While incredibly rewarding, the construction industry is a challenging sector to work in for cost-focused business and project executives. Today’s firms typically operate on razor-thin margins with an average of 4-6%, which means even a tiny change in costs or revenue can significantly impact your bottom line.
And the pressure is rising. Bank failures, rising interest rates, high material prices, and labor crunches are all making it more challenging for construction companies to protect, let alone, improve their margins. The good news is that these challenges aren’t insurmountable. By taking proactive steps and adopting the right tools, you can mitigate and safeguard your firm’s profits.
We’ll look at some of the top hurdles firms face around profitability and offer action steps that construction leaders should take to maximize their company’s bottom line.
The top challenges to improving profit margins
Here are some of the most common challenges construction leaders and executives face to maintain profitability in their operations and projects.
Little to no project or business predictability
Most construction projects are like a unique snowflake. For one, market factors heavily influence labor and material expenses, making forecasts difficult and increasing the likelihood of overruns.
Then there are the projects themselves, which are incredibly complex. The involvement of various stakeholders, such as owners, architects, contractors, and subcontractors, can lead to constant communication breakdowns. Plus, unforeseen circumstances like weather conditions, supply chain disruptions, or regulation changes can also arise.
This lack of predictability in construction makes it difficult to produce accurate forecasts and maintain profitability, but there are a few ways to combat these issues.
Firstly, recognize that most of these problems start during the early stages of the project—i.e., design and preconstruction. Research by the International Journal of Innovation, Management and Technology found that “frequent design change” is one of the causes of construction overruns.
That’s why you want to align teams, costs, and expectations early on; all stakeholders must be on the same page from the outset of the project, including the earliest design phases.
Lack of visibility
Disconnects between the office and the field mean construction executives often have limited data and insights into budget, safety, and quality make it difficult to make critical project and business decisions. When you don’t have accurate information, you may end up making decisions based on incomplete or outdated information, leading to errors and potential cost impacts.
In fact, according to a report from FMI and Autodesk, 30% of construction professionals indicated that more than half of their project data is “bad” and results in poor decision making more than 50% of the time. Decisions made using “bad data” are estimated to cost the industry $88.69 billion in rework alone annually.
Construction technology has a major impact on your bottom line—and it’s not just about the cost of the tools themselves.
While the right solutions increase efficiency and productivity, having a suboptimal tech stack leads to the opposite: wasted time, duplicate effort, and higher costs.
These issues are prevalent in firms that implement technology in silos. Teams handle budgets using separate Excel documents and financial ERP systems (neither of which are built for construction professionals).
Stakeholders then must deal with multiple documents and different systems, which makes controlling costs even more difficult.
Problems arise when you don’t have a connected technology platform that’s flexible enough to handle a project’s unique set of variances. In these instances, stakeholders often have to use inefficient workarounds that are both time-consuming and costly.
How to protect your margins
Now that we’ve discussed the challenges of retaining your already slim margins let’s look at how you can overcome them.
Implement a robust technology strategy
A recent study by Autodesk and Deloitte of construction firms in the Asia Pacific region found that “More than two thirds of businesses surveyed said using new technology to deliver client work would be a main source of revenue growth, while half said that growth would also come from using digital tech to improve internal processes.”
Clearly, technology can enormously influence your projects’ productivity and profitability. But, your technology strategy is critical to seeing a return on investment (and ultimately a healthy bottom line).
Consider these foundational elements to factor in when creating a technology strategy.
Consider your preconstruction technology as your defensive strategy. With better planning and alignment up front, you’re more likely to mitigate risk and issues that could plague project profitability at later project stages.
Take estimation for instance. When project estimates are more accurate, finances and resources can be better managed during the course of a project.
That’s why you should set your sights on solutions that connect teams and project components during the preconstruction phase. A good preconstruction solution streamlines connected activities and workflows like estimations and design and document management.
Connected workflows also allow real-time adjustments, resulting in quicker and better builds and reduced costs.
Flexible and customizable cloud-based cost management tools are essential for staying on top of budgets and forecasts. Better access to data, especially when it’s connected to accounting and ERP systems, ensures stakeholders have a handle on a project’s financial health in real time, which aids their forecasting and decision-making.
You should also confirm that your cost management solution integrates with the rest of your construction management tools and workflows. This keeps projects synced with other areas of the business and removes the need for double entry or manual updates. Plus, it helps stakeholders stay on the same page and communicate more effectively.
It’s estimated that around 4-6% of the total project cost is related to rework. That’s just factoring in reported rework and direct expenses. It’s important to note that redoing work can also increase indirect and direct costs by approximately 9%.
You can help avoid these unnecessary costs during construction by better connecting the office to the field with project management software. Not all construction project management solutions are created equal, however. When selecting a platform, choose one that’s:
- Cloud based, so that data is synced in real time and stakeholders can view and access the info they need from anywhere.
- User-friendly because teams should be able to devote their energy towards executing the project (and not wrangling technology).
- Made for mobile, which empowers field teams to stay in the know and get more things done on the jobsite.
- Integrated with your existing business apps to eliminate manual updates and double-entry.
Make data your safety net
Enhancing predictability and profitability in your projects isn’t just about collecting data; converting that information into valuable insights is equally important.
As Jit Kee Chin, Chief Data and Innovation Officer at Suffolk Construction puts it, “Gathering data isn’t enough. For it to be useful, you need to find ways to succinctly surface that information to the right people. Since stakeholders have different roles, the data presented to each person must be tailored to them.”
Most construction software solutions offer reporting capabilities. The question is, do they also provide practical intelligence that can help with your decision-making? Can you create custom views or dashboards to surface information relevant to each user? These are just some of the questions you should ask when creating your technology strategy.
“Gathering data isn’t enough. For it to be useful, you need to find ways to succinctly surface that information to the right people.”
Suffolk, for example, created a dashboard view that surfaced different information for each user based on their roles. One of those views was built specifically for management, and it showed trends and tolerances for certain metrics. If something is out of tolerance, that matter is automatically flagged.
This initiative essentially created a data safety net, enabling Suffolk’s management teams to spot issues quickly and act before they become bigger problems impacting cost and schedule.
On Time. On Budget. On Autodesk Construction Cloud.
In today’s market, it’s more vital than ever to implement the right strategies that keep projects moving forward on time and within budget.
With Autodesk Construction Cloud, you get a centralized and flexible platform that paves the way for more accurate data visibility and better collaboration. Autodesk Construction Cloud enables project and business leaders to achieve higher levels of transparency and accountability, ultimately helping keep your projects on budget and schedule.
Get in touch and see how Autodesk Construction Cloud can help protect your profits.