Be a Construction Game Changer

Monday, April 6th, 2015
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There are many differing types of construction organisations, and it’s how they contribute that matters most.

For example, new constructors may have careers in either the for-profit or not-for-profit sectors. Economic construction entrepreneurs will be just as important as social entrepreneurs. In the end their business models are very similar. Both have common technical, risk management, cost, scheduling and procurement attributes. The variable is to where profit or construction surpluses go.

The same can be said for construction careers in civil defence forces and organisations who operate in the development aid sectors. These organisations offer equally rewarding and valuable careers.

According to the Bureau of Statistics there are over 207,000 Australian construction enterprises. The average number of employees in these enterprises is fewer than five. It’s clear that not everyone is cut out to be a construction entrepreneur. Based on the over 25,000 construction insolvencies each year, some that have the desire to employ lack the prerequisite skills to do so. This must change.

Most from the class of 2015 will imagine that this subject is premature and beyond their immediate aspirations. In my view, this is not so. The rapid changes I forecast in the use of integrated information systems and technologies will be a game changer that will seed many new construction start-ups.

Constructors and employers are important to the Australian economy. Constructors build the nation’s infrastructure, the buildings that enable the nation’s businesses and services to operate and the nation’s housing. Constructors employ over one million people and with a little national vision, the industry could employ even more people. A key element of construction that is often left for later learning is the nature of the construction transaction. It’s the alpha that follows having the essential construction capabilities in the first place.

Constructors from the outset should shape their knowledge and practices with a clear understanding of the essential transaction arrangements found in construction contracts. These will include:

  • The relationship between a head construction contractor and the client,
  • The growing integration of design, procurement, fabrication and assembly,
  • The relationship between a construction sub-contractor and the contractor,
  • The relationship between a supplier and a sub-contractor or contractor, and
  • The future roles of construction workers (trade or professional) and employers.

In the end, it is the composition of these arrangements that allow clients to award a contract, to obtain construction finance and create assets or deliver services. Without a head contractor none of these outcomes are possible. A contractor provides a single point of delivery and performance “risk wrap” to a client that in effect bundles the client’s aspirations, business case, site conditions, designs, specifications and construction consent obligations with the contractor’s own legal and professional obligations. The contractor’s business and equity is exposed until these are all met.

The class of 2015 should always remain mindful of the constructor’s key role in delivering projects as these are unlikely to change in the future. What most assuredly will change is the way projects are documented, how the construction value chain is organised and engaged, how construction work is packaged and performed, and how contractors develop competitive and sustainable business models that deliver more robust futures through the cycles than those of their forbears.

There is a hierarchy for businesses in construction. Often the terms Tier 1, Tier 2 and Tier 3 contractors are used to determine which organisations have the scale, capital adequacy, experience and present capabilities to perform different types of projects. These are reasonable labels and not ones that I would tamper with other than to present some descriptors for the purpose of this conversation. Based on my experience the following scale parameters might usefully be applied to historically distinguishing these constructors:

  • Tier 1 Contractors will have successfully completed over $1 billion of hard money (fixed price) construction work per annum over the last two consecutive years, have at least $1.5 billion of uncompleted work in hand and have a successful trading history of at least 10 years
  • Tier 2 Contractors will have successfully completed over $100 million of hard money construction work per annum over the last two consecutive years, have at least $150 million in uncompleted work and been in successful business for at least seven years
  • Tier 3 Contractors will have successfully completed over $25 million of hard money construction work per annum over the last two consecutive years, have at least $30 million in uncompleted work and been in successful business for at least five years

All of the remaining constructors could be grouped as Tier 4. Notwithstanding all contractors should have paid up shareholder equity of at least five per cent of the uncompleted book value of construction projects in hand. Contractors should be able to achieve net construction profits which deliver at least 7.5 per cent return on equity per annum. Of course a successful construction company requires an experienced proprietor, management team and a robustness to deal with the many challenges construction throws up. Capability, scale and economic success are fundamental to all of these.

I hear the constructors from the class of 2015 say “these barriers to entry will disbar me from starting a successful construction enterprise any time soon.”

Well, that defies what is happening in businesses across the world. Today’s entrepreneurs are more inventive and agile than their forbears. Companies such as Google, Facebook and thousands of others like them have invented disruptive business entry points which could be equally applied to construction. They have been able to simulate business capability through supply chain aggregation, shared equity and back of house.

In my view, the disruptive construction enterprise of the future will have attributes such as:

  • A commitment to performing projects which measurably exceed customer delivery and in service performance expectations when compared to peers (more for less)
  • The capacity to win the respect of the project value chain through demonstrable construction knowledge, innovation, bid competitiveness and delivery expertise
  • Project procurement and delivery capabilities that integrate design, manufacturing and assembly inputs to lower cost (not margins) with no compromise to quality

These attributes would be unique in construction. They do not exist in a single existing construction organisation I know today. Better, smarter, faster and cheaper is shaping enterprises globally.

Combined, these attributes can be shaped to create a durable competitive advantage which will be difficult for many to follow. Don’t think for a minute that there will not be backers for these enterprises. Industrialisation and globalisation of construction will shape new supply chain alliances, capabilities and enterprise possibilities. Removing substantial construction waste and cost will open up far more attractive returns on funds employed. A 20 per cent reduction in delivered construction costs gives the client a better deal and creates more sustainable earnings for the constructors involved.

Make no mistake, these constructors will need to have learned their craft well. They will need to have the business acumen and enterprise ethic that made the Albert Jennings and John Holland the success of their day. I expect these constructors to first make their mark in housing, but these business models will spread. They will redefine the products on offer, how they are sold, the customer experience and the value proposition. They will disrupt the status quo.

Constructors from the class of 2015 will be launching their careers into a changed construction future. The way in to tomorrow’s construction enterprises will be different. Having a sound grounding in the attributes that will define those enterprises early will be advantageous. It is from this cohort of constructors that I predict the game changers of construction tomorrow will emerge.

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