Construction output is forecast to fall by 3.9 percent in 2023, following a rise of 2.0 percent in 2022, as activity continues at a high level, according to the latest Autumn Construction Forecasts 2022-2024 by the Construction Products Association (CPA). Will construction productivity rates increase this year?
In this blog post, we’ll look at the steps construction companies should take to increase productivity despite a looming recession. But first, where are we right now in terms of progress?
The State of Construction in the Philippines
After witnessing a decline of 30.3% in 2020, the Philippine construction industry is expected to record growth of 12.7% in real terms this year, supported by improving investor confidence and investment in transport, renewable energy, and residential and commercial infrastructure projects. This is a downward revision of the previously estimated 21.9% growth in 2021 due to the impact of the wave of Coronavirus (COVID-19) infections on economic activity in late Q2 and into Q3 2021. GlobalData expects the industry to record growth of 20.7% in 2022, driven by improved economic conditions, consumer and business confidence, and foreign direct investment. Prominent downside risks to the outlook in 2022 include the uncertainty surrounding the potential impact of the Omicron variant and whether it may force a tightening of restrictions, inhibiting the construction industry’s recovery and potentially weighing on the tentative improvement of business and investor confidence. Between 2023 and 2025, the Philippine construction industry is forecast to record a real annual average growth of 7.6%, with real construction output expected to surpass its pre-pandemic value by 2023.
Economic & construction experts agree: A recession is here.
With the construction industry booming over the last few years, many contractors have enjoyed a surplus of work and near-record backlogs of future work. The steady flow of available projects has allowed many contractors and material suppliers to increase in size and profitability.
However, with greater potential profit comes a greater potential for loss. This is especially true when there is a recession looming on the horizon. Recent world events have shown how quickly everything can change without notice.
According to Anirban Basu, chief economist of the Associated Builders and Contractors, “Businesses should be raising cash, determining if their lines of credit are large enough, considering staffing models, and ensuring the good graces of bankers and insurers.”
In a recession, money seems to get extremely scarce, and that’s when contractors get in trouble. It’s difficult to pay for your materials and labor when you’re not paid by the owner or general contractor of the project(s). There are steps you can take today to minimize the negative effect of a recession on your business.
In uncertain and challenging times, construction firms are under significant financial stress. Access to accurate, reliable, and up-to-date information is vital in helping construction project teams react and adapt to often quick and ever-changing conditions on-site.
The past few years have been anything but “business as usual” for everyone in construction. Against this backdrop, contractors have had to contend with significant turbulence in the supply chains abroad, causing backlogs, delays, energy costs, and shortages of materials, equipment, and staff, leading to soaring prices.
These 5 steps will help prepare your construction business, whether a recession hits or not. Various sectors are seeking alternative solutions to increase productivity.
Step 1: A single source of data for all project teams
A single source of truth means having operating data that everyone working on a construction project can trust and is accurate. It is more than just good document management; it means project teams working at different sites, at the office or on-site, sometimes even on other sides of the world, know they are working from the right data without duplication. This confidence and improved visibility across multiple projects, teams, and locations are vital to helping you reduce errors, improve communication, increase on-site productivity and mitigate risks.
That is why end-to-end visibility through construction Software- from initial construction estimates and planning to supply chain operation and what’s happening on-site as it happens – has never been more important. It has been discussed as the construction industry’s future; it could and should be the here and now.
Adopting mobile technology
Effective communication is crucial in construction when there are so many moving parts on the go at any one time. Utilizing mobile apps available through construction software tech will bring together your onsite and back-office teams to reduce delays and increase the visibility of your projects. Mobile apps help you collaborate in real time with your team, allowing employees to use their phones to record essential information (like invoices and timesheets) and upload it back to the head office immediately.
The construction industry, as a whole, is notoriously slow at adopting new technologies. Countless studies and surveys over the years have shown that business owners continue to underinvest in technology, despite their acknowledgment of the many benefits technology can provide to running their business and managing construction projects.
BIM, telematics, mobile devices, and software applications have been used in the construction industry for several years. Emerging technologies like VR and AR, robots, drones, 3D printing, the Internet of things (IoT), wearables, and autonomous vehicles are all being adopted in the construction industry.
Ironically, many of these technologies can help address the construction industry’s other challenges. BIM, VR, project management software, and mobile devices can help with scheduling, planning, communication, and collaboration, leading to better productivity.
Drones and wearables are being used to monitor workers and keep them safe. VR is being used to train workers in safe environments. Robots and autonomous equipment allow workers to alleviate some of the more strenuous tasks they are required to perform while also removing them from some of the more hazardous areas on construction sites. Companies that are adopting new tech also have a leg up on attracting more millennials to come and work for them.
We are quickly reaching the point where technology will be a critical component of all construction projects. Companies that are early adopters and implementing new tech into their workflows and job sites will have a noticeable advantage over those that don’t. Companies that fail to see the advantages of technology or continue to underinvest in these tools won’t have the competitive edge to survive in this rapidly changing environment.
The technological changes in this construction industry are driving it towards adopting a smart and dynamic technological system to develop infrastructure and promote environmental friendliness and protection. For instance, using bridge lock-up device systems, building information systems, etc., enhances the construction industry’s dynamism. The adoption of new and advanced technologies and refined building components is creating a favorable environment for the growth and development of the construction industry in the Philippines.
Step 2: Manage the project scope effectively.
The project scope is defined in the goal-setting and planning stages of a project. It would be nice if the scope never changed, but this is the real world! The project manager must always be alert for changes to the scope and effectively manage those changes. Are the changes really necessary for project success or just nice-to-haves? What effect will the changes have on the budget and the schedule? Has everyone agreed that the change must be done? How are the changes tracked? Managing the scope is one of the more challenging parts of managing projects.
Developing a plan is more than just entering the tasks into a software application. All the deliverables need to be defined along with the necessary tasks to produce them and any associated risks. Responsibilities should be assigned to the tasks and deliverables with appropriate due dates and accountabilities. The planning process should also include risk management activities and communication requirements. Developing the project schedule is only a part of the planning process.
Step 3: Improve your office productivity and lower your overhead costs.
Every contractor has to deal with overhead expenses. They are the cost of doing business, but the overhead rate varies wildly from one contractor to another. In good economic times, lower overhead costs allow you to increase your profit margins and still get the project. A lower overhead will allow you to remain competitive without lowering your profit margins in a less favorable economy.
The smartest move is to reduce overhead costs by getting the same amount of work done in a shorter timeframe. For most contractors, overhead expenses are made up of the same three components:
- Accounts receivable
- Accounts payable
Save time on every project you bid by moving as much of the bidding process as possible onto your computer. There is no shortage of online plan rooms in most areas, and the plans and project info are accessible 24/7.
Another huge time saver is using an estimating program, which can perform the take-off and calculate your material needs at the same time.
Digitize your old bid files and save them to your server. Now everyone can access them via computer, tablet, and smartphone, anytime they are needed.
Expedite your accounts payable process by using company/agency websites to file the necessary paperwork and make payments. Never miss a deadline or get hit with a late fee caused by snail mail again. You can also save on printing and postage costs by filing your form and making payments online.
All your taxes (state and federal), worker’s comp, and unemployment insurance can all be filed and paid via the internet.
You can even use an online payroll service to handle your payroll needs. Enter the hours for each employee and then print the checks. They also handle 1099 and W-2 forms and filings to boot.
Your accounts receivable process is absolutely crucial to your cash flow and your company’s profitability. When a project’s funding stops, the GC or lender must decide who gets paid and who doesn’t.
If you didn’t file a prelim notice, you would likely have to wait for your money. The GC or lender knows that you have no real recourse to get paid since you don’t have the leverage of an NOI, and you can’t file a lien against them either.
You should always submit a prelim notice and an accurate billing statement and provide the needed lien waivers to ensure you get paid on every project.
Stagnant Productivity Levels
Unlike other industries, construction has seen little to no improvement in productivity over the past eight decades. A recent report from McKinsey & Co. finds that “While many U.S. sectors, including agriculture and manufacturing, have increased productivity ten to 15 times since the 1950s, construction productivity remains stuck at the same level as 80 years ago. Current measurements find that there has been a consistent decline in the industry’s productivity since the late 1960s.”
Those findings are troubling, especially as construction projects become increasingly complex. Several factors lead to poor productivity in construction projects. These can be due to inadequate planning and scheduling, lack of collaboration and communication between stakeholders on the project, and idle time wasted waiting for materials and supplies to be delivered or for prior work to be completed.
The labor shortage also has played a role in hindering productivity in recent years with workers not having the skills or experience needed or by companies trying to do more work with fewer workers. Fragmentation in the industry from working in silos also contributes to the lack of improvement in productivity levels over the years.
Construction methods like design-build and lean construction practices, which require a high level of communication and collaboration among key players on a construction project, have been proven to improve project efficiency and productivity. Building information modeling (BIM) and project management software are also tools contracting firms can use to bolster productivity.
Step 4: Review your contracts & service agreements for potential protection issues
The construction supply chain has already started feeling the effects of The construction supply chain has already started feeling the effects of The construction supply chain has already started feeling the effects of the coronavirus. Chances are that material prices will increase due to a production slowdown/stoppage or the inability to transport in a normal and timely fashion.
Your construction contracts should include sections about handling pricing fluctuations, shipping/transport delays, or schedule delays caused by others, nature, or other uncontrollable circumstances. Adding a force majeure clause can protect you from liability for delays that aren’t your fault. An escalation clause can limit your responsibility for material cost increases. Without contractual protection, you may spend more money on a project than you budgeted for, with no means to recoup those expenses.
It’s also important to decide if you will charge late fees for unpaid invoices. Determine the amount and if it is calculated daily, weekly, or monthly.
Always remember that a good construction contract is about sharing the risk equitably among the parties involved.
Step 5: Adjust your scheduling to avoid the “slowdown bottleneck.”
When revising your project schedules, keep an open mind and be flexible.
- The “busy bottleneck” typically happens in a growing economy when you don’t have enough manpower to meet the demand of current projects and schedules.
- The “slowdown bottleneck” occurs when the economy is slowing down due to production decline or stoppage. A limited supply of materials means you will have to decide which project gets priority and which will have to wait a while.
Depending on the cause of the bottleneck, you might consider working “off hours” to keep a project on schedule. You can work a day, swing, or graveyard shift to still hit those milestones and meet those deadlines.
Another option is to have some employees have their days off during the week, so they can work on a project over the weekend. By shifting when the “weekend” happens, you have effectively added two more production days each week for the specific job.
Whether dealing with a work slowdown or a ramp-up, this is an easy way to get more done without needing to pay overtime to make it happen.
Create a goal-orientated company culture
A responsible and goal-oriented company culture will do wonders for construction projects. This isn’t something that can be implemented overnight, but there are various ways to instill the right company culture in your construction projects. Instilling the importance of meeting deadlines and achieving goals is one way to go about this. Hiring the right people is another way to go about this.
Take steps now to keep construction cash flowing during a recession.
Cash flow is crucial to construction success in any economy, whether in a recession or not. During a recession, your ability to manage your cash will determine whether or not you survive.
These five steps will provide you with the best protection from the looming recession and keep your cash flowing. While you might not be able to implement all of these ideas right away, start where you can. Every step counts, no matter how small it is. Look at your accounts receivables, and see if you can reduce your reduce your reduce your days’ sales outstanding (DSO) by a week or more. Start sending a preliminary notice on every job, and see what happens. After all, none of these steps will kill you – and one of them might save you.
Book a demo with us to learn more about how AIMHI can increase your profit by as much as 5 to 10 percent.