You’ve seen them on reports and forecasts, and occasionally haunting your nightmares with bright red ubiquity and promise of a month-end panic attack. Profit margins – the hard-fought battle between revenue and costs – are your company’s life blood. The yearly trend of spending January cutting fat and getting lean has inspired us to take action against one of the construction industry’s biggest questions: why are construction profit margins so small?
According to the Construction Financial Management Association, the average pre-tax net profit for general contractors is between 1.4 and 2.4 percent and for subcontractors between 2.2 to 3.5 percent.
So, why are profit margins so low? Is it the nature of the industry?
No. It’s because of us.
Unlike other industries that have stepped into the digital age, the majority of construction continues to budget less than 1% of annual sales volume to information technology. That’s the least for IT when compared to other major industries.
Which begs the question: do we bypass technology because we don’t have the money to invest in it, or, do we have low profit margins because we pass on technology?
Sure, the economy is healthy – but for how long?
Growth is slowing. In order for our margins to be strong enough to handle the next, inevitable crisis––recession, trade war, labor shortage––we’ll need to find smarter ways to tighten the belt on waste. That’s why we need to resolve to audit not just our finances, but how technology investment strategies impact margins as well.
The lesson here is urgent and sobering
Manual documentation tools like paper and Excel are cheap up front but error prone and costly in the end. Until all jobsites are a reflection of the digitization that has already taken place in the trailer and back office, we’ll continue to live in a cycle of razor-thin-margins by our own design.
The time for construction executives to start seeing field technology as a long-term investment instead of a burdensome line item in the overhead category, is now.
Here are five ways to begin reassessing your technology investment strategy.
1. Audit and consolidate your current tech stack
According to Intermedia, the average business uses 14 apps company-wide. This is one of the biggest pain points for a construction firm of any size––integrating the various single point software systems required to be successful. Start by replacing aging infrastructure. If VCRs were a thing when your company first purchased the software, odds are, it’s not optimized to handle the complexity and speed at which your teams need to work today. In order to be successful, make sure your software is: mobile, integratable, and constantly being improved by the company that builds it.
Ultimately, getting down to the truth of how effective your tools actually are will provide you with an easier way to take control of your margins, increase job costing efficiency in the field, and mitigate risks that could shrink your margins.
2. Save more by investing more in better tech
Growth or profit? If you want to expand your business, you generally have to spend money. But when does growth at all costs become a reckless strategy? How do you find the right balance between growth and burn? Technological changes can be difficult to manage, and may feel a lot like gazing into the Unknown, casting doubt on your knowledge as a leader.
No solution is worth an existential crisis. Start by asking yourself simple questions. How does this technology strengthen your department and the company as a whole? How does this technology impact your current IT strategy and investments? What ROI can we expect to see from this project?
Harness your learnings and lean on experts within your company. Which leads us to the next point…
3. Collaborate with IT
In construction’s digital age, your IT department is no longer a server babysitter. Accordingly, stop thinking of IT as a silo from the business goals of your company.
Give your IT department key performance indicators (KPIs) for the business––not just bits and bytes. Harness their expertise to advise on your technology investment strategy. Empower them to help select and manage a set of services that effectively meet business requirements while minimizing cost.
Successful IT departments will move away from being cost centers and toward powerful drivers of business output, innovation, and growth. Organizations that are positioned for this change will be more competitive and more agile.
4. Look into field financial tools and integrations
In the mid 80s and early 90s, most offices made the transition from pen and paper ledgers to computers and ERP solutions. Quickly, admins, accountants, and company executives found efficiencies that were not possible before. In 2019, having an accounting solution in the office is no longer enough to help keep your company’s financials in order.
Construction doesn’t happen in the trailer or back office, obviously. So why is it that even in 2019 a majority of projects are still not using mobile job costing solutions in the field? In order to work more efficiently, and avoid dumpster diving for change orders written on sticky notes, companies need to set up field-to-office integrations. Allowing for both teams on either side of the jobsite–office divide to have confidence that your financial data is free from manual double-entry errors.
Sage recently announced an integration with Procore Construction Financials mobile job costing tools to provide project and accounting teams access to the data they need to be more collaborative and efficient.
5. Dive into the data
According to Forrester, “most construction companies are drowning in data, but starving for insights. Worse, they have no systematic way to consistently turn data into action.” Don’t just empower your field team to collect project data with new, mobile-enabled tools. Get a system that automates data analysis, and feed that data to the people who need it so that they have the answers they need to make the right decision at the right time. Answers to questions like:
● Should you keep your fees the same, lower them, or raise them? A fee increase of 3% might offset your budget’s 2019 shortfalls, provided it doesn’t dampen winning bids.
● How can you combat potential changes to your cost of labor? Perhaps you plan to cut down on temporary tax-season help. Or maybe you hope to reduce admin costs through automation. If so, how much will it cost to automate?
● Are your materials suppliers likely to raise or lower prices? Are you planning to switch to lower-cost suppliers? Will quality suffer as a result?
● If adoption and standardization is an issue, do your staff need further IT training or support?
Rethinking your company’s tech investment strategy can be daunting, but it doesn’t have to be if you start with these five steps. This small investment of time will give you a much better return than continuing to do nothing.