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Are low margins crippling the construction market?

Posted on 31/08/2019 at 8:30 AM by in Blog

Will low profit margins spell disaster for the construction industry?

Currently the construction industry is in somewhat of a rough spot, with low profit margins on projects being one of the main contributing factors.

Low margins have been a talking point amongst the industry for some time now, and it seems to have taken a turn for the worse over recent years.

It is a very common thing these days to see construction companies trying to win tenders by offering ridiculously low bids, and a lot of the time it works. By lowering costs and promising quick delivery times, their bid is ultimately going to be very attractive to clients.

But what many companies fail to realise is that this is a very slippery slope, and things can get out of hand in a short amount of time. Low bids means low profits, and having your profit dependant on delivering a project on time and under budget isn’t a stable option.

Are low profit margins and short delivery times crippling the construction market?

With that in mind, we’ve decided to take a look at the effect that low profit margins have in the construction industry, and some ways of potentially increasing them going forward.

The situation

To put it simply, profit margins are currently lower than ever before because companies are continuing to put in lower, more attractive bids in order to win projects.

The whole idea of offering the job at the bare minimum profit feels like the only way to get any work, and this mentality has had a negative ripple effect on construction as a whole. The industry is so competitive right now that in order to win any chance of work, companies are having to risk going into the red just to get a project.

Overspending on bids and offering bids that are unrealistic and leave little room for error is unfortunately a very common practise these days. On average, UK constructions firms spend around £3 billion or 3% of their overall sales on bidding alone, winning one in five projects at best.

With figures like that, it’s clear that something needs to be done.

Operating with such low profit margins is definitely doing more harm than good, with clients now more used to getting the work done cheaper and quicker at the expense of the contractor. You’ll often find that companies put in a bid at too low a price with the hope of forging relationships and winning bigger and more profitable contracts as a result of this, but this is definitely not something anyone should be banking on.

Because every project comes with low profits, companies are having to take on more and more just to break even. Many companies are using this model of high volume of work at low profit, but this could have serious repercussions on the quality of work that is being carried out.

The problems

Now that we’ve taken a look at what the current situation is, let’s look further into the problems that come with low cost, quick delivery projects.

One of the biggest issues with increased amount of workload (thanks to low profits) is the amount of stress and pressure that comes with getting projects finished on-time or quicker.

Setting unreasonable time frames just to win a tender is never going to be a good plan, and you could be putting not only your worker’s health and safety at risk but also the general public. A shorter window means the work needs to be completed in a fraction of the time, leading to corners being cut and ultimately, health and safety being treated as an afterthought.

Less time to finish a project results in messy and sometimes unfinished work, with workers having to put themselves are risk and the quality of the build questionable.

This whole approach has led to the unfortunate demise of many construction companies, with the biggest example of this being Carillion at the beginning of 2018.

Carillion were the second largest construction company in the UK, and even they still went down due to rising debt. Delays and budget blowouts caused a lot of problems for them, and their low margins for projects did not help.

The result of their actions left many projects unfinished, and the health and safety of certain sites being brought into question.

These ideals are simply too much risk with not enough payoff.

Many of these companies also end up suffering thanks to “legacy contracts”, which are jobs that run over several years and eventually become unprofitable because of material and labour prices increase.

With most of these projects being agreed at low prices, it doesn’t take long for them to leave the companies worse off – especially when taking delays into account.

But it’s going to take more than an article or two to completely change the industry, so what can construction companies do to try and make jobs as profitable as possible in these trying times?

The solution

Ideally, we want to see more accurate bids from companies with full transparency as far as delivery time and overall costs, with room to actually make a profit. In the meantime, here’s a few things that companies can do to keep a project in the green.

Firstly, focus on getting a better, more efficient sales team that will strategise and win you projects without having to subject yourself to unrealistic delivery times and low margins. A good sales team will go a long way, and your business will benefit from it in the long run.

Following on from that, it’s crucial to really understand your costs and resources to hand. One thing that often gets overlooked is just how useful the right technology is. Investing in technology and software that is going to help you efficiently plan projects and budgets, and carry out the work to the highest of standards is always a good idea, and you’re essentially stunting your growth if you refuse to upgrade.

When on the job, it’s critical to make your team as productive and efficient as possible. Setting goals for people to work towards, making sure you have the right equipment for the job that will get it done faster and cut out any unnecessary costs.

You should also be building a team of talent, ensuring you have the right people for the job that all share the same focus and ideals. Recruiting and retaining individuals that add value to the business needs to be a priority, and will only help your company grow and grow.

Overall, there are many different ways to try and cut and manage costs without having to sacrifice quality of work, and will help keep you in the green when dealing with low profit margin projects.
Going forward, the industry definitely needs to change and low profit margins need to be a thing of the past if construction is going to thrive.

Do you think that low margins are crippling the construction market? We’d love to hear your thoughts about it.

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