Why Cost Cutting isn’t the Solution for Civil Construction Cost Management

It’s no secret that the construction industry is going through a very difficult phase. Despite a large amount of civil and infrastructure construction work, the costs to deliver these projects are increasing sharply.

We are hearing from most of our customers that they are struggling to run profitable projects under the current market conditions. There are some factors you can’t control (increases in costs and tender bids from your competitors), but there are some things you can control that can significantly improve your profits and reduce financial risk.

The temptation is to start cutting whatever costs you can. While this is understandable and indeed many costs should be cut, this can lead to unintended consequences that can result in even more costs in the short- and long-term. A much better approach is cost optimisation, recognising the many interdependencies in your business and that sometimes you need to “spend money to save money”.

In this article, we will focus on the civil construction cost management steps you can take for the things you can control.

The typical response from construction contractors is to cut all “non-critical” expenses to reduce costs. This is understandable, and sensible if the benefit from that spend is not producing revenue or savings for the business. The reality is that over the last two decades, construction contractors have neglected the investments required to improve productivity.

To demonstrate the point, let’s look at the numbers. We will compare averages across all industries, manufacturing and construction.

Investment in technology

This is the “Catch-22” of construction. Because profit margins are low, there is little spare cash to invest in technology. Because there is little investment in technology, efficiencies remain low. Because efficiencies remain low, profit margins are low… and the cycle repeats.

The construction industry has one of the lowest investment rates in the technology of all industries. While the average across all industries is 3.5% of revenue, the construction industry invests just one-third of this at 1.2%.

By treating technology investment as a “discretionary” spend, the construction industry has not benefited from the massive drop in overall costs seen in other industries like manufacturing.

Productivity rates

In construction, a lot of this cost inefficiency comes from low productivity. Outside of construction, the last two decades have brought a huge increase in efficiency and productivity thanks to the appropriate use of technology.

This is true across all industries, with an average increase in productivity of 25%. One of the leaders is manufacturing, enjoying a huge 60% increase in productivity.

Construction is the outlier at the other end as the industry with one of the lowest productivity increases at just 5%.

The conventional wisdom of cost-cutting hasn’t worked to date, and under the current challenges in the industry, it still won’t work. Rather than looking at cost cutting as an end in itself, like the leaders in the construction industry and other industries, you must be looking at a long-term profit-maximising strategy. This will serve you well now and even better in the future.

So, what should you do today?

When considering your cost optimisation, it is important to ensure that you are able to withstand short-term business conditions while also ensuring that you are well-placed to grow profitably into the future.

We recommend that you do an audit on your business and ask yourself the following questions:

1. What expenses do we have that are not providing a return to the business?

These are expenses that can be safely eliminated

2. Are you hitting your productivity targets?

The biggest cost to be cut for civil construction contractors is low productivity. Too many man and equipment hours are going into a fixed amount of work.

3. Do you have the right systems in place?

Without the right systems in place, it can be difficult or impossible to identify productivity issues and cost overruns until it is too late. The cost of these business inefficiencies is almost always many times more expensive than the investment in the right supporting technologies.

By doing this simple audit on your business you can confidently optimise your civil construction costs. In some places, you will cut expenses knowing that they will not affect other areas of your business. In other places, you can safely make investments in systems to improve productivity and quickly identify cost overruns. For most civil construction contractors this is where the real cost savings are made.

If you own or work for a civil construction contractor and want to improve efficiency and increase visibility into your financial performance in real-time, get in touch with one of our cost management advisors to discuss how we can help you!