You only need to look at the Melbourne CBD skyline to appreciate the true scale of construction projects currently being undertaken in Australia. This is very important for our economy. Construction is considered a key driver in the Australian economy, and in a lot of ways is the ‘canary’ that will first show stress in times of impending crisis. However how many of these projects are really profitable? Observation from our work is that a large number of these projects are not generating material profit, and maybe creating false or misleading economic data.
In this environment, careful selection of projects that will support your overall business strategy is critical to maintaining growth either in your business or your overall portfolio. The smaller your profit margin, the less margin for error and tolerance of change. Remember it only took one awry project to bring one of the stalwarts of the construction industry – Reed Construction – to its knees only a few short years ago.
This, of course, is not only relevant to construction. With diversified markets there is increased pressure on profit margins, with competition becoming fierce to secure projects across many industries. Businesses must engage in innovative portfolio management techniques to ensure their survival.
So, how do you select the right project?
1. Always, always (I say again, always) have your business strategy front of mind – all action is in support of it, not incidental to it.
2. Ensure you have robust data of your business – know your key metrics e.g. profit margin, breakeven and risk premium and price these into your tenders and quotes.
3. Review the contract – there is no point signing a contract you have no capacity to administer or manage. The contract needs to be within the scope of your businesses ability, and in line with your risk management processes.
4. Don’t panic – so many times we have worked with businesses that have been frightened of lack of turn over and signed on to a contract in this panic. They have often found themselves in hot water as a result. If panic is present – don’t sign. Get whatever information you need to make a considered decision.
5. Focus on your strengths – you will be most efficient – and most profitable – doing the things you are best at. Select projects that will allow you to leverage your strengths, and minimise exposure of your weaknesses.
Many businesses are finding that they need to grow in the current market to maintain return to investors and the overall viability of the business. In this environment, make sure that you are clear on your project selection methods and criteria, follow the steps above, monitor performance and be prepared to make adjustments to ensure the success of the project. There are a lot of contracts out there at the moment, but at the end of day you can go broke relaxing at home. If you’re going to work hard and take projects on, they must be profitable and take you further along the path you wish to go down.