Construction businesses have traditionally operated on thin margins, but supply chain disruption and today's focus on decarbonization are increasing the pressure on the bottom line. How can construction businesses accelerate transformation and maximize margins in 2022 and beyond? Here are six things you can do.
The COVID-19 pandemic has caused global disruption across most industries, with the construction industry sector being particularly hard hit. Not only that, but a growing focus on environmental, social and governance (ESG) and decarbonization means construction contractors may soon find themselves being challenged if they don't rapidly adapt to meet changing government and consumer requirements. Whilst penalties are not in place yet, according to the UK Government body, Department for Business, Energy and Industrial Strategy, they may be imminent.
The problem for many is that they are already operating on razor-thin margins, even at the tender award stage. With added build requirements meaning the use of lower carbon materials, which are, of course, more expensive to procure, there is even more pressure on the bottom line than before.
Most companies in the construction sector, although mainly the main contractors, already have programs to substantially cut costs. But, and here's the main challenge, the cost cutting is either not severe enough or the pace of change is too slow to deliver the required returns to satisfy the stakeholders. By stakeholders, we primarily mean shareholders, who have been mostly patient in waiting for their returns — but patience is running out!
The bottom line? Construction companies must change, must move into the future with optimism and must identify opportunities to enhance their offering or risk becoming smaller or even obsolete. To help accelerate your transformation and spot opportunities for the construction industry, here are the six key post-pandemic focus areas to create wider margins in the construction industry, whilst overcoming tough environmental obstacles.
Six key post-pandemic focus areas to create wider margins in the construction industry
1. Boost information-sharing among employees
Communication is a challenge in every industry, but particularly sectors that use a high coordination ratio, such as the construction sector. The average house needs typically 22 contractors to finish the build; on a large construction site, there can be over 50 subcontractors all needing coordination through communication.
Many organizations lack staff members who can communicate improvements across projects. From the leadership level down, everyone must be assigned to one or multiple areas of responsibility (while also trying not to overload and over-schedule someone). Leadership must understand how resources (i.e. employees, equipment and materials) are allocated to optimize the build progress — and more importantly, to do that safely.
Technology is essential in improving communication and enhancing productivity. The right digital tools should be identified and staff members must be trained to use them effectively to ensure safe, efficient work practices and that any potential hurdles are eliminated before they lead to delays; it's not the technology or the data alone — it's what you do with the data that is provided through technology that counts!
2. Take the lead on productivity
Without detailed planning, productivity and therefore progress will inevitably wane. In the construction sector, your people will carry on their activities in the same way they did yesterday and the day before. Leadership must set the targets, and identify which are the most appropriate work methods to achieve a productive safe operation. Just because it's been done before doesn't mean it's the best option now. Always challenge current practices, share new methodologies and communicate across all departments teams. Technology can be helpful here too, with real-time activity tracking that can be visualized anywhere in the company, or even with the client, giving site leaders the data they need to make informed decisions.
Consider developing a live, per-project KPI report that can be accessed and interacted with anywhere, anytime. When rolled up into an executive platform, your organization's leaders can easily identify what changes can — and should — influence your operational and financial performance.
3. Streamline communication across all departments and leadership levels
Communication can be improved by installing real-time platforms that identify critical areas for success. In old-school terms, remove the bottleneck! With everyone using the same system, all projects become comparable, challenges are more readily identified, and communication is faster and far more accurate. Importantly, turn your organization into a place where it's okay to be wrong — learning from mistakes means you can share solutions across other projects.
A centralized system can improve your margins by implementing a data lake of all your vendors, supply chain challenges and stock levels so everything can be more easily reconciled. Once you have visibility of all the data, more informed decisions can be made and that will significantly reduce costs. One clear benefit: with all this information in one location, rather than spread across multiple systems or departments, you can easily manage, control and reduce material costs through reduced obsolesce and better vendor management practices.
4. Use MOS and IPP
A Management Operating System (MOS) is a collection of management activities and tools that help run any business or even any department. An Integrated Planning Process (IPP) is the culmination of all plans into one central position, incorporating all processes, subcontractors and suppliers, to ensure all project elements are coordinated and aligned with one outcome: the end date of the project. Too often, project management knowledge is siloed in different departments with little coordinated consistent feedback, making it difficult to get a view of project performance (attainment to plan) or where constraints could exist in the future.
When combined, these management tools (MOS and IPP) can help construction companies take a synchronized approach throughout the project lifecycle.
5. Prioritize equipment needs
Coordination and planning is critical to reduce equipment needs. Failure to manage your equipment planning, availability and maintenance requirements effectively can cause project delays and budget overspends. Instead, equipment should be scheduled according to the demands of all of the sites.
In addition to creating savings, the combination of the MOS and IPP also allows you to make sure you are aware of your equipment, people and lay-down area constraints. Understanding this will let you prioritize how best to utilize your assets and quickly identify where additional capacity can either be released or is required. Most importantly, it will allow you to preview where you might run into delays from any and all aspects of your construction project. Having this visibility allows you to update your plan, communicate it effectively, and minimize or eliminate the downtime of equipment, operations or contractors.
This is why a MOS is critical: it allows your people to see the availability and location of all equipment and whether it is currently being used on a project.
6. Start the journey for total decarbonization
Achieving lofty ESG goals doesn't have to be expensive. In fact, by decarbonizing your business, you can shift over to more cost-effective ways of working that improve the environment and your margins.
You can start by installing resource management systems to help get more out of the energy and water used on projects. Staying local can also be an effective tool in decarbonization — sourcing your project needs from local suppliers can reduce your carbon footprint (and your costs, too), even as far as scope 4.
Shifts in the landscape are exacerbating margin pressures for the industry more than ever — the ESG agenda, stricter government regulations, and talent shortfalls are but a few challenges. The only way out is to forge ahead with a combination of digitalization efforts, enhanced management of subcontractors and the supply chain, and processes aimed at brutally managing costs.
Critically, you want to ensure that you understand the scenarios of decarbonization that are available to you, and you want to have the opportunity to challenge your end-to-end value chain data so that you can easily understand how to start your decarbonization journey.
With a greener future demanded of you and regulators beginning to enforce guidelines to protect the environment, now is the time to start appreciating your potential.
All of that said, it's critical to ensure that, in addition to the points mentioned above, all stakeholders in your operations are engaged. You want to create a community that cares deeply about the work that they are doing, the teams they are leading, and the company for which they work. Engagement will drive your MOS and IPP to success; it will ensure that all the changes, plans, communications and digital systems are successfully implemented.
Start, or continue, transforming your organization by putting in place operational plans to act on these six key areas of opportunity, all while engaging your people. The time to create impact is now and you can do that with the implementation of robust, agile change blueprints that consider, govern and track the results of all the elements of change, from internal and external stakeholders to operational, digital and decarbonization solutions.
Proudfoot has worked with construction companies around the world, enabling them achieve remarkable results.
We have extensive experience helping major operations streamline their projects to meet deadlines and stay cost-effective. For example, we helped Rio Tinto's Oyu Tolgoi construction project overcome the costly threat of cost overruns and delays — estimated to represent $2 million of net present value each day of delay. Our solution was to design and implement a customized MOS and IPP process that was fit for that organization; it considered its contractors, engineers, construction employees, vendors, machines, space, time, materials, maintenance, etc.
As a result, the project led to safe completion and stayed on schedule, breaking records and winning global awards.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.