by Steve Jones, Industry Insights Analytics Senior Director at Dodge Construction Network
Construction is at one of its most challenging junctures to date, and it is trickier than ever to safeguard your bottom line. The current challenges span many areas:
Economic Factors:
- Rising interest rates make the already high overhead of building even riskier.
- There is plenty of work for now, but a recession could put the brakes on that at any time.
Global Impact:
- Supply chain disruptions and cost fluctuations still have not settled down and contractors frequently have to absorb increased costs and cope with schedule delays.
Workforce shortfalls:
- Contractors struggle to find new, adequately skilled workers.
- Meanwhile, a pending wave of upcoming retirements threatens to age-out much of their existing workforce.
These challenges compound each other to erode contractors’ already thin profit margins. A recent Dodge Construction Network study of civil contractors published in the Civil Quarterly shows that many now predict their profit margins will get even lower over the next year. They point to economic, competitive and supply chain pressures as the culprits.
Key Factors Impacting Profitability
To survive in this environment, contractors need to know two key things:
- What are the most dangerous factors eroding construction profit margins?
- What are companies doing to effectively address them?
To uncover those answers, Dodge Construction Network and Procore partnered to conduct a global study of specialty trade contractors in five key sectors: mechanical, electrical, plumbing, steel and concrete. The report identifies several trends across all sectors and regions.
Margin Erosion Plagues 99% of Specialty Contractors
While the average annual profit margin across all specialty contractors surveyed is 21%, their margin on individual projects is eroded by an average of 5% during construction with nearly one third typically suffering 7% or more. 42% cite materials challenges and almost one third (31%) point to a lack of skilled labor as the top causes.
Unplanned Rework is a Key Drain on Profitability
In addition, unplanned rework hampers productivity, schedule management and cost control. Top drivers include poor resource management (e.g., labor, materials, equipment) and poor client communication. One third of large trade contractors (> $50M annual revenue) say rework accounts for half or more of their margin erosion.
Unbillable Change Orders Represent Major Lost Revenue
On average, 32% of specialty contractors’ potential revenue is lost because of change orders that go unbilled and unpaid. This is especially true for large trade contractors, many of whom say they can lose half or more of their potential revenue because of this.
Nearly One Third of Payments to Trade Contractors Are Made 60+ Days After Invoicing
While 49 days is the average payment time across all trades and regions surveyed, 29% report their typical period exceeds 60 days, forcing them to absorb financing costs and risk defaults with suppliers. Among the top solutions, contractors cite:
- Better financial management software
- More multi-party automation of invoice and payment processes
- More efficient invoicing/logistics processes internally
Larger Companies Leverage Far More Debt to Finance Materials Purchases
Large trade contractors use credit card debt (73%), supplier loans (70%) and bank loans (65%) far more frequently than smaller organizations (47%, 39% and 17%, respectively). As debt becomes increasingly expensive, this impacts profitability.
Supply Chain Disruptions Will Continue to Afflict the Industry and Drive New Approaches
Material prices are fluctuating and on average, 31% cannot pass materials cost increases on to owners on half or more of their projects. This is highest among steel contractors (43%), who face a very volatile cost market. Many specialty contractors absorb these material cost increases. To deal with these challenges, nearly half are raising their prices, especially concrete trades (56%). Others like steel contractors are most frequently procuring directly from manufacturers (46%) and turning down work if they cannot obtain materials (40%).
Ways to Protecting Profitability
Some of the approaches noted above, such as raising bid prices or turning down work, are mostly reactions to the symptoms of these challenges and do not address the heart of the issues. Instead, a focus on improving internal and multi-party processes and enhancing automation with technology builds more resilience into an organization, enabling it to withstand these and numerous other pressures.
The study reveals that the current use of software for financial management ranges from just 54% among mechanical trades to 78% for concrete contractors. Most others are still using manual processes. And among those using software, many are not yet taking advantage of commercially available solutions that have been purpose-built specifically for the construction industry.
Achieving and maintaining profit margins requires a coordinated, organization-wide effort, but tried-and-true tools and processes are out there to help.