Tuesday, December 16, 2014

Defective Business & Delivery Models in Construction

In the article excerpted and linked below Mark Wakeford, the Managing Director of Stepnell, Ltd out of the UK comments on the dangerous nature of the "cash generation" and "hibernation" business models prevalent in the construction industry.  Mark's insightful analysis deserves the attention of advocates of BIM and IPD as he lays bare the dangers associated with running an entire enterprise through the OPX side of the books and neglecting targeted CAPX investments.

OPX is short hand for operating expense and CAPX, of course, refers to capital expense.  Construction companies are notorious for running expenses through operations and neglecting capital investments.  Mark's article describe the bumpy ride associated with the "cash generation" model during a boom and the "hibernation" during a bust.

Mark describes the intersection of these two models as follows:

This hibernation model, coupled with the cash generating model for contracting, explains a number of pressures that contractors are facing as we emerge from recession. A long hibernation period, as we have faced since 2009, means that companies have used more of their financial resources than they may have anticipated during the recession. As a result these companies have less funds and they now need to win work to generate the cash required to support their businesses. One result is that competitive tenders remain highly competitive at a time when input prices are rapidly increasing.
Here's a link to Mark's article titled, A Dangerous Business Model.

While Mark's article accurately describes certain deficiencies in the alternating "cash generation / hibernation" business models his solution is simply a gentle reminder of the need to diversify revenue streams, primarily through owning income generating properties.  Specifically, Mark says:

If this construction business model is unsuitable for this phase of the economic cycle then what is appropriate? Clearly a business that generates a return during a recession is more robust as it can invest and prepare for an improving market. Historically, contractors used to hold significant property interests that provided both an income during recession and assets to support a growing turnover post-recession. Other models exist, but this is the one that Stepnell follows as our historic property interests support our construction activities.

Not every enterprise that delivers services in the construction industry has the ability to invest in real property that generates income during an economic downturn.  Large well managed construction firms with deep pockets may have that luxury, but not the vast majority of the stakeholders in the industry. In fact, more than 98% of the business entities that deliver planning, design and construction services in the United States have 50 or fewer employees.  Similar numbers are seen in Europe, Asia and Australia. However, the fact that most in the industry lack the resources to successfully execute the hibernation half of the "cash generation / hibernation" business models takes nothing away from Mark's criticism of those models.

Lack of liquidity and access to capital reinforces, rather than detracts from, the argument Mark is making.  So what's the key problem?  How do we solve that problem? And where, strategically  does the industry go from here?

The built industry's problem is a waste rate of 50% to 60% on capital projects, manifested by the Fifty (5) Years of Failure to improve labor productivity in the industry. 

The solution to that is to form, deploy and utilize integrated teams capable of better planning, design and construction processes in a trust based environment.  In construction this is known as integrated project delivery or IPD

The best strategy is to creating a smart built culture that supports and enables the formation, deployment and utilization of integrated teams in a trust based environment.

In addition to reliance on the inefficient business models of "cash generation / hibernation" the industry relies on a  defective delivery model, design, bid build & its economic spawn, profits extracted from waste.  That defective delivery model exacerbates the pain inflicted by the defective business models Mark described. While even a flat worm turns away from pain, not the construction industry. We wallow in the misery. Smart collaborative delivery models, like integrated project delivery, where profits are earned by adding value mitigate the risks better and built industry players that want to survive in the emerging knowledge economy will adopt, adapt to and deploy smart built cultures.

Welcome to the Collaborative Revolution!

James L. Salmon, Esq.
Collaborative Construction
300 Pike Street
Cincinnati, Ohio 45202
Summary of Services and James L. Salmon's CV

Office 513-721-5672
Fax 513-562-4388
Cell 512-630-4446

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