Risk Management Put to Test as Construction Industry Meets Infrastructure Demand

NEW YORK (Jan. 30, 2012) 

Many major urban areas across the globe are straining to adequately support rapidly growing populations prompting a need for infrastructure investment. This development is pressuring the engineering and construction industry to step up to meet the demand, putting their efficiency and risk management processes to the test, according to KPMG International’s 2012 Global Construction Survey.

The Great Global Infrastructure Opportunity surveyed 161 engineering and construction companies around the world with revenues ranging from US$250 million to more than US$5 billion.

“Global industry players will need to scale up to meet demand and navigate a tough political, commercial, regulatory and governance environment — which will significantly test their risk management capabilities,” said Geno Armstrong, international sector leader of KPMG’s Engineering and Construction practice.

Energy and Transportation Sectors Offer Greatest Opportunity

Slightly more than 40 percent of global respondents anticipate that the energy sector offers the greatest opportunity for revenue over the next 12 months. Second, behind energy, were roads/bridges tied with residential at 24 percent, followed by rail and mining.

Nearly 60 percent of respondents from the Americas believe the energy sector will have the biggest impact on revenues. Respondents from Asia Pacific (35 percent) and Europe, Middle

East and Africa (EMEA) (nearly 40 percent) also see energy as their biggest revenue producers.

Economic Uncertainty and Skills Shortage Are Biggest Concerns

“The demand for firms and individuals with sector-specific engineering and construction skills will rise as power and other energy-related projects continue to proliferate around the globe,” said Armstrong. “This should prove to be a major source of income for the industry as a whole.”

While 49 percent of global respondents expect their backlogs will grow from 5 percent to more than 15 percent in the next year, 71 percent of respondents cite economic uncertainty as their biggest ongoing concern, followed by a skills shortage (31 percent) and government deficits (30 percent).  In the Americas, economic uncertainty (70 percent) was the biggest ongoing concern, followed by government deficits (52 percent). 

Sixty-two percent globally say that they expect margins on current bids to remain unchanged from their current backlog.  Fifty-seven percent say their revenues in 2011 increased from 2010, with the Asia Pacific region seeing the greatest growth (72 percent), followed by EMEA (53 percent) and the Americas (41 percent). 

Creating Efficiencies to Manage Complexity and Meet Demand

To mitigate risk, manage project complexity and effectively meet the anticipated increase in demand, companies are seeking solutions to address efficiencies in their procurement/supply chain.  Nearly 60 percent of respondents globally say improvement in this area will improve profits and enhance cash flows.  Almost 40 percent of respondents say the primary cause of inefficiencies in their supply chains were disparate processes and systems.

Cost-cutting still remains a challenge for companies as well, with 61 percent of respondents globally and 78 percent in the Americas seeing organizational culture as the culprit for implementing the cuts. A surprising 17 percent of respondents globally say that cost reduction was not a priority at all. 

Survey respondents acknowledge that IT optimization is critical to improving efficiencies, yet 50 percent say that overhauling IT systems takes too long and costs too much. Thirty percent say that there are not enough available ERP packages tailored to the construction sector.

“Those who previously funded major IT enhancements are now reaping the rewards of centralization and transparency across their supply chains,” said Armstrong.

Risk Management Still a Major Concern

With projects expected to become more complex, maintaining margins and mitigating risk are major concerns for most respondents.  Globally, 45 percent of respondents say that quantifying risks is the chief concern; in the Americas, 52 percent of respondents say that identifying risk is the main focus and nearly 50 percent say they want to better understand the link between strategy and risk.

“Despite considerable investment, risk management still comes up a bit short,” Armstrong said. “Our survey revealed that nearly 54 percent of respondents say they failed to identify upfront issues that later caused margin erosion and only 36 percent believe that their project review processes are very efficient.”

Barriers to Investment

Respondents say the primary barriers to public-private partnerships in infrastructure investment is a combination of a lack of policies, leadership and investment by the public sector as well as a lack of initiative in the private sector.

Forty-seven percent of respondents believe public policies will have a positive impact on investment, with Asia Pacific being the most positive (49 percent) followed by EMEA (47 percent) and the Americas (41 percent).

Moreover, respondents showed concern about the public sector’s ability to drive infrastructure investment with 80 percent of respondents globally saying that lack of leadership will hamper investment.

And, while respondents globally anticipate that energy (34 percent) and transportation (33 percent) will likely attract the most private sector investment for their companies, two-thirds see a lack of private sector initiative as another barrier to investment.  Fifty-six percent of the Americas respondents see transportation as having the biggest appeal for investment.

“With austerity policies in many countries constraining the scope for public sector spending, it is vital to create an environment that encourages private sector investment,” Armstrong said.