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How performance improvement can help your construction business navigate uncertainty in 2023

How performance improvement can help your construction business navigate uncertainty in 2023

Synopsis
4 Minute Read

The real estate and construction industry is facing many challenges in 2023 — including reduced EBITDA margins, consolidation of suppliers, interest rate hikes, and skilled labour shortages.

It is essential to address these challenges by taking steps to improve the performance of your business. These four factors can help ensure your organization thrives in the current economic environment:

  • Decentralizing operations
  • Deleveraging debt
  • Building on processes and systems
  • Aligning behaviours with technology and data-driven decision making

The 2023 economic landscape has introduced many new challenges to the real estate and construction industry — including slow industry movement, impacts of high interest rates, and talk of a looming recession. Now you may be asking yourself how you can position your construction business to remain competitive and profitable during these uncertain times.

Let’s review the emerging trends we’ve seen in the industry in 2023 and four steps you can take to face the looming challenges, improve performance, and achieve success.

What emerging trends are impacting the construction industry?

Let’s take a closer look at the looming risks and opportunities facing the real estate and construction industry in 2023:

Increased costs lower EBITDA margins

Companies are experiencing increased costs to run day-to-day business operations which is eroding margins and, ultimately, profitability.

Consolidation of suppliers

Some suppliers have gone out of business due to increased costs and supply chain complexity. Work is now flowing into the remaining sub-suppliers who may not have the capacity and resources needed to handle more business.

Slow industry movement

The construction industry is moving at a slower than average pace due to factors such as slow approval timings and skilled labour shortages.

Impact of high interest rates

Many companies are struggling to keep up with debt payments — and some are nearing high-risk levels for insolvency.

New investments in construction

It’s not all bad news: large investments in housing, infrastructure, municipal, industrial, and other segments are providing businesses in the construction industry with new opportunities in 2023.

How can your construction business improve its performance?

While the current landscape poses many challenges for construction businesses, there are still steps your business can take to improve the performance of your business in the months ahead. Companies that have remained profitable and successful share these four key characteristics:

Decentralize operations

Many leaders in the real estate and construction industry are highly involved in day-to-day work and decision-making. This shifts responsibility from team members onto higher level management — and decreases enterprise value by tying the operations of your company to only a few key figures in your business.

Decentralizing decision-making will enable your business to make decisions quickly and increase its value. You can get started by implementing processes and systems that place responsibility accountability for outcomes at the right level in your hierarchy.

Take the first step toward decentralizing your operations by implementing a Governs, Responsible, Informed, Prepares (GRIP) matrix within your organization to empower individuals at the right level to not only do the work — but also make day-to-day decisions. This will enable your business to react quickly to unexpected changes, empower your employees to make decisions, and ensure leaders are held accountable for decision-making.

What is a GRIP matrix?

A GRIP matrix can be used to assign responsibilities throughout projects to enable individuals at the right levels within your organization to make decisions.

  • Governs — Identify the individuals who set objectives, provide direction, and make high-level decisions for the project.
  • Responsible — The individuals who are directly responsible for performing tasks and activities for the project.
  • Informed — Key stakeholders who are not directly involved in the project but must be informed of its progress and outcomes.
  • Prepares — Individuals who gather information or prepare the resources needed for the project to progress.

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De-leverage debt

It is essential to pay off your debt quickly in a high interest rate environment to maintain profitability. You can get started by building tools to forecast your cashflow for a minimum of 12 to 16 weeks — or three to four billing cycles.

Cashflow forecasting will help you proactively prepare for the future by allowing you to predict how much money will enter and exit your business, where it is coming from, and whether you may need to use your line of credit to make up for any potential shortfalls.

Invoice projection and creation systems can also help you maximize your invoicing to customers on monthly draws to ensure cash is entering your business on a consistent basis. Review your invoicing trends to identify what percentage of your projects are complete and how much needs to be invoiced to your customers.

Additionally, implement systems that closely monitor the profitability of each project on a weekly basis before financials to help ensure your projects remain on budget and identify potential risks. Building better payment terms into your new contracts will also help ensure your cash flow is optimized at the start of each project.

You may also consider contracting a third party to help you build a payment strategy or re-structure your debt. Each of these steps will help your business deleverage debt and remain profitable during an era of high interest rates.

Build on processes and systems

It is essential to ensure your organization has the right processes (i.e., formalized activities undertaken by your employees) and systems (i.e., tools you use to monitor projects and drive decision-making) in place to help it thrive in the current economic environment.

Use the system that works best for you — whether it is a digital ERP, an Excel spreadsheet, or a sheet of paper. No matter which system you choose, it should allow you to catch scope creep and identify and address potential risks.

Systems should also enable proper visibility and communication from the top to the bottom of your organization hierarchy. For example, your site supervisor should be able to send daily site reports and updates to ensure your labour is optimized on site and that you are aware of any risks to a project.

The right processes and systems will help manage the budget, schedule, and scope of each project to ensure your business remains profitable. Review whether you have systems in place to know how much profit each project is generating — and how much its projected profit will be after factoring in scheduling delays, scope changes, and cost savings/overruns.

Align behaviours with technology and data-driven decision making

Your organization must collect and report on the right data to predict potential challenges. Conduct the right reports for your business that connect your operational metrics to your financials.

For example, cash flow tools, accounts receivable (AR) reporting, change order reporting, and submittal trackers can all help you monitor your progress on projects and proactively manage potential risks.

It is essential to train your team members to look at reports and make decisions based on what the reports are telling them. For example, if a report shows an overdue submittal, your team members can contact the architect to make sure it gets approved.

Additionally, incorporate weekly meetings within your departments/teams to discuss operational reporting. These meetings can be quick and should cover high level updates on schedule, scope, and budget. You should also take time to discuss the risks identified by operational reporting such as overspending projects — and make informed decisions on how to mitigate those risks.

Take the next steps to grow your business

The economic environment will pose unique challenges for those in the real estate and construction industry throughout 2023 and into 2024. Still, there are steps you can take to remain profitable and competitive through any headwinds you might face. Decentralizing operations, deleveraging debt, building on processes and systems, and aligning your behaviours with technology and data-driven decision making will be key to keeping your business competitive.

Contact us

If you need support to improve the performance of your organization, contact a member of MNP’s Consulting Services team. We can help provide the insight you need to help your business thrive in the 2023 construction landscape.

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