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Do you remember the cartoon character Bob the Builder? His signature yellow hard hat and red toolbox are as recognizable as his famous saying, “Can we build it? YES WE CAN!” Thomas C. Schleifer, PhD, is a former professor at Arizona State University and wrote that “many construction professionals believe they can design or build anything. The pertinent question is, ‘can we build or design it at a profit?’ Construction isn’t that hard. Construction at a profit is.”

When presented with a project opportunity, many contractors quickly respond with enthusiasm like Bob’s before thoroughly considering whether taking on the project makes sense for their business. Subsequently, being awarded the project often results in the famous adage “the good news is we won the project, and the bad news is we won the project.” Fortunately, there is a better way to evaluate projects that balances the optimism of a win with the practical need to make a profit.

Many organizations use a go/no-go test to evaluate the viability of a potential project with criteria such as:

  • Prior experience/relationship with client;
  • Geographic location;
  • Payment history; and
  • Other likely bidders.

Absent from this approach, though, is a risk assessment of profit potential. If profit potential is not already a criterion in a contractor’s business development efforts, it should consider incorporating a risk matrix into the discussion before saying yes to the next opportunity.

This classic risk matrix is an effective tool for examining a project’s potential success.

While there are many criteria that can impact project profitability, the four most important relate to how well the project aligns with your previous project success. These include:

  • Project size;
  • Project type;
  • Geographic area; and
  • Project owner.

Here is an example of how to use the matrix to evaluate the potential risk of a new opportunity:

A design/build contractor is asked to bid on building a new 50,000-square-foot, $5.5 million athletic complex in a nearby suburb. The majority of the contractor’s project experience is negotiated high-end office construction (average project size of $2.5 million) with an area developer, who is the driving force behind the new complex. This is a great opportunity to deliver a win for the client and the company. Can the company build it? Before saying yes, it is important to evaluate the risk.

Use the risk matrix to evaluate the four aforementioned critical experience criteria that place profitability at risk. For this scenario, project size and type are the two key considerations because they differ from the contractor’s experience.

Project size: In volume, this project is almost twice their average size. A standard rule is that a project up to 10 percent larger than past profitable projects is low risk. The key word here is profitable. A project twice as large as past profitable experience is high risk.

Project type: This project is not comparable to the type of work the company has profitable completed in the past.

Lacking profitable experience with projects of this size and type of work, this opportunity is at high risk of being unsuccessful—or highly unprofitable.

Using the same example, but changing the project size to $3 million dollars (closer to the 10 percent acceptable increase), a different analysis occurs. The project is now much lower in risk and other factors such as relationship with the owner and project complexity, and available resources, such as manpower and equipment, can be taken into consideration when making the go/no-go decision.

While there are many factors to consider when pursuing a project, evaluating the risk of the four critical experience criteria should be part of the process. New opportunities are always exciting, but be sure to heed the advice of Tom Schleifer and consider not whether or not you can build it but if you can build it at a profit.

“Can we build it?” Maybe.

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