Construction’s Culture is Conservative & Risk Averse
Construction is an industry constituting a bit more than 6.5% of USA GNP – over $1 trillion dollars. Yet it has at best modest profit margins in comparison to other industries. Its management culture is known for an obsession with reducing costs immediately to make money now on current projects. Capital investment is typically restricted to core facility, real estate, equipment and tool purchases.
Construction management must deal with engineering practices, zoning and permitting regulations and other constraints. Most firms aspire to be quality builders using long established methods with minimal risk. Many are led by managers who only endeavor to do the same type of building over and over at the lowest cost within a limited region where their brand is well known. Construction management innovation is rarely practiced.
Most construction firms do not consider innovation a priority nor a necessary competency. A well reported fact from the federal government’s Bureau of Labor Statistics is that construction productivity has remained static, despite the explosion of new technologies and methodologies used in other industries. Safety statistics also have not improved in decades, and the two are no doubt related.
Complicating matters further is the cultural divide between headquarters and jobsite operations. Headquarters, more likely than not, is staffed with knowledge workers sitting in front of computers. Field operations, in contrast, manages real-work physical tasks performed and evaluated using sight, sound and touch. Moving matter around to build things is much different than moving electrons. Jobsite work is much more experiential and riskier.
Construction Management Innovation a Competitive Must
Yet there are major macroeconomic forces that cannot be ignored. The most significant over the past fifteen years is the diminishing pool of experienced trade labor to hire.
How did that happen? The collapse of residential construction in 2007 was amplified by a financial crisis resulting in massive industry layoffs. Firms burned in the crisis limited hiring, training and career development efforts. So fewer and fewer young workers have been choosing a career in construction. The industry made little attempt at outreach and expanding the potential pool of workers beyond white males.
Even as the construction economy grew again in the last decade, its workforce aged, experienced more health issues and costs, and started approaching retirement. Then came political resistance to any increased immigration of any type, a global pandemic, and now a potential wage inflation spiral.
Construction firms must take steps to increase productivity – the status quo is not an option. And increasing productivity requires innovation. Construction executives need to start making the capital investments in people, workflow processes and technology required to raise their firms productivity if they are to remain competitive.
Budgeting for Innovation
Project services firms tend to to manage each project’s P&L in isolation. Competitive bidding means keeping both project overhead and general builder’s overhead as low as possible while de-risking the project plan to increase opportunities for profit by using tried and true, not innovative, processes and tools.
Yet innovation is not going to happen magically without investment. Contractors will need to move beyond a “cost is everything” mindset and begin thinking in terms of investments. Serious innovation investments must become a budgetary line item. Innovation does not come for free.
Some innovation investments will be expensed (think training programs and certain process improvement programs), while others will be capitalizable (such as technology product purchases). But in any case, for any size contractor, the budgets for innovation will necessarily come from one of five accounts:
- Enterprise G&A and overhead,
- A large project’s overhead,
- The billable aspects of a large project.
- External funding
- New business models
In our next blog, we’ll discuss each of these in turn.