Winning Construction Work and Staying Profitable in An
February 02, 2023
A mentor once told me that if you can become good at making money in the construction business, you can probably do just about anything. Having spent the majority of my career in construction, I’ve found that statement to be true; asserting construction is a risky business would be an understatement.
The work we do is highly commoditized, meaning owners typically give more consideration to contractors with the lowest price than to contractors who can deliver projects with the highest value. This commoditization of construction services fosters a cost competitive environment where a contractor with the lowest bid price, and theoretically least likely to make a profit, is the one who is awarded the work and gets to try to complete the work for a profit.
However, the variability inherent in our work where no two projects are designed the same, operations are continually moved from site to site, work is performed for new owners with new designers and with new contractual requirements unique to every project means construction services should be considered anything but a “commodity.”
Still, despite these challenges, highly effective contractors have proven themselves capable of identifying and managing project risks to complete work successfully and for a profit, defying the odds.
But I believe many of the risks we have conventionally managed to complete work successfully is changing further still. Why? Because new economic instabilities are ushering in a whole new set of risks that, unless properly identified and mitigated early on, will threaten the long-term viability of a construction enterprise.
So, what does it take to be successful and thrive in today’s unstable economic conditions?
Honestly Considering Risks Up Front
To formulate a plan, we need to first start by identifying some of the new and unique risks that threaten the profitability of our projects today. One of the biggest risks facing contactors today are supply chain issues and the unpredictable nature of which raw materials will be the next ones to suddenly seem to vanish from the face of the earth. Lack of an adequate supply of materials not only results in increased demand for those materials, which drives up the price, but it also introduces delays which interrupt the efficient flow and sequencing of the work.
For example, at the time of this writing, ductile iron pipe is in such short supply, it is taking about one year from time of order to receive delivery to the site. The current fly ash scarcity is also making it more common for concrete producers to limit the amount of concrete that contractors can order, sometimes being limited to amounts exceeding no more than 150 CY/wk, all to stretch the limited supply of concrete to as many customers as possible.
The severity of these supply disruptions is continual and unprecedented, and the impact they can have to a projects schedule are significant. Supply chain logistics needs to be vigorously managed and when material delays threaten a projects schedule, consideration for the delay needs to encompass the actual cost of the delay beyond simply granting an extension to a project’s completion date.
Bringing Cost Disruptions into the Light
These types of supply chain snarls also tend to result in sharp increases to the cost of our materials and likewise the price of our work, with no real added tangible benefit for the owner. In fact, many owners who are now expanding their operations and implementing capital improvement projects are not able to get the bang for their buck that they used to and are incorrectly presuming the contracting community is somehow colluding to benefit from this situation. Unfortunately, such misconceptions add to the strain of an already challenging contractual relationship.
While the willingness of an owner to acknowledge and accept economic realities that the price of work they may have been used to paying is largely a thing of the past, contractors tend to make things worse by continuing to withhold vital cost information. This tendency has been encouraged by generations of low bid pricing as the primary means of acquiring work.
However, willingly sharing information on the true cost of the work, both good and bad, as well as the actual impact of economic events can go a long way to helping owners understand how their capital funds are being spent. This more open behavior can also promote a cooperative relationship where amenable re-negotiation of contract terms can take place when issues arise.
Additionally, there are alternative delivery methods that can be more encouraging of “open-book” methods of information sharing between owners and contractors and should be explored where practical. Now, how can a company survive and thrive in chaotic market conditions?
Appreciating the Past, But Looking to the Future
Even though most successful contractors are adept at identifying and quantifying the risk inherit in their work, the external factors that are at play in today’s environment are not the same types of factors we are accustomed to dealing with. In talking with a friend of mine the other day, he recalled how, during the period immediately preceding the Great Recession of 2008, “it was a great time to be a contractor.”
Though it’s nice to reminisce, we must remember that project prices were also appropriately higher accounting for the scarcity of resources necessary to complete work. For contractors capable of navigating those risks, it became an opportunity for many to grow their business. Yet fast forward to today, and a similar economic condition exists, where there is plenty of work and not enough resources to complete it all, but these market conditions, in my friend’s estimation, “just don’t feel good” for some reason.
Why? Because the risks now are much more pronounced and the downside risk of people and materials just not being available to complete work we are contractually obligated to, no matter how good the price may be, will force us to reimagine what it will take to be successful.
I believe, however, that this is ultimately a good thing, and will push us to search out new technologies, techniques and processes to optimize our time, costs and work forces beyond the “good old days.” Of course, only time will reveal what the winning formula — or formulas — will be, but I can assure you of one thing: survival moving forward will require more than simply a desire to hunker down and wait for things to get better. The time to act is now.
Ready to take a deeper dive? Schedule a one-on-one consultation to find out how InEight can help you succeed in your construction digitalization journey.
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