The construction industry is the largest single component of GDP in the U.S. That is the good news. The bad news is that it is the most competitive segment of the economy. Competitive bidding is prevalent, barriers to entry are low, and business risk is very high. It is the closest thing we have to pure competition, which means margins are always tight.
In spite of these challenges, we work with many successful construction firms that produce excellent results. Their success leaves clues. As we look across these firms, we can begin to see patterns among the best-run, longest-lasting companies. While the industry is very cyclical, the successful companies seem to be able to manage through the ups and downs. At a high level, these firms do three things really well:
- Focused Strategy – Successful construction firms know their core competencies and focus on the types and sizes of projects where they will do well and can make sufficient margins. They focus their energy on that work.
- Operating Discipline – They have clear business rules, operating systems, and procedures around how they run their businesses. And they are disciplined about enforcing the rules.
- Execution – They execute at a very high level. This is because they make key investments in important elements of their overhead structures: namely, people, technology, financial matters, and risk management and safety. They are aware of the need to keep overheads low, but invest wisely in their overheads so their investments drive business value.
Based on our experience, we have identified a number of areas contractors can focus on to improve their performance, go from good to great, and be as successful as the best construction firms.
- Bidding Practices – Because of the highly competitive environment, many contractors succumb to the “bid anything” approach. This leads to projects that may not be the best fit for the company and may be too large to execute well or too small to carry enough margin. Many companies also chase bad volume in their bidding, meaning that they bid at exceedingly low margin to add to their backlog without an ample level of margin on the project. The best companies know their sweet spots and have the discipline to say no to projects that do not fit their requirements.
- Change Order Management – This is an area where we see many contractors lose money. Managing change orders and cost events is a challenging process for every contractor because the project has to continue while you address these changes to the scope. Many companies lose a lot of money here because they do not have systems between the field and the office to properly track and manage the progress in getting the change orders signed. They often get delayed to the end of the project when the contractor has little leverage. The best companies have a highly disciplined process to track and follow up on change orders weekly, as well as mechanisms to properly follow up with the project owner.
- Safety Programs – Building a project carries significant risk, and there is a high cost of insuring those risks. Many contractors do not make enough of an investment in their safety programs. Not only is safety important to employees, it also adds a quality control mindset to everything the contractor does. A culture that prioritizes safety implies that things get done the right way the first time. The best-run contractors invest in their safety programs and tend to have low experience modification rates and loss ratios.
- Communications Between the Field and the Office – Many companies have a culture that says that the field is where the profits are made and pay little attention to the coordination of those activities with the other executives at the home office. Integration between the field and the office is an important best practice for well-run contractors. Every company does it a bit differently, but they consistently have processes where those in charge of building the project in the field have a high degree of communication and coordination with the CEO, CFO, and VP of Construction.
- Overhead Investments in IT, HR, and Financial – It is common for many contractors to focus on keeping overhead low because of the low margin environment in which they work. In many cases this is done to a fault. Taking this mentality to an extreme affects the long-term health of the business and can severely affect its ability to execute and perform well. Without the proper level of overhead investments in key areas like human resources, training and development of people, and technology and financial management systems, the business cannot operate well. The mistake many contractors make is to keep these investments so low that they harm the business. The best contractors invest wisely in these areas because they are the support mechanisms that allow the company to produce its revenues and profits from building projects.
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