Construction industry tips for a sound 2007

by Gregg M. Steinberg

The environment today within the construction industry is tenuous at best. In fact a recent study by our International Profit Associates Small Business Research Board (IPA SBRB) showed that the SBRB Confidence Index for the Construction and Contracting Industry fell to 30.7 in our third quarter 2006 poll. This was a significant decline in industry confidence from the 49.3 index recorded during the second quarter poll completed in May.

By comparison, the confidence that owners and managers of construction companies have for the next 12 months is far more pessimistic than that of the entire "small business" category. Comparatively the third quarter Small Business Confidence Index across all sectors was nearly nine points higher at 39.3.

The aggregate opinion of construction and contracting industry managers nationwide is driven by their view on the direction of the economy as well as operating issues related to the costs of materials and gyrating fuel and energy costs.

According to the results of the survey, 26% said they had confidence in the general economy—a drop from the 48% in May. Concurrently, 38% of the respondents in the current poll indicated disappointment with the direction of the economy, an increase of 11% from the 27% who expressed that opinion earlier in the year.

These shifts in opinion are compounded by rising costs of materials and the general impact of fuel and energy prices. The cost of materials was described by 25% of the participants as the leading concern (the same as the previous period), while 15% named energy and fuel as a leading issue—an increase from only 3% in the May 2006 report.

Nevertheless, the attitude is cautiously optimistic about the final 2006 results, with 52% of the construction and contracting firms responding to the survey estimating revenues for this year will be about the same as 2005 and 40% saying they would be better than last year’s performance.

Understandably, companies will enter 2007 with strategies geared to manage all costs. A key category is management of labor costs where 26% said they intend to increase hiring, 49% said they intend to maintain current workforce levels and 14% plan to decrease hiring.

About 9% of the construction and contracting firms were unsure of their plans.

The question then is what does this mean for those involved in the construction industry whether it be general contractors, sub-trades, manufacturers and distributors of products utilized within the industry or professional services providers like architects and designers.

Looking forward to 2007, companies need to look at operating efficiencies such as supply chain management as well as bids for new business to maintain a competitive advantage. More than ever, there needs to be vigilance over how jobs are bid. The process includes tighter control on cost management. This involves starting with clearly identifying— on a true and real time basis —the exact amount of materials needed for each specific job; maintenance and control on a job site of raw materials; reduction of theft, scrap and waste; and methodologies to manage all those critical factors on a day-by-day basis.

This is an assignment, not only for those who manage the job sites, or the shop floor, but for the tradesmen, professionals and laborers. Incentives should be considered to motivate all to attain on-time performance while maximizing the opportunity for profit. The ability to manage each job by itself in a true job cost basis, taking into account specificity relative to labor cost, labor production, labor efficiency and labor’s use of material is key to success. This ultimately allows for a competitive advantage against those companies that still run day-to-day operations by the seat of their pants. As we look forward to 2007, one can anticipate that the IPA Small Business Research Board Construction and Contractor Confidence Index will once again fall from the level reported in the third quarter.

This waning confidence can either be viewed as warning signs of impending disaster or an opportunity to take advantage of those less well managed. Now is the time to ensure that your business is working from a sound set of well designed and engineered blueprints and that the foundation, if not yet prepared, be cemented immediately for a sound 2007. Those who do will reap the rewards. Those who do not will wish they had. The choice is clearly to both profit in business and prosper in life or go by the wayside.