As a dedicated commercial insurance broker at The Horton Group, specializing in Construction Business Insurance, Surety, and Safety, I’ve witnessed firsthand the challenges and complexities our industry faces. It’s time we address a critical issue that’s been undermining our sector for too long: the notoriously low margins in construction.
The Reality Check
It’s no secret that construction is seen as a low-margin business, a view that even artificial intelligence echoes. This perception isn’t unfounded. Contractors risk substantial capital on complex, lengthy projects requiring precision and expertise. Yet, the financial rewards don’t always reflect the effort and risks involved. Over the years, the average net profit margin for construction companies has dwindled, marking our industry as one of the lowest-margin sectors in the US. This gradual decline has subtly become the accepted norm, a dangerous mindset that we must challenge.
The Road to Higher Margins
This year, I am committed to addressing the factors that perpetuate the low-margin belief and exploring strategies to significantly boost net margins back to the healthy 15%+ figures we saw in the mid-20th century.
Challenging the Low-bid Acquisition Norm
The construction industry’s standard procurement method, low-bidding, has long been a double-edged sword. While intended to identify the most efficient producer, it has inadvertently led to a race to the bottom, with contractors submitting unsustainable bids just to win contracts. This practice has eroded profit margins to alarming levels, a trend we need to reverse.
Combatting Commodity Pricing
The perception of construction services as a commodity has further depressed pricing. Clients often fail to distinguish between contractors, opting for the lowest bid without considering quality or expertise. This mindset has contributed to the industry’s profit squeeze and needs a radical overhaul.
Addressing Contract Imbalance
The disproportionate risk placed on contractors by construction contracts has added to the industry’s challenges. These contracts often favor clients, leaving contractors to shoulder the bulk of financial and performance risks. It’s time to advocate for fairer contract terms that appropriately distribute risks.
2024: A Year of Change
Inspired by Robert Frost’s words, “Two roads diverged in a wood, and I – I took the one less traveled by, And that has made all the difference,” let’s embark on the road less traveled. It’s time to rethink our business model, focusing on profit, cash flow, and managing risks more effectively.
The Path Forward
Over the next couple of weeks, we’ll dive deeper into strategies for avoiding the low-bid trap, altering the commodity image of construction services, and negotiating better contract terms. Our goal is to cultivate a more sustainable, profitable future for our industry.
Join Us on This Journey
As we navigate these challenges and opportunities, I invite you to join the conversation. Together, we can redefine the construction industry’s future, ensuring a prosperous and equitable landscape for all stakeholders.
Stay tuned for our next post, where we’ll explore how to elevate quality and reputation over low-bid wins. Your insights and experiences are valuable to this dialogue, and I look forward to engaging with you further.
Let’s take the road less traveled and make 2024 a year of significant change and success in the construction industry.
Dan Leja
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