Many construction companies struggle to stay profitable. One major reason behind this is the way the industry works. A lot of business leaders focus on bidding on contracts and winning jobs rather than making a profit in order to keep up. Many clients, especially in the public sector, tend to award contracts to the lowest bidder, making it a challenge for contractors to maintain profitability.
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On top of this are the frequent payment delays and instances of nonpayment that contractors contend with. And with the scope and complexity of construction projects, companies burdened with profitability problems and payment issues are unable to keep up and lack the cash to cover expenses and fund growth opportunities.
For construction companies to survive these challenges, it is important that they maintain healthy margins. Here are some of the ways contractors can increase profit margins.
1. Avoid lowering prices to stay competitive.
The construction industry is one of the most competitive industries in the world. As the conventional way of getting more jobs is bidding, many construction companies consider lowering prices as the only way to win more contracts. Unfortunately, this type of strategy is a lose-lose situation for both contractors and clients.
A client may think that they got the job for cheap but it could be substandard because the contractor cut corners to meet the bid. A contractor may get a job but change orders and other unforeseen setbacks typical of construction projects may cause them to just break even or worse, lose money.
Instead of lowering prices, construction companies should focus on getting quality projects that take advantage of their skillset. Think about your unique selling point, which is what you specialize in, and emphasize it in your marketing. It is better to get fewer jobs but with higher margins rather than more work but with paper-thin margins that are at risk of turning into losses.
2. Reduce the need for RFIs.
Like it or not, requests for Information or RFIs are a necessity in the construction industry. RFIs are used to gather and clarify information that may not be included in the initial plans and specifications of a project. They are critical in resolving issues that can delay the completion of a project and have it go over budget.
However, RFIs themselves can slow down a project, causing frustration for all parties, and this can lead to a negative impact on profits. They are expensive, time-consuming, and a pain to manage.
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According to an in-depth study on RFIs by the Navigant Construction Forum, each construction project they studied had an average of 796 RFIs that each required around 8 hours of review. Around 13% of these RFIs were unnecessary and could have been answered by checking the provided documents. The estimated total cost of RFIs per project was $859,680 amounting to around $1,000 each, a significant cut from a project’s margins.
Contractors need to find ways to reduce the need for RFIs as well as the cost associated with them. One of the ways to do so is to streamline communication between designers and builders through a unified communication platform. Having a cloud-based file system where project participants can access documents will also improve review and response times. Through these, RFIs that may take days to get a response can be resolved within hours.
3. Minimize mistakes that cause rework.
Rework is one of the more expensive issues that can happen to a contractor. It not only impacts a company’s profits from a project but the damage to their reputation also affects future profits. Research showed that rework costs the US construction industry more than $177 billion annually to fix construction errors.
The same study found that miscommunication and poor project information accounts for half of all rework on job sites. Ensuring that there is open communication between teams will minimize the need for rework. In addition, if contractors participate in the early phases of the project, the viability of the project will improve and the need for late-stage changes will be reduced.
4. Address payment issues and get paid on time.
No one wants to work only to get paid late or even not get paid at all. And yet, payment issues are rampant in the construction industry for a variety of reasons.
Multiple contracts in one single construction project and their hierarchical payment structure cause payment issues to arise quite easily. The long duration of projects also means the industry is sensitive to economic downturns. Changes from an original plan may also cause clients to be dissatisfied with the work done, which again causes payment disputes.
Whatever the case may be, it is important that contractors use the tools at their disposal to get paid on time. Knowing how to protect lien rights by sending a preliminary notice early on in the project will help improve the chances of getting paid on time.
5. Take advantage of new technologies.
The construction industry is one of the least digitized industries in the world, second only to agriculture. There are plenty of time-consuming processes behind the scenes that will benefit from automation. These processes have a major impact on your margins and profitability and leveraging new technologies to make these processes efficient, you can do more work that actually makes money.
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One of these time-consuming and error-prone processes is the monthly payment application. Switching to an automated application from a paper-based process reduces time wastage, along with the costs associated with paper-based processes and the potential for human error. This will also bring multiple benefits of using new technologies such as improving communication and reducing misunderstanding with clients and getting paid on time.
The construction industry is built upon risk. There are too many things that can go wrong and cause a construction project to fail. Razor-thin margins are not enough for a company to survive the industry. Contractors need to work hard and find ways to improve profit margins in order to grow their business.
About the Author: Patrick Hogan is the CEO of Handle.com, where they build software that helps contractors, subcontractors, and material suppliers with late payments. Handle.com also provides funding for construction businesses in the form of invoice factoring, material supply trade credit, and mechanics lien purchasing.