contracts

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.