How to manage owner expectations and remain profitable

HOW TO MANAGE OWNER EXPECTATIONS AND REMAIN

PROFITABLE

WHILE THE CURRENT MARKET DYNAMICS AND INFRASTRUCTURE INVESTMENTS ARE BOOSTING COMPETITION IN FAVOUR OF CONTRACTORS, THE LONG-TERM ISSUE OF LOW PROFIT MARGINS IN THE CONSTRUCTION INDUSTRY STILL LOOMS, SAYS MATTHEW MACARAS, SENIOR SOLUTION ENGINEER AT INEIGHT.

Australia is in the midst of one of the greatest infrastructure booms in its history. While infrastructure spending was already playing catch-up to fill the gaps created by migration and population growth over the past decade, the pandemic and the federal government’s commitment to infrastructure investment to boost the economy in the post-COVID world has boded well for the sector.

The federal government released its 2021 Australian Infrastructure Plan in September last year, advocating for a new wave of infrastructure reform to be driven by a $110 billion investment. The government’s vision for the next 15 years addresses a range of areas for reform, including city redevelopment and expansion, housing density and public and private transport.

This dynamic market condition has been welcomed by contractors, particularly the smaller and medium-sized companies, who are finding themselves in need of growth and expansion to meet the size and scale of incoming work. And while this may have temporarily relieved some of the pressure felt by contractors to reduce their profit margins to win contracts, the underlying issue has not gone away, according to industry expert Matthew Macaras.

As a Senior Solutions Engineer working with the global construction management software company InEight, Macaras deals with Australian contracting businesses of all sizes to help them streamline their project management processes.

InEight’s tools help contractors minimise their project risks by creating more transparency.

Matthew Macaras, Senior Solution Engineer at InEight.

He observes that the civil construction industry has long suffered from a pricefirst approach to contractor selection, while sectors such as mining, oil and gas have been quicker to adopt a value-based approach. The result, he says, is “razorthin” profit margins for civil contractors.

“This is particularly true for the smaller infrastructure projects,” he says. “The contractors are going in with narrow margins, or sometimes no margins at all, to place their bids and win the projects. This then means that they’ll need to cut costs where possible and charge the asset owner with a change order processes at every step to try and recoup some of that margin and make the project profitable.”

SOME RELIEF The scenario, Macaras says, has improved since more investments have started pouring in, but it may only be short-lived.

“I think the reason we see conditions improving right now – and I expect we’ll start to see it taper off in the next couple of years – is because there’s just so much work that if companies don’t get the margins they expect, they don’t under-bid. They already have enough work, so more projects would stretch their resources and increase their risks. They also know their competitors are experiencing similar conditions.”

Broader uptake for contract styles that help mitigate some of the risk for contractors has also been a welcomed sign, Macaras observes.

“In recent times, we are seeing an increase in the New Engineering Contract (NEC) framework, which are more about owner collaboration and having early warnings for changes. This makes sure changes can be resolved in a timely manner,” he says.

“Similarly, in larger projects where the contracts are often either designbuild or Engineering, Procurement and Construction (EPC) type contracts, contractors are being brought in at earlier phases of the project, which allows them to help define the project scope. The contractor is still assuming some level of risk, but they can now better define that risk and price it appropriately so that they can adjust their margins later.”

A SINGLE-PLATFORM SOLUTION As a solutions provider in all aspects of digital project management, from simulation to document control, planning and scheduling, InEight’s tools help contractors minimise their project risks by creating more transparency between owners and contractors. InEight’s analytics tools also allow contractors to keep track of their projects in real-time and visualise their progress.

Macaras observes that using interactive and collaborative digital tools, such as those provided by InEight, contractors are finding it easier to manage their risks, recoup their costs and communicate with asset owners in a transparent fashion.

“Where InEight’s capabilities as a digital tool come into the picture is by allowing contractors to see what’s happening on their projects. What we do is to help contractors better manage their projects, capture all the data in a single spot and then provide them the reporting and the visibility to be able to make proactive decisions, as well as allowing the change process to proceed smoothly,” he says.

“By capturing and storing all of the project’s changes, large or small, in one platform, contractors are better able to see them through to resolution. It’s really about having that visibility and everything in the one spot so contractors can make informed decisions and be pro-active in their decision-making.” IMPLEMENTATION PROCESS Macaras says InEight’s experts have helped many contractors combine their discrete project management processes into a unified platform or create new processes where there were none.

“As a solution provider, we do not just sell our clients the tools they need and walk away, but we also help deliver the outcomes they seek. Depending on the level of the client’s digital maturity and how much involvement they expect from us, part of that delivery process might be going through a business process assessment and looking at what the business currently does and then helping configure the systems to meet their requirements,” he explains.

“The implementation process always follows a dialogue, so it’s not just the contractor providing information to us and we sort it out for them. It’s a process where we have conversations with the client to bring our best-practice experience to them.”

Macaras observes that the construction sector has become more receptive to digital growth in recent years.

“More so since COVID, but also before that, contractors are starting to see the benefits of modernising the way they do business through connected platforms,” he says. “We are seeing that in two aspects. On one hand are the smaller contractors, who are using technology to grow and have a better picture of what’s going on in their projects, to become more efficient, have more confidence in their estimates and their forecasts, and to leapfrog competition. On the other hand, larger tier-one companies are doing it to streamline their operations and get visibility into their project portfolio.”

Gone are the days of reading pages and pages of pdf reports to gain insight into projects, Macaras observes.

“The way we capture project data has improved over time. But real power comes not from the data itself, but from being able to visualise that data to gain better insights. That’s where the real benefit of technology will emerge.”

“WHAT WE DO IS TO HELP CONTRACTORS BETTER MANAGE THEIR PROJECTS, CAPTURE ALL THE DATA IN A SINGLE SPOT AND THEN PROVIDE THEM THE REPORTING AND THE VISIBILITY TO BE ABLE TO MAKE PROACTIVE DECISIONS, AS WELL AS ALLOWING THE CHANGE PROCESS TO PROCEED SMOOTHLY.”