business

Why are firms losing money in a building boom? It's all about scale

In this period of record demand, there are construction companies winning work, growing revenue – and yet still not making money. 

They’re growing, but they’re not scaling. Why are they not achieving sustainable margins from their sales? 

I believe the problem here is a doomed construction business model. It is ‘mandraulic’, built on high levels of manual labour input.

In Australia and New Zealand the construction business model relies on the competence and ability of project managers, supervisors and foremen to drive productivity, quality and margin. 

For many businesses, the approach to meeting growth is either working these staff harder or trying to find more of them – which, in a constrained labour market, is near impossible. 

And when one of these staff members goes, they leave a huge knowledge and capability gap.

Construction businesses in New Zealand have historically been built on hard work, grit and force of personality. When a job has been done well the approach is to use staff knowledge and experience to replicate it, rather than document or systemise it.

Systems and processes, along with effective training and communication, enable even the newest, or most junior member of staff, to understand how a job should be done. This provides a platform for quality and consistency that isn’t dependent on the capability or capacity of the person who’s managing them.  

When an ambitious business is winning work and growing its revenue base, it needs the systems to ensure that the experience its 100th client receives is consistent with, and as good as, the first. It needs the processes to understand and manage risk so it doesn’t take on work at a price it can’t profitably deliver. The investment in these systems and processes, including technology and data-led solutions, pays off when sales revenue grows at a greater rate than its costs. That is scaling. 

Our company has worked with dozens of businesses of all sizes. An inability to scale seems to be due to one or more of the following factors: 

  • A fundamental lack of good processes and systems in client (and supplier) organisations to manage quality, programme, compliance, financial and commercial outputs and risks. 
  • A misguided growth strategy that seeks to blindly dominate a market as opposed to pursuing the products/services that customers have the best results with – and where the business makes the best recurring profitable revenue
  • A lack of training and investment in project management capability and systems
  • A lack of governance around understanding the commercial commitment, risk and cash flow.  

I recently re-read the “E-Myth” by Michael Gerber about why most small businesses fail. It looks at industries where businesses have successfully grown and scaled their business models in a labour-constrained market – including airlines and complex manufacturing. 

These models are characterised by measures including: providing consistent values to your customers, employees, suppliers and lenders; providing a uniformly predictable level of service; able to be operated by people with the lowest possible levels of skill; and being impeccably ordered and documented. 

There is a big opportunity here for contractors to learn from other industries, and be sustainable for themselves, their clients and the public – through the good times and the rough. 

 

Warner Cowin, CEO Height

 

*So what are the firms that we’ve worked with who are scaling and making sustainable profits in New Zealand doing right?


  • Investing in systems and processes (for both suppliers and contractors)
  • Making growth part of a considered strategy – built on focusing on opportunities where you can make sustainable profits, not just on winning for the sake of winning
  • Setting and reinforcing clear expectations of values and associated behaviours for all staff and suppliers – organisational culture is key
  • Using live performance data and measurement
  • Putting a committed focus on contract transition from bid to delivery - ensuring that all systems, processes, resources and people are in place
  • The discipline of accurate and regular reporting of customer feedback, programme, financials and risk
  • Innovation: modularisation of construction processes and standardisation of solutions.

What can we learn from the collapse of Carillion in the UK?

The collapse of Carillion has important lessons for Australia and New Zealand – it could happen here. Carillion, which went into liquidation in January, was the second largest construction company in the UK. It was contracted to deliver major public works, including new railways and hospitals, as well as other services in education, corrections and more. Carillion was locked into unprofitable contracts with the UK Government – the same situation our large contractors have found themselves in. 

The collapse of Carillion means the UK Government is now faced with 450 contracts it has to take in-house and billions of pounds of uncompleted work. Additionally, tens of thousands of staff and thousands of Carillion’s smaller subcontracting firms have been plunged into uncertain futures. 

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The fact is, contractors need to make sustainable profits, because the economic risk of them failing is too high. The success of our major contractors and the success of our economy are co-dependent. In an outsourced market, we need contractors to produce public works and infrastructure – to engage, make decisions and actually make work happen on the ground – so we have schools, hospitals, roads, transport, water, power and other vital services. 

In New Zealand you could argue we have even greater mutual dependence on our major contractors. There are only a handful of contractors with the geographical reach, subcontractor networks, and people, plant and processes, to deliver multiple major works.  The due diligence and long lead-in times required for complex projects means if a supplier fails the process of finding alternative suppliers is prolonged and cumulatively more expensive.

As the success of the economy is interconnected with the success of our suppliers, we should be pursuing long-term Government-supplier relationships with sustainable margins. Government should embrace suppliers as partners, valuing the relationships, valuing the investment they make in their people, plant and processes, and taking an active interest in their financial success.

We need to avoid ‘race to the bottom’ bidding wars that lock contractors into unrealistically low prices. 

Part of the issue is Government buying agencies – and contractors themselves – need more maturity in establishing sustainable price and margins. You can see how, when an agency has one bidder undercutting other bidders by say 20%, the temptation would be to throw caution out the window. 

But parties need to be really clear on the risks, the levels of service expected, and the desired outcomes. The buying agency needs to choose a procurement model that suits the level of risk. That means interrogating and analysing precisely what is being delivered at the price. And if there are too many gaps or uncertainties – including the possibility of the price being unsustainable – this may compromise the agency and its level of service for taxpayers, and the risk is too high. In procurement that old adage applies: if a price seems too good to be true, it usually is. 

Which isn’t to say that sometimes the lowest price genuinely offers the best deal, particularly in a low-risk scenario. But evaluate the risks first.

I am sure there are UK government agencies now managing failed contracts as a result of Carillion’s collapse wishing that they had.

Warner Cowin, Height CEO

The rise of the 'Super Subbie'

So, where’s the really good money being made in construction these days? Those outside the industry might be surprised at how comparatively little the Prime contractors make when you balance return against their investment in capital, commercial risk and meeting health and safety obligations.

From our experience, it's been the so-called “Super Subbie” who is consistently managing cashflow and making good returns.

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What differentiates them is their clear ownership of a specific technical niche and their understanding of where they sit in the market.

The Super Subbie focuses all their attention on being good at just a selection of key things - which are important to their customer. This could be anything from foam bitumen stabilisation to traffic controller design and installation to deep stormwater excavation to urban streetscapes.

They are the go-to guys for that product or service, and a client will often specify using them. They also consistently execute and deliver on promises.   

So what can the stretched Primes – and anyone else in business – learn from the Super Subbie?

  • A clear understanding of the core customer – they have a very clear understanding of their core customer, the one that provides the maximum return and repeat revenue for their business down to a department and person level.
  • Tight and personal management of customer relationships – because they engage actively to understand their customer’s challenges - and design solutions around these problems - Super Subbies maintain tight customer relationships.  They are in regular contact with customers, and mutual trust is high.
  • Be world class at a few things - being narrow and deep as an organisation to own their corner of the market.
  • The whole business understands the value proposition – from management to crew, everyone knows and can articulate their value proposition and what they do as a business i.e. ‘we are world class at x, or we deliver services for z industry’.
  • A clear understanding of customer return on investment (ROI) – Super Subbies can articulate the return on investment for a customer which can often come with some form of guarantee and warranty – eg % reduction in customer complaints.
  • They deliver – Super Subbies fundamentally build a reputation for execution and delivering on promises.
  • Ability to change market offering – Super Subbies take feedback from customers and are quick to innovate, implement technology, and make changes within their business.
  • World Class + Value Proposition + ROI + Execution = Premium Price and Market Sector Ownership – Being all the above creates the opportunity to demand a premium, be specified in tender documents and negotiate work directly with customers.

We all know examples of great subbies that have built their business by being great at all or some of the above. And I know that some Primes would argue that their size means they just can’t be as flexible as the Super Subbies. But this is really about culture, not size. You only have to look at the likes of Apple. Their customer-centric and innovative culture has seen them sustain an 80% profit share of the premium smartphone market. 

Warner Cowin, Height CEO

 

Top tips for Kiwi firms making the leap to Australia

For most successful New Zealand businesses, the next big leap is to Australia.

At Height we have a unique insight into the Australian market through our relationship with New Zealand Trade and Enterprise (NZTE). We support Kiwi exporters in the engineering sector with specialist advice on pitching, pricing, innovation, product development and more.

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So, what’s different about operating in Australia? From what we see, it’s the scale of the market and a more direct commercial business culture.

Here are some top tips from our customers, and from our own experience, to succeed in the Australian market:  

1.     Know where you stand and be clear about you market offering – Those businesses that really succeed are acutely aware of where they stand, how they differentiate and what value they add. A good example is Hiway Stabilisers who have built a solid reputation within Australia for the provision of geostabilisation for road contractors. Their value proposition is unique and clearly defined.      

2.     Time to team up – Many of our customers have made a successful entry into the Australian market with a local partner. A good partner will provide the use of their marketing channels, local knowledge, and maybe even the provision of offices or space to help get you going. This speeds up the learning process so that you reach a more positive cashflow position sooner, and with less stress and aggravation.

3.     If you’re serious about the Aussie market, consider an acquisition – New Zealand businesses tend to prefer organic growth to acquisition as a market entry strategy, possibly due to limitations in capital and the perceived challenges of integrating with a new business. However, an acquisition is worth considering, and you could do this in stages: you might buy a percentage share of a local partner so that you can learn the market and grow your offering, then buy that partner out over a period of time.          

4.     A direct commercial business culture – In NZ we tend to work pragmatically with clients/suppliers to resolve any issues in a contract – business is very relationship-based. In Australia you will be held accountable to all aspects of the contract. This will generally be ruthlessly enforced – you may feel you are being persecuted like a middle order batsman at the MCG. Rest assured, this is not personal.  Do your due diligence, read the contract, be clear on your tags and clarifications within your proposal, and don’t be afraid to exercise your rights. 

5.     Play the long game – potential clients will size you up as a new entrant. They need assurance that your business is in Australia for the long-haul, and that you won’t be scared off if you put a toe in the water and don’t get enough bites straightaway. Your business strategy should allow for a long-term commitment to the market.

6.     They actually like us – Australian businesses really like doing business with Kiwi companies – NZTE found this in its research. In fact, with the strong interstate rivalry within Australia it’s sometimes more palatable for a Queensland business to do trade with the Kiwis than with a company out of New South Wales.

7.     Cost of labour and labour laws – Understand the cost of labour and local labour laws. The unions work strongly to protect the rights of local employees, so what you might find is acceptable in NZ will be completely unacceptable in Australia.  A good example is lone-working for field technicians – an acceptable practice here in NZ, but not under the local rules in Australia. The net result would be an almost 60% increase in base cost to complete an equivalent task. Other aspects are the general cost of labour and the associate benefits such as superannuation and Medicare. So recheck your base costs and definitely any assumptions you may have about productivity rates.           

If you are an engineering business that is interested in growing your presence in the Australian market either drop us a line or contact one of your local NZTE Customer Managers who have some great resources, experience and people on the ground who can provide practical advice and support.

Warner Cowin

CEO at Height and Engineer 

Australasia’s Leading Technical Tendering and Procurement Specialists

 

Height's 4 year Anniversary: celebrating the humble garage

It is surprising to note how many well-known companies started from humble beginnings in their founders’ garage and grew into something much bigger: Amazon, Apple, Disney, Google and Harley-Davidson, to name a few. From one garage to the next, here we are celebrating Height’s humble beginnings in Warner’s garage four years ago. We are amazed how quickly our company has developed into a team of 11 consultants, with a great client base, now tackling opportunities all around the globe. Through the success of our clients, we have fast built a reputation as “Australasia’s leading Technical Tendering and Procurement Consultancy.”

We are hugely excited about the fresh and massive opportunities the new financial year will bring for our clients. In 2017 from Height you will see a brand refresh and we will also be launching new products and services to help you add real value to your business.

To our clients, customers and supporters, thank you for working with us over the past four years; it has been a great experience so far and we look forward to working with you in 17/18 FY.

An Engineer’s Guide to Working with Creative People – It Isn’t That Scary!

As an engineer, I have often seen myself and my colleagues struggle to maximise the opportunity to achieve innovative, game-changing outcomes through working collaboratively with creative people such as graphic designers, architects, fresh young minds or even big thinkers. Maybe it’s something in the engineer’s DNA that leads us to see only the constraints in other ways of thinking.

I used to worry that working with creative people would mean relinquishing control – something that could possibly spell disaster. Now on reflection, I realise our biggest achievements at Height have resulted from letting the creative juices flow, without allowing the engineering side to micro-manage the whole solution.

Since starting Height in 2013, I’ve built a team of engineers and creative people who successfully work together to develop world-class bids and procurement solutions for clients in New Zealand and overseas. Here are some of the things I’ve learnt about working with creative people:

Height's unique approach to tendering and procurement

Height's unique approach to tendering and procurement

  • Don’t assume you know what the creative solution already is – 101 stuff really but how often have we as engineers (technically competent as we are), come prepared with the solution already in our heads and effectively used our team as an extension of ourselves to document and create what we think is right? Be open minded, creative colleagues can provide a fresh perspective and clever solutions you may not have even considered.
  • Provide context, not look and feel – this is the challenge and where we often slip into predetermining the outcome. The trick here is to describe the broad outcome that you want to ultimately achieve in the context of the audience, key messages, emotions, risks, etc. Being too prescriptive in the early stage will frustrate your creatives and limit their ability to make something new and exciting.
  • Let creative people be creative – this is often where the magic happens, so once briefed, I find that if I give my creatives some space and a chance to work up a concept without my meddling, it gives them the opportunity to explore their full creative and innovative thinking. If they need any more detail or information from you - they’ll ask.
  • Understand that creativity is an iterative and interactive process – the power of working up an initial concept provides a starting point for everyone to work from. Its ok for it not to be right first time, it will likely take some refinement and reworking.
  • Review with the end audience in mind – this is where we can undo all the good creative work and revert to our original predetermined solution. Try to put yourself in the end users’ shoes (they may not be engineers) and use your wider team to challenge, review and update the creative solution.

So, engineers, have faith and a little trust in those creative colleagues. Relinquish some control and you might be surprised to see what game-changing or profitable solutions may come from it.

Warner Cowin

CEO at Height and Engineer

“Australasia’s Leading Technical Tendering and Procurement Specialists”

5 reasons to intern at a small business - insights from our Height interns

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Here are some top reasons why interning at a small business is just as valuable as experience gained with a large corporate.

Every student knows how stressful researching and applying for internships can be. What many don't know is that you don’t have to stick to the big corporates – interning at a small business can be just as (or even more) awesome. From two current interns, here are five reasons to intern at a small business.

1. Ownership and responsibility

In a small business, you get given responsibility for projects and deliverables almost immediately. Due to their limited resources, they need to trust you early on – whether that means one-on-one client visits, working with confidential information or being involved with strategic decision-making. The challenge here is you have to learn fast to keep up with information and responsibility thrown your way from day one. Say yes and then figure out how to do it!

2. Diversity of experience At Height, interns write reports, edit contracts, facilitate innovation workshops and so much more. The diversity of experience is massive compared to the niche roles you would fill in a larger organisation. There is something uniquely satisfying about a role where you construct your desk on the first day and present to a client’s leadership team one month in.

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3. Listening and being heard – your opinion counts! Small businesses have to be great listeners to understand what their customers, suppliers and other stakeholders need. If they don’t, they will be out-competed by a larger or more relevant competitor. This means that they’re great at listening to you, even as an intern. When you contribute it’s exciting to see your suggestions in the products delivered to clients. To succeed, you need to learn to be just as good a listener as your team.

4. Being part of a small team

Over the course of two months, you get close enough to tease your boss about his ancient car and remember the names of your colleagues’ spouses and children. When you work in a small team, they quickly become your friends. But if you feel like you don’t fit in with the crew, it might be a rough few months. Don’t be afraid to ask to meet the team when you apply. Most of all, don’t accept a role if you’re certain you won’t be happy there.

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5. Flexible working arrangements Flexible working arrangements are a big perk of interning at a small business. Everyone knows what everyone else is doing, so you’re trusted to work from home or leave early to shoot off to your personal trainer. The downside is you have to manage your workload carefully and make things happen close to deadlines. You get used to going home anytime from midday to 10pm.

Interning at a small business doesn’t have to be your second choice; they are competitive, well-rounded experiences where you face a new challenge everyday. If this sounds like you, just go for it!

About the Authors – Interns at Height:

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Jade Crawford – Recent University of Auckland Graduate, Majors: Accounting, Geography, Management and Psychology, third culture kid and gym bunny

Patrick Williams – Third Year at University of Canterbury, Majors: Finance and Accounting, road hazard (cyclist) and weekend adventurer