High-interest rates, inflation, workforce shortages, and supply chain issues have created uncertainty in the global economy. In times of economic turmoil, it becomes crucial for businesses to focus on preserving profit margins. Especially in industries like construction, where construction profit margins are marginal in times of economic stability. The Engineering News-Record (ENR) recently highlighted concerns the top 400 contractors raised about the challenges they face in maintaining project profitability: “Top 400 contractors are worried about reaching the limit of their ability to keep projects profitable.”
Many Owners and Developers are putting projects on hold because of high-interest rates. With fewer projects, keeping the existing projects profitable is even more important. To address these concerns, here are four steps to protect profit margins in construction.
1. Foster Transparency and Collaboration
Now more than ever, it is crucial for GCs and Owners to establish a foundation of trust through transparency. By fostering open communication and sharing information, both parties can identify issues early on and work collaboratively to find effective solutions. This proactive approach reduces the likelihood of disputes and costly legal proceedings, ensuring projects stay on track and profitability is preserved.
2. Provide Notice for All Delays
One common mistake made by GCs is the failure to provide timely notice of project delays. Often, this stems from a desire to maintain a positive relationship with the owner. However, by promptly notifying owners of legitimate delays, GCs can enable the opportunity to negotiate time extensions or cost adjustments, ultimately protecting profit margins. Transparency and clear communication during the delay notification process enhances trust between all parties involved, strengthening relationships and increasing profitability.
3. Proactively Manage Risks to Prevent Surprises
In these uncertain economic times, it is paramount to proactively manage risks rather than merely reacting to them. Monitoring project risks, particularly schedule metrics, offers valuable insights into potential risks before they escalate. The only project metrics that offer a precursor to potential risks are schedule metrics. All other project metrics are trailing metrics, identifying issues after they occur. These project metrics produce transparency that leads to more trust and better relationships.
The top schedule metrics which are precursors to risk are:
- Predicted End Date
- Schedule Quality
- Compression
- Schedule Performance Index
- Critical Path Delay
4. Do More with Less
Labor shortages are posing significant challenges for the construction industry. Leveraging technology offers a solution to overcome these obstacles and achieve more with less. By utilizing advanced scheduling software and analysis tools, construction teams can optimize project schedules, identify bottlenecks, and allocate resources efficiently. Automating time-consuming tasks through technology enables teams to save valuable time, which can be redirected towards proactive project management and honing scheduling expertise. This efficiency allows for greater productivity and can contribute to preserving profit margins.
Strategies for Safeguarding Construction Profit Margins
The current economic environment requires construction businesses to take proactive measures to safeguard their profit margins. Companies can navigate challenging times successfully by prioritizing transparency, providing timely notice for delays, implementing proactive risk management strategies, and embracing technology. Remember, profitability depends not solely on external factors but also on resilience, adaptability, and strategic decision-making.
