Does Your Construction Company Need to Change to Increase Profitability?

The current recession has placed tremendous pressure on the profitability of the construction industry, causing some contractors to even take work at below cost. This situation is easy to blame on the recession, but the underlying problems existed in the construction industry long before the recession. The hypercompetitive nature of the construction industry has existed for decades. Look at some of the statistics and professional opinions. 

For years contractors have been complaining about how difficult it is to find qualified people. Peter Drucker wrote, “The first sign of decline of an industry is loss of appeal to qualified, able, and ambitious people.”

In 2005 Forbes magazine reported that the return on investment for the construction industry was a mere 9.7 percent compared to the average for all U.S. industries of 16.7 percent. This means that even in the middle of a construction boom, the construction industry had the second worst industry ROI in the United States. If contractors can’t earn a reasonable profit during a construction boom, when can they?

This has resulted in most contractors’ fighting to survive. Unfortunately for decades the construction industry has experienced the second highest turnover of businesses, with only the restaurant industry being worse. In 2005 40 percent of contractors didn’t make a profit and many more made insufficient profits as a return on their expertise, investment in time and money, risk and effort involved.

In contrast, Sun Tzu wrote in The Art of War, “Those skilled in war subdue the enemy’s army without fighting. Their aim must be to take all under heaven intact through strategic superiority.”  Without a superior strategy, contractors find themselves in a bloody ocean as a result of the competition beating each other up.

The question your company must address is, “Do we have a superior strategy?” To help your company evaluate that question, I have provided several questions that you need to answer:

• Is your company facing increased competition in your markets?
• Are you constantly asked to lower your prices to get the job?
• Is your company focused more on how to build cheaper instead of focusing on innovation and value creation for clients?
• Are you blaming your company’s struggles on a poor construction market? (Keep in mind the U.S. construction market
  even during the recession has been in the $800 billion range, so there is still a lot of work out there.)
• Do you believe the only way to compete in today’s hypercompetitive marketplace is to obtain the absolute lowest possible bids from subcontractors and vendors?
• Does it appear the only way to grow your business is through mergers or acquisitions to increase market share or to
  enter new markets?
• Do you feel like your customers think of your services as a commodity?
• Are your key competitive advantages basically the same as your competitors’? (In other words, are you emphasizing price, fast schedule, quality and construction experience?)

The problem here is that while there may be differences between you and your competition, in a hypercompetitive marketplace, these differences shrink and become very difficult or impossible for the prospect to discern. Therefore, they perceive your services as a commodity and choose contractors based on price. If you answered yes to a majority of these questions, then I hate to inform you that you don’t have a superior strategy and your company is competing in a bloody ocean.

The obvious answer is to get out of the construction business. Don’t panic! I’m not suggesting that you stop building things. After all, that’s what you do. However, that’s not the business you are in; the business you are in is how you add value for your clients. To do that you must redefine the construction business. Too many people think of the construction process as what exists from ground breaking until the contractor turns over the keys to the owner. To escape the bloody ocean, contractors need to redefine the process to include the time frame from the time a project is first thought about until the structure is torn down. Why?

First, contractors have a tremendous amount of value they can contribute in the expanded scope. For example, owners have told me the place where contractors can help them the most is before construction. Second, the cost of construction represents somewhere between 10 and 20 percent of the total lifetime cost of a building depending on the type of building. These percentages don’t include the impact on the cost of people working in the building. This expanded time frame drastically increases the opportunities for contractors to differentiate their services and, therefore, avoid the red ocean of hypercompetition.

Is this easy? Absolutely not! Why? First, if it were easy, everyone would do it. But more important, unfortunately there are many owners and contractors who believe the red ocean approach is the best and attempt to prevent others from escaping it. Fortunately not everyone agrees with a red ocean approach and, therefore, contractors who want to escape the bloody ocean caused by hypercompetition need to aggressively seek out others that understand what I refer to as Construction 3.0™ Strategies. This approach opens all kinds of opportunities for contractors to improve their profitability while better serving their clients. This is true regardless of whether they are competing on an integrated project delivery job or are forced to compete on the more conventional design-bid-build project.

Construction 3.0™ Strategies is not a quick fix to the construction industry but is a comprehensive approach to construction that integrates several powerful concepts. There is no single approach that fits all situations, but Construction 3.0™ Strategies allows contractors to apply critical concepts and principles that have a proven track record of success to their unique situation. It doesn’t matter if you are an international giant or a small local
contractor. It doesn’t matter if you are a design-build contractor or a low-bid contractor. The amount of potential benefits will vary depending on the contractor’s specific situation, but virtually every contractor can benefit. Further, while many contractors are already implementing some of the concepts described in Construction 3.0™ Strategies, they usually can still find additional ideas to take their performance and profitability to the next level.

One advantage of Construction 3.0™ Strategies is that many of its concepts and ideas can be implemented at very little cost but reap significant payback so the process pays for itself and more. In today’s hypercompetitive marketplace, no contractor can afford not to take advantage of strategies that can help its business be more profitable while providing greater value to its clients.

Source: Ted Garrison