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Construction Equipment With Chart Over Sky

The construction industry is changing rapidly. Here are a few survival tips for this brave new world as we approach the new year.

Survival Tips for the Evolving Construction Industry

  • 12/4/2012

Survival Tips for the Evolving Construction Industry

From the way buildings are built, to the way projects are funded, the construction industry is changing rapidly. Gone are the days of high margins, and even higher backlogs. Executives are now entering a playing field that is not like the one he grew up with. Terms such as “public/private partnerships” (P3s), and building information modeling (BIM) are part of the vocabulary.

In addition, builders are diversifying their backlogs to maintain market share, and the relationships between owners and unions have changed the way construction executives are navigating the future.

Here are a few survival tips for this brave new world as we approach the new year.

Cut overhead costs. Many companies have maintained their current level of overhead, thinking the downturn was only temporary. This has eaten into much of their retained earnings and equity. Now, failure to reduce these costs could impede their ability to respond to changes in their backlog, whether it is increasing or decreasing.

Think about public/private partnership issues. Although public/private partnerships may not represent a large portion of a company’s backlog, these relationships are becoming more prevalent and being knowledgeable about such agreements is required to manage the associated risks. All parties must understand who the customer is and who the owner is. With these arrangements, there is a payment risk when the project goes over budget, and attaching a lien to a property is not as easy with the partnership agreement.

Take advantage of government incentives. There are significant tax credits available to contractors when the projects they work on meet certain criteria. For example, an electrical contractor that also designs and installs energy-efficient equipment and materials could get substantial energy tax credits. In fact, some firms will bid the job at a loss, only to recoup the loss by claiming the tax credit.

Invest in information technology. More competitive bidding means margins are even tighter. The right software tools can help.

  • BIM and three-dimensional engineering software allows users to identify construction conflicts prior to starting work. This reduces the number of errors (and re-work) associated with project engineering. Previously, these costs were either absorbed into the project, or re-billed to the customer. Now they only impact the already slim profit margins.
  • Newer accounting software systems can help improve job costs estimates by linking estimates with actual job performance, allowing the company to generate more competitive proposals.

Understand the company’s fixed and variable cost structures. Knowing a company’s cost structure allows for overhead adjustments when estimating the total job cost. For example, work generating more revenue at a lower margin frequently covers the same fixed costs as lower revenue/higher margin jobs. With increased competition, much of the high margin work is not available.

Understand the risks of diversification. Whether a company is doing business in new states or performing work without previous experience, construction executives need to use their available resources to mitigate risks. For example, working in New York City means additional taxes and administrative filings. Similarly, attaining Leadership in Energy and Environmental Design (LEED) certification means significantly greater costs and administrative requirements. Get whatever knowledge is necessary to perform work out of your comfort zone to ensure that the perceived profit does not evaporate.

The construction industry has changed substantially in the last five years, and will continue to change for the foreseeable future. Some of these recommended changes are more difficult to implement than others, but in this new era of tight margins, tax credits, and industry specialization, your future profitability may depend on it.

Dave English, Construction and Real Estate Manager or 847-597-1842