Contractors Can Remain Profitable in a Down Market
Sep 5, 2023
Many contractors focus more on winning projects than making a profit. The reason? Clients, particularly in the public sector, typically award contracts to the lowest bidder. That makes it challenging for any contractor to maintain profitability while working on large, complex projects.
There are a variety of factors that can shrink a profit margin. An inability to control cost plays a huge role. Also, poor productivity can, and does, have a detrimental effect as it ultimately impacts job cost. Similarly, rising wages can put a dent in a contractor's margins since they must increasingly fight for a smaller worker pool.
There are some steps a contractor can take to maximize profitability, even as profit margins are squeezed in the midst of a challenging construction market.
What to Do
Technology can play a role in boosting profitability, including anything from an accounting software upgrade to the use of software for billing, estimating, bid proposals, purchase orders, and credit card management. Owners and contractors have also increased their reliance on scheduling tools as a means to improve efficiency.
One of these time-consuming and error-prone processes is the monthly payment application. Therefore, switching from a paper-based process to an automated payment application can eliminate wasted time and decrease costs and the potential for human error. This process switch will also improve communication and reduce misunderstandings with clients.
However, controlling capital costs, managing risk, and dramatically improving project performance will take more than adopting new technology. Some companies have begun minimizing the number of hand-offs and interfaces throughout a project's lifecycle to drive certainty and predictability. They're also pushing toward a more integrated and construction-driven approach to their projects.
It has become commonplace for many companies to move a lot of their fabrication work offsite and look at new modularization approaches and innovations. By moving the work to a more controlled environment, they become more cost-competitive and improve efficiency. Other contractors are focusing on the supply side of the equation through enhanced recruitment and training efforts.
The following are other ways a contractor can increase its profit margins, even during the downtimes:
- Don't Lower Prices. Many contractors consider lowering prices in order to win more contracts. Unfortunately, this is a lose-lose situation for both contractors and clients. While a client might think that they're getting a deal, they could ultimately get a substandard product when the contractor must cut corners. Instead, construction companies should focus on landing projects that take advantage of their unique skillsets.
- Reduce Request for Informations (RFIs). RFIs are a necessity in the construction industry, as they're used to gather and clarify information not included in the project's initial plans and specifications. However, RFIs can slow down a project and lead to a negative impact on profits. Contractors should find ways to reduce the need for RFIs as well as the costs associated with them. One way is to streamline communication between designers and builders through a unified communication platform, whereby all project participants can access documents. The use of this platform will improve review and response times.
- Minimize mistakes. Re-work is one of the more expensive issues at a job site since it impacts a company's profits and damages its reputation. Ensure that there is open communication between all team members to minimize the need for rework. Participating earlier in the project can also go a long way towards reducing changes down the road and improving labor and equipment productivity.
- Get paid on time. Payment issues are rampant in the construction industry for a variety of reasons. Whatever the cause,it is crucial that contractors use any means available to get paid on time.
When it comes to maximizing profitability in your construction company, there are several ways that you can approach winning projects and maintaining efficiency. If you have more questions information, reach out to a CRI advisor for further guidance and assistance.