap proximately 35% of the variability in results. Conversely, 65% of the variability is attributable to other factors. Upon examination of the rating system therein lies a weakness of the IPA System. All things being equal, it appears that the lower the imp ortance of a practice, the greater the disparity % and affects the results. For example, if a practice is rated a 2 on importance and its performance is rated a 1, then the disparity percentage is 50%. However, if a practice is rated a 7 .0 on importance a nd performance is rated a 4.0 then the disparity percentage is
79 approximately 43 %. Numerically, a smaller rating of importance could lead to a greater statistical effect. So, using only highly rated practices (5, 6 and 7) appears to have more significance that all practices. It is widely accepted that highly rated practices would be a better focus for construction professionals. By definition, executing these often would have a greater impact on outcomes. Figure 4 2 Linear Regression of Participating % of All Practices against Their Performance of Them on X scale. Specialty Contractor Peer OH/DC % Difference is on Y scale. Size of Data Set The number of specialty construction firms participating in this study was less that 15. Sever al firms were disqualified for various reasons : a) peer financial data was not qualified ; and b ) one manager responded to practice survey. The number of firms who y = 1.7183x + 0.6964 Pearson Correlation = 0.6546 -30.00% -20.00% -10.00% 0.00% 10.00% 20.00% 30.00% 40.00% 50.00% 60.00% 70.00% 80.00% 0.00% 10.00% 20.00% 30.00% 40.00% 50.00% 60.00% Overhead / Direct Cost Peer Comparison Disparity % of All Practices Rated All Practices' Disparity Between Importance and Performance Ratings Plotted against % Peer OH/DC Ratio
80 qualified was 9. The small size of the sample leads to more variability of the data. Statisti cally, i t can lead to less confidence of accuracy in the result. The issue is whether results can be deemed statistically significant. T he question to answer is whether the data pattern is a result of chance or not The graph indicates whether constructio n professionals performing important tasks well and often answer s itself. The 154 management practices grade d on importance and performance were analyzed. Analyzing the Four Major Categories of Practices The 154 management practices were grouped into f our categories : 1) Work Acquisition Management ; 2) Project Management ; 3) Financial Management ; and 4) Business Management. Analyzing these four categories of practice did produce insights into the relative value as compared to each other and the predicti on of exceeding or not exceeding Peer OH/DC % Below is an explanation of the testing methodology and results. Scatter Plot Diagram The primary step in analyzing a large set of data is most times the simplest. Using a scatter plot diagram to visually insp ect for correlations is an efficient way to determine what to investigate. It allows the research er to spend more time early on what does not have independence. Any visual charting itself is not reason to conclude correlation but, it eliminates guessing of areas to focus on Scatter plots can show correlation by the clouds of data points plotted. If there is perfect correlation a straight line will be produced. Conversely, there is no correlation then a random set of dots will emerge.
81 Upon review of the scatter plots in Figure 4 4 some correlations appear to exist between the categories Here are the pairs most likely to produce significant insights into the behavior and value of GOPs: 1) Overhead / Direct Cost Ratio and Project Management ; 2) Business M anagement and Financial Management ; 3) Work Acquisition Management and Project Management ; and 4) Work Acquisition and Overhead / Direct Cost Ratio The plot indicates correlation between Peer OH/DC Ratio and Project Management Practices, however more data is needed. Figure 4 3 Scatter Plot Diagram of Categories of Practices to Peer OH/DC % Difference Two Way Analysis of Variance This test is helpful in determining which factor is most correlated to the dependent variable Peer OH/DC % Difference This analysis tests four hypotheses about the Peer OH/DC % Difference v alues Two Way Analysis of Variance measures the main effect
82 of 1) work acquisition practices ; 2) project management practices ; 3) financial management practices ; and 4) business mana gement practices Table 4 1 4 T wo Way Analysis of Variance Table Between Categories of Practices Source Dependent Variable Type III Sum of Squares df Mean Square Corrected Model Work Acquisition 2.818 a 8 0 .352 Project Management 1.633 a 8 0 .204 Fina ncial Management 2.865 a 8 0 .358 Business Management 2.516 a 8 0 .314 Intercept Work Acquisition 6.418 1 6.418 Project Management 10.411 1 10.411 Financial Management 14.088 1 14.088 Business Management 19.536 1 19.536 Overall Disparity Work Acquisi tion 2.818 8 0 .352 Project Management 1.633 8 0 .204 Financial Management 2.865 8 0 .358 Business Management 2.516 8 0 .314 Error Work Acquisition 0 .000 0 Project Management 0 .000 0 Financial Management 0 .000 0 Business Management 0 .000 0 Total Work Acquisition 9.236 9 Project Management 12.045 9 Financial Management 16.953 9 Business Management 22.052 9 Corrected Total Work Acquisition 2.818 8 Project Management 1.633 8 Financial Management 2.865 8 Business Management 2.516 8 The Type III Sum of Squares is an analysis of between groups expected versus observed values. Type III Sum of Squares is the default measure of SPSS 20 software for the difference between estimated and observed variability. Dividing the resulti ng number by the degrees of freedom (df) produces the mean square. This results in a
83 more accurate measure since many times there may not be an equal number of cases in all groups. The test of unexplained variability is embodied in the F test. It is ratio of within groups and between groups variation. F measures the ratio of between groups mean square to the within groups mean square. Since T able 4 14 is measuring between groups only, a dash (meaning no value) results and the significance measure is also a dash. ANOVA Computing a one way ANOVA of the four practice categories against the peer comparison OH/DC % result illuminates the relative fit to the regression line for each factor. The ANOVA Table tests the overall significance of the model and the regression equation. From th e analysis of variance, project management related practices scored a 1.633 sum of squares and a 0 .204 mean square. This category is the tightest fit and thus the most correlated OH/DC Peer % Comparison for the overall grou p of contractors. Table 4 15. Analysis of Variance ANOVA Between Categories of Practices Category Sum of Squares df Mean Square Business Management 2.516 8 0 .314 Financial Management 2.865 8 0 .358 Project Management 1.633 8 0. 204 Work Acquisit ion 2.818 8 0 .352 Pearson Correlation Pearson Correlation is helpful to explore the strength of the relationship between two continuous variables. It can range from 1 to +1. Any negative number indicates that
84 when one variable moves in one direction, th e other moves in the opposite direction. A positive number indicates that the two variables move in the same direction. What is most noteworthy are the correlations with Peer OH/DC % Comparison d by U.S. Banking Data ). Other correlations will help refine our conclusions about the data, but the Peer Comparison correlations give relative importance to each category of practices. It determines success or failure. The strongest correlation in regards to the Peer Comparison (Overhead to Direct Cost Ratio) is with Project Management Category of Practices. The Pearson Correlation value is 0 .830. This indicates that the project managem ent functions of a construction contractor have the largest influence on overhead efficiency in managing direct costs. Table 4 16. Pearson Correlations of Categories of Practices Peer Comparison Work Acquisition Business Management Financial Managemen t Project Management Peer Comparison 1 .0 0.545 0.534 0.058 0 .830 ** Work Acquisition 0.545 1 .0 0.645 0.608 0 .751 Business Management 0.534 0.645 1 .0 0.222 0 .812 ** Financial Management 0.058 0.608 0.222 1 .0 0.194 Project Management 0 .830 ** 0 .751 0 .812 ** 0.194 1 .0 **. Correlation is significant at the 0.01 level (2 tailed). *. Correlation is significant at the 0.05 level (2 tailed).
85 The weakest correlation is Financial Management. It is calculated at 0.058. This category of practices has a large ly neutral effect on whether the contractor exceeds the peer averages. The other two categories have approximately the same correlation: Work Acquisition at 0 .545 and Business Management at 0 .534. Hence, t hey have a significant effect and are generally ac cepted as having a complementary effect on install ation of construction work.
86 CHAPTER 5 CONCLUSIONS This section cover s conclusions made by the researcher based on the results of the analysis of quantitative and where available, qualitative data. Overall, the specificity of practices lends itself to more prescriptive conclusions. That is more direct and actionable recommendations for the specialty contractor who seeks to improve his or her business Research Objectives Addressed There were four research o bjective s for this study: 1) Determining good operating practices ; 2) Determine common practices that are negatively correlated to overhead efficiency in managing project costs ; value and compliance ; 4) P ropose an approach to applying this research to construction organizations engaged in specialty contracting This study has determined several good operating practices. These are ( SPSS 20 2012) This is an important part of this research for a couple of reasons : a) for companies reorganizing under bankruptcy law or otherwise in distress, effectiveness ; and b) this research proves that there are best practic es through a scientific methodology. However, t he construction industry relies on informal coordination and decentralized decision making and this impedes comp a ny optimization and innovation (Brosseau and Rallet 1995)
87 A group of practices were negatively correlated to overhead efficiency. These financial practices and how to manage th is inefficient effect. confidence, however as the research continues enough part icipation should be captured to treat conclusions with more confidence. These management practices are the start of a journey for any specialty contractor to reach above average performance. The methodology utilized can be part of the beginning of a firm o r turning one around. The practices can be treated as prescriptive instead of as guidelines. However t here are several avenues to consider : a) Use in business planning software for startup firms ; b) Use as an additional qualifying tool for general contrac tors for subcontractor selection ; c) Use as an additional diagnostic tool for surety corporations to gauge risk of failure ; and d) Use for specialty contractors to self diagnose their operations. Good Operating Practice Selection It takes much time and ex pense to collect superior practices from the construction industry. The effort is worth it. For an individual construction firm, capturing, formalizing and disseminating good operating practices can create a better, more competitive busi ness. For the indus try, there is a great benefit. More capable contractors capturing reasonable and the projects life cycle is long. Making the effort to collect practical methods for all contractors to benefit from can be a good first step.
88 This paper suggests a prescriptive approach. The Total Quality Management (TQM) and the Lean communit ies did establish great value when they codified the concept of standardizing practices. However, t hey did not go far enough. TQM did not promote a sharing of good practices, although society and industry would benefit. Establishing common good operating practices and communicating them to specialty contractors is the next step. There has been a n attem pt to derive tactics and methods by the Design Build Institute Construction Industry Institute, Electri International the Lean Construction Institute and other associations They appear to be done informally. After an internet search, literature review a nd conversations with industry professionals it appears that there are no programs that are structured and formal Collecting good operating practices will be difficult. There is a conflict of interest; those who know them are in a business that competes with others for revenue and profits. Their salary is a direct result of beating competitors Why would they be incline d to share hard won information? What reward would there be to them? Would it be advantage ous to have a better competitor? Therefore, it is rational t o have skepticism about th e process of collection of good operating practices H ow much confidence can one have in applying them to any contracting business situation when competition is a normal culture in construction contracting? Good oper ating practices are better gathered and confirmed by a third party such as a management advising firm or university. Both have done so in the past and have an incentive to have such a library of information. Both can gain access to the inputs (practices) and the outputs (business metrics). They can confirm correlation (not
89 causation) in their research process. Each can easily build a database They can keep the data confidential for participants These could be legacy systems aid the industry and improv e p ractice quality over time. Th is research paper concludes that and not These kinds of practices are where most professionals should start the i r search for a better way of contracting construction work. Contrast this with an alternative methodology to work for many years and find what works through trial and error. A construction career can stretch to over 50 years and a specialty contracting business may take as many years to consistently deliver wealth to its owners. This shortened learning curve could help specialty contractors decrease the chances of bankruptcy and therefore financial disruption to employees, clients, suppliers, etc. Measure the Value of Selected Practices Measuring the value of the p ractices is a key step to establish a program of adding good operating practices to the industr knowledge base. There appears to be value to using the Importance Performance scale in correlating these practices to desired results however caution must be used. The measurement of overhead to direct cost % much discussion in the industry occurs over the question of the appropriate overhead amount. It is a short sighted topi c. This paper asserts a better metric is measuring the efficiency of the overhead in managing the direct costs. Allowing for Self Selection of Importance by Specialty Contractors Each specialty contractor is unique. These kinds of firms have geographic, m arket and client variations among other differences Some allowance for this kind of non uniformity has to be designed into any prescriptive good operating practices process.
90 The execut ives of a firm should be the drivers of good operating practices standa rdization. However, managers (middle or lower) know intimately if a practice works with efficacy or not. These two parties can work togethe r to help standardize the practices and thus the processes needed to manage smoothly and profitably. Measuring Perfo rmance All practices are worthless unless they are executed. There is no value realized unless a practice is followed In some management thi nking it is called compliance The Lean Production Community has label ed it ercent p la n c omplete (PPC) ( Ballard and Howell 199 4 ) If applying to a construction contracting organization, one tool used by the research in the past is the use of an electronic checklist. A web enabled method that lists company required practices and is accessib le by all employees including senior management. When the employee records completion of a practice and clicks on the A summary report is available any time to the senior management of completion, date o f completion and any comments the employee might want to share. This can be a proactive way to monitor a project. As an example, when practice completion is not timely, an executive might speak and correct the lack of compliance before the first job cost r eport (possibly negative) is published. The Ultimate Value of Selected Practices Many hours of research was conducted to capture the practices to test. This included o bservations of construction contractors by the researcher. The researcher has personally known many to them. Those companies that have been in business for many years and are consistently profitable were of particular interest. Most practices tested
91 were distilled from these types of firms. The 154 practice s appear to have an effica cious ness of making overhead more efficient in managing direct costs. The Value of 4 Categories of Practices A Pearson Correlation was executed to 4 categories of practices comparing their effect on OH/DC % peer comparison. It illuminated some potential research. Practices categorized as project management appear to have the most direct correlation. The Pearson Correlation is 0 .830 and is the highest of the four categories. On balance, if a company desires a higher profitability, it appears that more time and effor t placed on project management will result in more gross profit. This typically will result in a higher net profit before tax. Those practices categorized as business management have a P earson correlation of 0 .534. This is a substantial effect. The contr have to be carefully chosen and complied with. Practices that are considered by the researcher as work acquisition have a correlation of 0 .545. From the experience, this process area is the precursor o f project management practices. Work acquisition flows into project management according to Figure 1 2. These practices done with high compliance help make project management more effective and efficient The Pea r son Correlation of financial management pr actices calculated at 0.058. They are neutral in contributing to better than average OH/DC This may indicate that these types of practices should not be intrusive or time consuming to a specialty contractors operation. Since they have little correlation, thought has to be given to easy collection, analysis and distribution of financial data. Possibl y with the use of electronic methods and those methods that are less labor intensive for managers Time and effort
92 saved here can be more beneficially used for project management activities to drive overhead efficiency. Good Operating Practices From the multiple regression output, 7 practices are considered predictors. These They are highly correlated to the dependent vari able OH/DC % Com p arison. Listed in order by SPSS highest listed first, they are: 1. Practice 156 We re estimate bad bids to fairly set the correct budget. 2. Practice 96 Our Company Managers "get the potential out" of Employees by coaching and challenging them. 3. Practice 17 At least yearly, we review our actual unit costs and production rates to change or confirm the costs we bid. 4. Practice 14 9 We measure cost to complete accuracy by Project Manager. 5. Practice 93 All Managers are trained and understand financial management. 6. Practice 116 Our job cost software projects cost at completion for best / worst cases 7. Practice 58 We keep change orders separate on our cost reports from the base contract. Application of Model Results This is the start of a disc ussion about a group of practices and the i r effect on the overhead efficiency of a contractor. Since multiple external factors and internal practices are part of any success or failure of a specialty contracting firm, dramatic conclusions cannot be made. H owever prompting others to engage in this area of scholarship is the basic goal of this research. This study limited by the nature of the research strategy to see the companies. This research does not suppose that i t sees all the dynamics of each company in full.
93 The unequal value of each practice is clear. This is a result of two major factors : 1) different perceived values of each practice, and 2) the compliance of executing the practices. As stated earlier, importance has an effect on compliance. The resulting often less overhead is needed to manage each dollar of direct cost It can be interpreted as an overall statement that perfect compliance with what is deemed impo rtant by a firm will result in an approximate 69% greater overhead to direct cost ratio over their peers. The model also indicates 40% disparity between importance and performance results in average peer Overhead / Direct Cost performance. Opp ortunity to A dvise Prescriptively to the Construction Industry From the statistical analysis, predictors emerge. These predictors are produced by usin g standard multiple regr ession analysis. If a prescriptive advising role is requested by a contractor, it may be possib le to start the complicated task of changing contractor efficiency by focusing on the 7 predictive practices. Action research as described by Lewin (1946) may be possible. Due to the importance of the industry to the U.S. economy, and the great benefit s ociety receives when employment is optimum and corporate bankruptcies are minimized it may be advisable. As a general goal, capturing, delineating, and communicating highly correlated practices to the construction industry might decrease bankruptcy occu rrences and produce less disruption to construction professionals lives. In other words jobs and profitable businesses are great social programs. These are worthy public goals. Future Research Recommendations There are several future research recommendati ons to offer. Each is a conclusion that occurred to the researcher during the course of this study.
94 1. Partnering with construction organizations to distill more practices and then to test those practices aga inst yearly organization al performance E fforts sh ould be made to capture trade specific practices especially in the areas not covered by this study completely. 2. A new set of practices should be tested to see if better correlation to Peer OH/DC % comparison can be achieved. If higher correlation results, then the practices will have a higher value. 3. Creation of a database containing longitudinal data of construction organizational performance for querying. 4. Creation of construction specific software for the business of contracting. In this age of heighten t of practices and accompanying metrics to software would help increase organizational effectiveness. 5. Creating a research methodology to discern any misalignment of senior e organization of practice importance and performance. 6. only help the industry, its practitioners and the status of the construction research community. 7. Research and c reat i on of an audit process so the use of good operating processes may be confirmed by third parties such as project owners and sureties 8. The same general process may be utilized to correlate strategic practices against organizational performance. Additionall y, other industries may find this applicable to testing practices for their efficacy.
95 APPENDIX A SURVEY INSTRUMENT OF 154 PR ACTICE STATEMENTS
121 Figure A 1 Example from Study Contractor financial analysis of income statement
122 APPENDIX B PEARSON COORELATION OF PRACTICE STATEMEN TS
155 APPENDIX C SAMPLE INDUSTRY FINA NCIAL DATA
159 Table C 1. Participating Contract ing Organization Description Designator of Contracting Organization Contract Revenue FYE 201 1 Description of Organization BFE $35 million An electrical contracting firm serving commercial and industrial clients with 3 offices in different sta tes. Eridge $8 million A self performing general building firm serving commercial clients. in one state Bduron $4 million A c oncrete restoration firm serving multiple states. Sdirt $21 million An earthwork and utility firm with 2 offices s erving a si ngle state GMA $3 million A m echanical and plumbing contracting firm serving a single state ISE $66 million An electrical contracting firm with multistate operations serving commercial and industrial clients Rland $8 million An interior construction firm serving multistate area Edrain $22 million A utility construction firm serving a single state. Cdoug $31 million A roofing firm operating multiple offices serving commercial, residential and industrial clients in multiple states with 5 offices
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169 BIOGRAPHICAL SKETCH Matt Stevens is the president of Stevens Construction Institute, Inc., Management Advisors to Construction Contractors. in the construction industry he has been working with con tract ing organizations as a management advisor since 1994. He earned an undergraduate degree in Construction Management from University of Louisiana Monroe and an MBA from Rollins College, Winter Park, Florida. Stevens has performed s trategic p lanning, b us iness e valuations, partnering sessions and p roductivity i mprovement engagements with dozens of construction firms and conducted hundreds of training sessions ranging from one day seminars to weeklong boot camps across the United States, Canada and Mexico He has analyzed many contracting firms as a management advisor and assisted owners in improving their firms with business and process improvement initiatives, some lasting as long as eighteen months. He is certified on several subjects ranging from people skills to business processes. Matt has written technical and business process manuals for firms seeking to companies in keeping processes efficient, implemented, and structur ed for efficient monitoring. Stevens writes a monthly newsletter for his blog, The Construction Con trac tor's Digest (http://www.contractorsblog.com), currently contains over 190 articles and templates. He writes a regular column for Contractor magazine Stevens Construction Institute offers an E Learning Center (http://www.constructioncbt.com), with over 200 self paced online courses to complement the books, white papers, seminars, webinars
170 and blog. His first book, Managing a Construction Firm on Just 24 Hours a Day (McGraw Hill, 2007, 416 pages) has been adopted by contractors, associations, sureties colleges and universities in the U.S., Europe, Asia, and Australia. His latest book is The Construction MBA ( McGraw Hill, 201 2 512 pages) has been adopted by many of the same organizations. Stevens has also delivered expert witness testimony, both in the courtroom and in depositions outside the courtroom. His area of expertise is construction business operations for companies and pr ojects.