The construction business is beset with the multiple challenges. The twin challenges of slow economic growth and high competition place relentless pressure on construction firms to improve their productivity and performance. They also remain hard-pressed to improve customer satisfaction in a big way, in an age where too many firms chase a limited number of customers.
Success requires construction companies to make a careful analysis of much more than simple profitability figures.
The Construction Financial Management Association (www.cfma.org) pegs the average pre-tax net profit for general contractors between 1.4% and 2.4%, and for subcontractors between 2.2% and 3.5%. This is when construction companies would do well to aim for a minimum net profit of at least 15% for viability.
Tough competition makes the industry highly price-elastic, and force construction companies to work at low margins. However, construction companies can still expect to increase their profit margins by enforcing tight control over expenses. Only about 30% of contractors actually know their overhead budget for the year.
Construction companies need a thorough understanding of exactly what it will cost to build when they bid for a project. About 81% of contractors do not know their labor and burden rate, or even fringes cost for their field employees. Most of them do not understand the true cost of their equipment either. They work on guesstimates and end up creating inaccurate bids and estimates. The net result is either lost bids owing to overcharging or extremely low margins to derive a healthy profit.
Many workforce estimates do not factor in all taxes, insurance, costs related to health insurance and workers’ compensation, employee vacation costs, costs for small tools, training costs, and other such finer expenses. Most equipment cost estimates limit the expenses to purchase cost, finance costs, and general operating costs. An accurate estimate of Insurance, interest outgo, maintenance, tires, gas, and repairs are essential .to get an accurate picture of the expenses.
Having a sales target, based on overheads and anticipated profits allows the company to determine how much work the company needs to perform at the markup. Tracking sales may seem obvious, but only 23% of construction companies actually know or track their annual sales or volume goals.
Most construction companies already have ERM and CRM suites. However, truly successful companies make sure the software they deploy collects the metrics on the background, and subject it to real-time analysis, to offer managers and other stakeholders real-time insights.
Customer satisfaction has become a critical factor of success today. However, customer happiness is a tricky proposition.
The basic ingredient of customer satisfaction is quality. No business can survive it generating revenue in excess of expenses. However, trying to maintain a positive balance sheet by cutting corners comes with the risk of hurting customers, and losing their business in the long run. For instance, constructing an apartment with substandard materials or doing away with quality checks may increase the profit on the immediate sale, but once the building develops leaks or cracks soon enough, the antagonized customer would not refrain from dealing with the company again. Worse, they may take it to the social media at a time when word-of-mouth referrals and carry far more weight and effectiveness compared to traditional marketer launched advertisements and promotions. The rule of thumb is a happy customer telling one person a miffed customer telling 10 persons.
Construction companies need to:
More than cutting corners, construction companies should focus on improving efficiency. The key to efficiency is transparency or greater operations Visibility. When key stakeholders such as business managers and other decision makers are aware of what is happening on a live basis, they may take timely action. Such timely action may nip a major issue in the bud, prevent cost-escalation owing to delays, improve customer satisfaction by dint of prompt action or response, boost employee productivity but eliminating non-remunerative repetitive and follow-up tasks, and more.
Transparency in day-to-day operations also allows the enterprise to manage complexity.
The key to transparency and efficiency improvement is embracing the latest technology. Mobile apps which offer real-time visibility and an easy way to collaborate. IoT powered workplaces which automate a bulk of the routine tasks, cloud-powered IT solutions which facilitate anytime, anywhere access, and more, are all key tools towards enterprise transparency. A conscious and determined effort to tear down silos also helps.
Above all, never underestimate the power of lean. Review all processes mercilessly to eliminate waste. The document only what matters, and cut out all frivolous and non-essential activities.
The construction industry is best with several players. Construction companies invariably deal with multiple external entities such as contractors, sub-contractors, architects, regulatory authorities, and more. Unless there is a robust and reliable way to keep track of the status at each end, and preferably a way to collaborate seamlessly, matters can quickly descend into chaos.
Purposeful mobile apps and other e-discovery solutions enable the construction company to remain in control of things. A sound reporting system where all relevant stakeholders are updated on the latest happenings, and key deliverables, on a timely basis, is also essential. Timely action through informed decisions eliminate waste, reduce hold-ups, and improve employee productivity manifold.
The use of construction scheduling software does give an edge when it comes to automation and managing the entire routine of operations. Its centralized management features complete with streamlined dashboards ensure greater transparency and facilitate a better way to execute key processes with ease.
Getting access to useful metrics is one specific feature ingrained into a construction scheduling software. Managers can seamlessly get insights real-time and apply the necessary analysis to closely track and measurably improve their vital performance metrics.
Benchmarking is a time-tested way to improve the efficiency and effectiveness of a company’s processes and offerings.
The Construction Industry Institute (CII) defines benchmarking as:
“A systematic process of measuring one’s performance against results from recognized leaders for the purpose of determining best practices that lead to superior performance when adopted and implemented”
Benchmarking offers a set of standards against which the strengths and weaknesses of the company may be analyzed. Benchmarking may be done internally, against competitors, or against industry peers. Competitive benchmarking entails a direct comparison of the performance of the enterprise with the performance of its direct competitors.
The first task towards benchmarking is establishing key performance indicators (KPIs). There is no universal list of KPIs, and companies need to pick and choose the KPIs that are critical in determining success.
Until recently, financial measures were the major criteria to measure and evaluate performance. However, the realization has struck financial indicators are lagging indicators, making explicit results of interventions already affected. Today’s fast-paced and highly competitive world requires real-time interventions.
Kaplan and Norton’s “Balanced Scorecard” (BSC), first proposed in 1992 issue of Harvard Business Review (HBR) presents four different performance perspectives: customer satisfaction, internal processes, organization innovation, and improvement activities. Subsequent researchers have identified several other factors, such as competition, employee, project and supplier performance, and more.
The Constructing Excellence Organization in the UK has developed a set of performance indicators classified into three main groups: economic, social and environmental perspectives
The USA Baldrige Model, another widely accepted model, offers a seven-category framework, which includes organization leadership, strategic planning, customer focus, measurement, analysis and knowledge management, workforce focus, operations focus, and results.
Regardless of the framework adopted, managers need to accept and embrace it and use it as yardsticks to evaluate and improve performance. More importantly, the framework should be sold to the rank-and-file and embraced across the board. Co-opting the metrics to the enterprise suit goes a long way in ensuring its acceptance and collecting accurate data.
Despite the seemingly big profits on offer, one out of eight construction businesses fail every year. The reasons for failure are hardly the business running at a loss. Failure to make adequate profits to make the venture worthwhile, and inability to grow the business and poor customer satisfaction scores. Effective leadership, involvement of the stakeholders and especially the front-line customer-facing staff, good process management, a focus on the customer, and good supplier relationships are fundamental to the recipe of success.
A well-integrated suite, delivered to key stakeholders through easy-to-use mobile apps which may be accessed when on the move, helps construction companies remain in tight control of operations, and make real-time interventions to do the right things at the right time.