Construction companies are changing their business strategy and preparing for changes.
How most companies are operating today
The construction industry today is fragmented with a multi-tiered sub-contractor model being used to design and construct new assets. In addition, when the asset is commissioned and handed over, another set of contracts and contractors are involved in the operation and maintenance of the asset.
This has created an overly complex and inefficient solution with potentially hundreds of contracts involved in the asset lifecycle. With the overall margin being small, contractors are forced to fight to maintain a margin on their piece of the scope. Variations, blame and claims become the norm.
Is everyone working to the same common goal or simply acting to make sure they all make money or at least not lose money? The end result can often be poor delivery, coordination and quality and potentially high cost due to the inefficiency of the complex process. The more companies that are involved, the higher the cost is likely to be, as the level of administration and inefficiency must increase. With each contractor wanting to take a profit, the end client or asset owner is probably not gaining value for the money.
How companies are preparing for the future
Asset owners are undergoing a change of mindset, looking to performance-based relationships that model the whole-life costs and deliver guaranteed outcomes. The question is, how quickly can the construction industry react? Will construction companies that only offer a tradition construction capabilities survive in the future?
Many construction companies have already diversified to provide facilities and asset management services, taking the first step to becoming a complete asset lifecycle management (ALM) solution provider. Construction and maintenance contracts are still typically discrete contracts, but perhaps the future client or asset owner will want one contract to deliver the asset outcome. For example, a contract for a new hospital that rewards the contractor based on bed availability or some other metric.
Today there are major benefits in providing maintenance services as the contracts tend to be of a long duration, often five to ten years, and provides a steady predictable revenue stream.
Any business that only delivers construction projects is at risk when a recession or major industry trend strikes and new build projects dry up. There are many examples of this in the oil and gas industry today. A business that has less than 50% of its revenue coming from non-construction-based contracts is far less likely to go bust than one with a diverse set of revenue streams that are working as a balanced portfolio.
Hire and rental contracts are also increasing. For example, “power-by-the-hour” contracts in the aircraft industry. The cloud is becoming the new norm in delivering IT solutions as a service and software as a service (SaaS)/rental pricing models are rapidly becoming the new normal.
Hire and rental models for property and other asset types are rapidly increasing, too. The client or asset owner is likely to be more inclined to deal with a total service-centric company as it not only reduces their risk but also provides them with the opportunity to move to an asset outcome-based contract.
One other trend that is also likely to significantly change the shape of the industry is the move towards modular offsite manufacturing. This is also going to squeeze many of the specialist sub-contractors that provide site-based trades. The industry skills shortage is going to act as a catalyst to accelerate this change.
What’s next for construction?
It seems very likely that the industry is going to go through a huge change in structure over the next five to ten years, which is going to force companies to change the way they work. The existing processes and systems required to run a traditional construction company will simply not cut it in the future, so the smart companies are changing their business strategy and preparing for these changes now.
In short, the companies that are likely to be the winners in the future will be complete asset lifecycle solution providers. For industry expertise and research on this topic, read the Construction: Optimizing your opportunity to maximize revenue throughout the asset lifecycle eBook.
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