Unpredictable economic conditions, unstable global trade and new, rival businesses all mean traditional contractors are finding it more difficult to stand out in a competitive construction market. But construction businesses can not only weather this storm, they can thrive in it—by embracing new business models, tools and technologies that will also future-proof their business.
In today’s market, it’s rare that construction contractors enjoy profit margins much beyond 3%—even during periods of strong economic growth. The largest contractors can be just one failed project or market dip away from insolvency. To understand the cause of this volatility, we need to know where to look for potential threats.
The Volatile Global Economy
A construction enterprise must be in a position to fund proactive growth, expand into new markets or invest in disruptive technologies. If not, a business will find it difficult to compete in today’s economic landscape. Unpredictable materials cost, partly as a result of protectionist trade policies, is a concern. Over the past year, material costs in the United States have increased by more than 7%, while years of expansionist trade policy have put project capital at a premium. This increase is due in part to a tight labor market—which represents another challenge for contractors as the cost of their other inputs also creep up.
The threat of the global economy to construction contractors is one thing, but ignoring technology innovations is an another, more self-destructing prospect. The most advanced technologies will be a key factor in setting apart contractors willing to compete and those who aren’t—not only on price, but also in terms of the degree to which they can drive value for project owners and expand into the life cycle of the built asset for stable, recession-proof revenue streams.
React to Large Disruptors
Take modular construction for instance. It represents a major area of growth, but as large, non-construction players, such as Ikea and Amazon, are using innovative technologies to press into the modular construction space, traditional contractors could miss out.
Thankfully, despite individual contracting businesses unable to greatly influence geopolitics or what technologies large disruptors invest in, they can make key improvements to their own technological readiness and business models in response to harsh economic conditions. Here are four ways that new technologies can help a construction business ensure its future.
1. Support Before, During & After Projects
Contractors should explore how cutting-edge technologies, such as artificial intelligence (AI), robotics and the internet of things (IoT) can help them change the way they do business.
Construction software, such as 4D scheduling with AI algorithms, can solve complex problems in real time that might be too complex for any human to handle. Leveraging IoT for projects may enable construction equipment to be remotely operated in hazardous environments or when there is a short supply of skilled operating engineers.
But the greatest benefit of technology, such as IoT, comes post project completion when it can monitor structural members, mechanical systems and project integrity to support high-margin warranty and service and maintenance contracts. In addition, IoT sensors can automatically update the databases that underpin building information management (BIM), and as the industry adopts predictive maintenance practices in the future, data from these sensors can also be run past algorithms that can forecast structural or system failures. This means a contractor can ensure the performance of an asset over its life cycle.
2. Revenue Potential Thanks to Servitization
While downward price pressure has kept the margin on new construction around 3%, margin on service contracting can be as high as 14%. When contractors can intelligently use all the data they have on the assets they deliver to a project owner, as required by BIM, they are then able to sell maintenance and service contracts, which makes them a strong strategic partner and unlocks revenue and margin gains.
In order to realize these profits that hold growth potential, the contracting business needs to have systems and processes implemented to manage entire asset life cycles and treat the initial construction and maintenance contracts holistically. As the contractor moves into more complex, servitized arrangements and becomes a full, at-risk business partner with the project owner, this will increase the need for intelligent application of transformational technologies, including IoT to drive compensation based on usage of the finished asset. The use of IoT can help contractors capture hours of usage against a contract by tracking performance on sensored equipment, eliminating manual accounting and allowing them to get the maximum out of the asset.
3. Realize the Potential of Off-Site Construction & Standardization
We have seen a rise in off-site fabrication for commercial and residential construction, and it’s of no surprise to see why. Improved use of labor helps address the global shortage of skilled workers in the industry. This also makes for lower total cost and compressed project timelines. In addition, using manufacturing processes for work completed off site is not impacted by inclement weather and can benefit from standard quality management and quality assurance processes common in a manufacturing setting.
But processes and software used in construction and manufacturing are hugely contrasting, therefore, contractors will need software environments that can seamlessly encompass both disciplines. Adopting a project-driven manufacturing solution can be a very effective way to overcome some of these limitations.
Off-site construction may also help drive another significant change in the way construction takes place through the standardization of parts and materials. As the industry has not made huge strides towards a business model where a contractor has standard parts and components to design around, estimating in a construction environment tends to occur against a specification from the project owner. Project-driven manufacturing software can have great benefits here. This allows contractors to work with owners to create unique projects that rely on standard components while also handling construction-centric business processes and the time and resource constraints of site-based work.
4. BIM & ERP: The Best of Both Worlds
Digital transformation tools, such as BIM and enterprise resource planning (ERP) software, can provide a base for management teams during times of uncertainty, while the adoption of these higher-margin business models makes them stand out in their regional or global market.
But these technologies will not be able to significantly transform the business if operations aren’t built on a consistent, agile and complete software foundation. Most mid-size and large construction companies have put in place some form of ERP software, but often they have only implemented financial and human resources modules. This is partly because the rest of a typical application suite is a poor fit for the business—and this may well be harming their profits without them realizing.
ERP software offers great potential for construction companies because it enables managers to take control of business by providing an accurate set of management information that allows predictable project performance and provides strong governance of their business. Projects can then be delivered at lower cost, on time, at a high quality and with minimum risk, but they rely on data to make this possible.
The ultimate aim is to integrate the digital asset data held in the BIM models with integrated ERP processes.
It’s Time for Your Construction Business to Blossom
Only one thing is for certain in this volatile global economy—the latest technologies and business practices will be key in future-proofing construction businesses. Tools like AI, robotics and IoT provide construction contractors with new avenues to offer different services and standardized products than before. But, to facilitate their potential, contractors must put in place a comprehensive ERP system that can piece these technologies, ensuring value and cost flow across the business.