Improving profit margins in the construction industry
Improving profit margins in the construction industry
The construction industry’s profit margins are some of the hardest to predict, and the lowest of any industry except retailing. This makes them a source of uncertainty in the financial status of even the most established firms. Just look at what happened to Carillion earlier this year. But why are so many contractors and construction companies on shaky ground?
Becoming unprofitable
In the aftermath of the recent recession, many contractors have found themselves tied up in legacy contracts. These jobs run over several years and were agreed at low prices during the crisis. They have now become unprofitable as material and labour prices recover. The Royal Institute of Chartered Surveyors found that the top 10 largest contractors had an average pre-tax profit margin of -0.5%.
The CEO of Balfour Beatty has previously stated that margins below 5% are unsustainable. However, in the construction industry, margins of 1.5% to 2% are not unusual. It is clear that there needs to be a focus on improving these margins to avoid going down the same route as Carillion.
Why do we struggle to improve margins?
There are a variety of reasons why construction profit margins are so low. The industry is fragmented, uncoordinated, diseased with a lack of trust, inefficient, expensive, and non-client focussed. All of these negative factors come together to make a recipe for disaster. Then, on top of this, the government is calling for an 80% cut in carbon by 2050. The industry is under stress, but we need to bounce back and start making headway on these changes.
Improving margins
Improving profit margins will not be an easy task due to all of the reasons listed above. That doesn’t mean we can’t start working on the small things that will make a difference. For example, any successful business needs to be efficient. Implementing new, innovative technology, and finding new ways of working is going to go a long way in making the construction industry more efficient. The implementation of technology in construction is an inevitable change. It is the other factors that involve effort on the part of construction companies, which will take the most time to change.
To improve margins, there should be an element of cost-reduction. In construction, this can be done by finding contractors who are willing to negotiate their rate. But, for this to occur, firms need to focus on fostering healthy relationships with other businesses and being open to working with companies that they haven’t worked with before. Choosing favourites is not a profitable way to do business, and fosters the distrust in the industry.
There also needs to be better communication within the fragmented industry. This is simple advice but, it can reduce mistakes and reworks, save time, and help foster better relationships. Thirdly, there needs to be more innovation in construction. The need to reduce carbon emissions should be inspiration enough for construction companies to put more money into innovative programmes and training.
At Inscape we focus on staying up-to-date with the latest in construction so that when the time comes, our manufacturing services are precisely what you need them to be. Don’t hesitate to get in touch with us today on 0845 230 8565 to see how we can improve your construction team.