Shrinking profit margins are haunting contractors all over North America. Increasing costs of materials and pressure put on projects because of the labour shortage are making contractors more and more aware of the role they need to play themselves in combating rising costs.
What Is Causing Shrinking Profit Margins for Contractors?
Growing Cost of Steel for Construction Projects
Tariffs on steel and metal products caused a price spike of almost 14% in 2018. In the fall of 2018 industry minds predicted a much smaller increase for the following year. Their 1.9% prediction wasn’t quite the ticket and the cost went up another 4% in 2019.
Material Costs As a Whole Keep Going Up
Increasing costs of metal and steel aren’t the only cost pressure contractors are facing. Diesel fuel, petroleum, and softwood lumber had cost jumps that also impact the bottom line of contractors.
Labour Shortage and Project Extension
The reports of contractors struggling to find skilled laborers is starting to sound like old news. It’s been a constant struggle, and from the looks of things moving into a new decade, it will continue to be a struggle.
Without having the proper workforce, projects are often pushed back or delayed. For contractors, delayed projects can incur additional costs for things like:
- Construction site facilities
- Management and supervisor salaries
- Extension of construction bonds and insurances
- Equipment rentals
- Paying delay costs to subcontractors
Finding good people and skilled workers continues to be a struggle in the construction industry.
Delayed projects have massive impacts on the efficiency and cost of a project. Delayed projects can tie up personnel from moving on to other projects, which can then delay those projects as well. Pushing projects into new seasons could result in environmental impacts that weren’t planned for. The stress of a project falling behind schedule could impact the safety of employees on-site, leading to further delays.
The delay of a project is a waterfall of extra costs and unnecessary stressors all that affect the bottom line of the contractor themself. This is because the business owners and independent contractors in charge of the project are the ones responsible to manage these changes.
Construction Companies Control the Costs
These costs, unfortunately, often fall on the budget books of the construction company and not the company that hired them. The bidding system alone creates an environment where money is everything. These fluctuations in margins, increased costs throughout a project, and even unforeseen costs caused by delayed and paused projects all fall to the contractor.
While all projects will have some sort of contingency budget in place of around 10%, there are things that contractors can do to help mitigate costs both during the planning, and then the actual building stages of a project.
How To Save Money As a Contractor
The ability to increase profit margins and save money on projects may seem like a daunting project. There are many things that construction companies can do, though, that can make a difference in the cost of projects. These include everything from technology adaptation to sourcing alternative materials, and using smarter project management practices.
Technology to Increase Construction Profit Margins
Construction technology is defined by the Construction Institute as a “collection of innovative tools, machinery, modifications, software, etc. used during the construction phase of a project that enables advancement in field construction methods, including semi-automated and automated construction equipment.”
We believe, however, that construction technology includes everything that leads up to the actual construction phase that helps to set a project up for success. Using building index modelling (BIM), smart systems to oversee project timeline and communication technologies to keep information flowing for a project during all phases can all play a part in keeping a project moving along as planned. Efficiency and technology should be seen as a fundamental part of a strong project foundation, not an additive to be included once the project has already begun.
Technology Use Can Plug A Hole That’s Leaking Project Money
In an article published by ConExpo/Con-AGG, Guido Perez Manfredini – USA & LATAM, MICROMINE Regional Manager – said that using technology could save the industry almost $300 billion worldwide.
“That is because these technologies offer a more comprehensive understanding of what is occurring on a job site, and they can automate workflow and processes,” says Manfredini.
The beauty of technology for site monitoring is that it allows contractors to track and get information in real-time. There is no need for a delay between a system seeing a project falling behind or identifying an issue and the contractor learning about it.
Proactive action has never been easier for the industry. Being able to nip issues before they become anything big is huge in keeping a project on time and on budget.
Something as simple as fleet management that can also monitor the health and life cycle of machines to keep them running smoothly. This simple process can have a huge impact on the bottom line by keeping all equipment doing the job they were brought in to do.
Technology to Fill the Labour Gap
Technology can also help to keep a project moving by helping to fill the labor gap that can slow a project down. Autonomous equipment and even robots are tools to help alleviate the pressures of the labor shortage.
These autonomous and automated machines also don’t need lunch breaks or slow down at the end of the day approaches, making it easier to keep a project on track.
Building Material Alternatives
Another source of cost pressures on contractors is the costs of materials to complete a project. Seeking alternative building materials is a great way to keep budgets down. Plus, it offers an opportunity for contractors to bring sustainable building materials to the table as a possible alternative.
A building in Minneapolis made of cross-laminated timber
Lumber – or more specifically cross-laminated timber (CLT) – is the next big thing in construction. Fire-resistant, as strong as concrete or steel, and better for the environment, this alternative building material is on the rise – literally. Buildings made of wood have already sprung up around the world and are now being seen in the US and Canada.
Although CLT is on par with steel in terms of cost, the material is easier to work within the prefabrication processes which can speed up the construction process as a whole.
Smart Project Management
Throughout a project, management decisions can help to keep a project on time and within budget. Aside from using technology, there are project management techniques that can be applied to a project to help achieve this. Things like just-in-time delivery and ensuring proper equipment on site can help to reduce overall costs and keep a site organized.
What is Just In Time Delivery and Why Does It Matter?
When ordering materials in bulk at the beginning of a project, there is a higher chance of overestimating and ordering too much, creating a stockpile of materials. As a project goes on, some materials could become damaged, or go missing, which is unnecessary waste. Having too many materials on site can also lead to unnecessary overuse of materials, which ends up wasting work hours doing something that didn’t need to be done.
Just In Time (JIT) delivery involves having project materials delivered on-site only when they are needed. It can eliminate waste by only bringing materials on site when they are actually going to be needed. There is less chance of over-ordering or damaging materials.
JIT requires that contractors develop a good relationship with suppliers in order to keep communication open and expectations clear. Much like developing relationships with building maintenance, maintaining communication with suppliers can make or break JIT delivery projects.
How The Equipment On Site Can Make Or Break Your Costs
Using the best piece of equipment for the job at hand is an easy and efficient way to reduce costs, overall. Now that heavy equipment rental is easier than ever, there’s no need to “make do” with one piece of equipment when there is a better fit. Being able to source more efficient equipment can keep job sites safer and reduce fuel and even material costs.
A backhoe is an example of an equipment piece that is becoming less popular; traditionally, a backhoe would be used as an all-in-one type of equipment. It could do a lot of jobs fairly well. Now, renting a mini-excavator and loader or skid steer can make a job more efficient by using machines for what they are actually made for, instead of “making do” with another piece instead.
Using the best equipment type for a project is an easy way to maximize the efficiency of a job.
Renting can be less costly, as well, since the machine can be delivered and picked up for when it’s needed. Having idle equipment sitting around on site can pose a safety hazard. Using the best fit for a specific project can also be safer in general for the operator and other employees on site.
Renting equipment can also help to reduce costs by giving contractors the ability to use newer equipment with the latest technology like fuel tracking, GPS and grade control.
It’s Time For Contractors to Think Outside The Box And Own The Their Profits
It is getting harder and harder for construction companies to earn a profit and traverse the path of rising costs. Thinking outside of the box and trying new things is going to be the best way to make the most of a phenomenon out of the control of contractors.
Rising costs of materials and the impact of the labor shortage can be balanced with technology, smarter material choices, and innovative project management practices on site. Contractors can do their part to increase profit margins and take the budget back into their own hands.