Building on Shifting Sands
Millennium Tower in San Francisco is sinking and leaning. The 58-story tower has sunk 17 inches and tilted 14 inches since it was completed in 2008. Engineers want to drill hundreds of steel and concrete “micro piles” down to bedrock under the tower to stabilize it and level it up. They estimate the cost at between $200 million and $500 million. They blame construction of a massive transportation terminal next door for undermining their building. The terminal engineers, they say, are removing groundwater for a new transportation tunnel and when the water levels under the Millennium Tower dropped the sand compressed causing their tower to settle.
Even the bible suggests that we avoid building on “shifting sand”. However, the sands of time are forever shifting and, just when construction contractors think they’ve got it figured out, conditions shift requiring adjustments. The construction market is cyclical, malleable, and forever evolving. Economic factors are not the only shifting sands that undermine contractor efficiency and competitive ability. Other more subtle and less measurable factors are constantly changing and challenging contractors to keep pace.
For example, not long ago, contractors built wooden forms from scratch to customize designs for complex concrete projects. The competition was limited to contractors who knew how to do this work. However, the process has been revolutionized by patented form systems that require much less skill to install—almost to the degree that anyone can do it. New technology standardized form building and eliminated a competitive edge. Evolving technology changed things, and concrete contractors had to adjust to new market conditions. Shifting sands.
Economies of Scale
Economies of scale emerge when the size and capacity of a company afford it cost advantages. As fixed costs are spread out over more units of output the cost per unit of output declines. When a company is able to reduce unit costs just by increasing output, it is in a position to benefit from economies of scale. Some of the economies of scale factors that impact the competitive environment in the construction industry are:
- Capital available to purchase the latest equipment.
- The ability to buy materials in bulk.
- The specialization, training, and efficient division of labor.
- The capacity to engage in formal research and development.
- The ability to access robust loan facilities.
Unfortunately, most small and midsize construction companies lack the resources to reduce costs through scale as fast as customers now demand. This differential in scale shifts the sands of the construction market in favor of larger enterprises.
Access to Information
The smaller legacy contractors of the past were able to keep their cost structures, bidding process, and production methods as closely guarded secrets. Now, with the proliferation of information aided by modern communication technology and the internet, all contractors compete for work utilizing the same data. There are no more secrets costing smaller legacy contractors to lose their competitive edge.
When construction was a custom effort, double digit profit margins helped compensate for any inefficiencies. However, as construction becomes increasingly standardized (everybody doing the same work the same way) efficiency and productivity become the major differentiators among competitors. Despite an exceptionally good economy, construction margins have slipped into the mid and low single digits. Low margins restrict resources, making it harder for small and mid-sized businesses to invest in increased efficiencies. Standardization enables larger firms to thrive at these margins.
In a construction market that is becoming more sophisticated every day in both management technique and skilled labor production, firms who continuously train their employees develop a competitive edge. The old-fashioned brick and mortar contractor who values only traditional craft skills and fails to invest in ongoing employee training will fall behind the curve. As construction becomes increasingly complex, continuing education and training is emerging as an important competitive factor.
Don’t Be an Ostrich
Don’t hide your head in the sand. Recognize that the shifting sands of the construction marketplace are affected by not only macro-economic factors but also factors of scale, standardization, education, and advances in technology. The willingness to learn and grow will be the “micro-piling” that stabilizes your company in the shifting sands of the construction industry. Hopefully it won’t cost you $500 million.
Read More: Prospering in Cyclical Markets and Simplar.com