I closed last week’s blog with a plea to the industry to join me in my 2026 mission to double the construction industry’s net profit margins. Let’s begin by looking back at the double-digit profit margins that the industry enjoyed during the era immediately following the end of World War II.
Goodbye Double Digits
- The modern construction industry in the United States as we know it today commenced at the end of World War II when soldiers returned from the war and received benefits from the Serviceman’s Readjustment Act of 1944. Known as the GI Bill, this legislation provided accessible and affordable mortgages to veterans and fueled a building boom never seen in American history. The construction industry was off and running and continued to generate double-digit profits through the 1970s.
- In the 1980s, as the construction wage differential advantage began to evaporate so did double digit profits. The industry reacted by introducing novel procurement methods beyond low-bid fixed price contracts.
- Construction Management (CM) became the new procurement method because contractors believed it would reduce their project risks while maintaining profit margins. Neither occurred as CM fees became miniscule compared to prior profit margins, and contractors were still saddled with project completion risks according to plans and specifications.
- Then came various types of Design-Build contracts that contractors jumped into with both feet until they realized they were “in effect” guaranteeing the design quality and function. Profit margins declined further and financial risk increased.
- Although hard to believe, after these new procurement methods declined into litigation of all sorts, low bid may be making a comeback.
- The only thing procurement experimentation accomplished was to drive down profit margins across the board.
- This gradual erosion of construction profit margins happened over time, to the point that current industry executives never worked in the halcyon days of the double-digit construction industry. Modern management doesn’t expect double-digit profit margins because they never experienced such abundance.
Unexamined Beliefs
Construction industry profitability is still hampered by unexamined beliefs that, when taken together, surrender profitability to revenues. These beliefs are hidden in the primary areas of construction business activity.
- Procurement – Over the 80 years since World War II, the country and national wealth have grown continually despite short-term reversals. The built environment has always been a large part of our nation’s Gross Domestic Product, and there has always been enough work to go around. Contractors, however, believe that there is never enough work to go around. For this reason, we chase bigger jobs for the front-end cash flow, looking for work outside our familiar home territory, sometimes chasing work we have no experience building, and even signing contracts we know in advance include a risk of loss.
- Accounting – Because it is almost impossible to accurately account for ongoing construction job profitability, contractors tend to discount the management control aspect of traditional financial accounting. Few use the balance sheet or cash flow statement as management control tools believing budgets are only “aspirational” plans. No one believes that a five-year analysis of their own financial history can reveal both negative and positive trends that can be used to recognize and manage risk in advance.
- Strategy – The contracting business has little transactional continuity. Contractors hop from contract to contract to stay in business and each new contract is like going into a new business. For this reason, most do not believe in long term strategic planning. They take the business as they find it and bob and weave their way through the inevitable pitfalls. Wouldn’t it be great if we could predict or control future events. But contractors don’t believe we can so what’s the point of a 5-year strategic plan?
- Organizational Behavior – Most contractors do not believe that accountants know anything about construction. They, therefore, discount the position of their own CFO and rarely include them in top management business decision making.
- Risk Management – Contractors are natural risk takers. You can’t be a contractor if you’re afraid to take big swings. We spend large amounts of time, effort, and money managing risk in construction operations but believe that financial risk must be embraced in the construction business. Because we do not believe that financial risk should be avoided (every time we sign a new contract, we are taking a large financial risk), we rarely recognize the difference between risk mitigation and risk avoidance.
Let’s Change Some Beliefs
Belief busting is the first step in restoring double digit profit margins to the construction industry. The rest of this year will be devoted to that task.
For more information on profit margins read more at: MARGINS
For a broader view of unexamined beliefs read more at: BELIEFS
To receive the free weekly Construction Messages, ask questions, or make comments contact me at research@simplarfoundation.org.
Please circulate this widely. It will benefit your constituents. This research is continuous and includes new information weekly as it becomes available. Thank you.
