Digital transformation and estimating software can tackle the challenges that lead to construction’s notoriously thin profit margins
The UK construction industry is facing a crisis of low-profit margins. A 2019 study found that 44% of UK construction projects run at a loss, and this issue affects companies at all levels of the sector. Advanced estimating software can help combat these issues.
The “race to the bottom” culture in tendering, where companies bid low prices in order to win contracts, is a major contributing factor. As a result, many construction companies in 2023 struggle to turn a profit.
A 2021 study found that the UK construction sector has the lowest profit margins in the world, at just 3.9%. This is compared to 4.6% in North America and 6.1% in continental Europe. The top 100 firms in the UK have an average profit margin of 2.6% and the top 10 UK contractors are running at an average loss of -0.1%.
Profit margins in the construction industry have been steadily decreasing over the past decade, and this trend has been exacerbated by challenging market conditions, including Brexit, the war in Ukraine, the recovery from Covid-19 and inflation.
These factors have all contributed to rising materials prices, disruption, delays, overspend and a further loss of profit in the sector.
Digital transformation and estimating software in construction
The construction industry remains one of the least digitised in the world. A traditional mindset has led to a reluctance to adopt new technologies, even when they offer clear benefits. The fragmented nature of the industry has also made it difficult to implement technologies that will increase profit margins in the long run, as it involves every company involved needing to make its own investment.
However, there are a number of trends that are driving digital transformation in the construction industry, including the rise of cloud computing and the increasing demand for sustainability across the building lifecycle.
There is a wide range of software which, when applied to construction, can transform companies and increase profitability both in the long and short term. This includes ERP (Enterprise Resource Planning) software, project management software and construction estimating software.
How technology can solve the challenges that lead to low construction profit margins
Not enough time spent on planning and preconstruction phase
Planning and pre-construction is the most vital part of any construction project and not spending enough time on cost estimating, procurement and scheduling will lead to blocks and delays later on in the project, which eats into profit.
Using a Construction ERP system, can help project managers with this important part of any construction project. Most ERP software includes procurement software tools to help managers and planners locate the right resources at the right price and plan schedules around plant hire.
ERP systems also include construction budgeting and forecasting tools which, using the right data, can help control budgets and build-in profits with realistic outcomes.
Poor data collection
While other industries have embraced digital transformation, construction companies still rely on outdated tools like Excel spreadsheets. This lack of advanced technology leads to poor data management, gaps in data and poor communication. As a result, construction projects are often delayed, over budget, and unprofitable.
ERP software allows for the same set of data to be accessed by everyone on a construction project team, a so-called “single source of truth”, which helps boost project visibility and allows planners to spot costly outliers, assess risks and make fair predictions and estimates.
This universal source of data also helps with communication and collaboration, which is vital for running a project smoothly and ending up in profit.
“A 2021 study found that the UK construction sector has the lowest profit margins in the world, at just 3.9%.”
The rework problem
Rework is such a core issue in construction that an estimated 30% of all work done on construction projects can be classified as rework. While some rework is simply unavoidable, much of it can be avoided through ensuring excellent collaboration in construction to avoid miscommunications, and once again spending more time on the pre-construction phase of a project.
A construction ERP system can help solve the problem of rework by providing a single source of truth for data. This means that all project information is stored in one place, and everyone involved in the project has access to it. This can help to track progress and identify potential problems early on.
This can help to prevent rework by allowing teams to take corrective action before it is too late.
Finally, a construction ERP can help to improve efficiency by automating many of the tasks involved in construction projects. This can free up time for teams to focus on more important tasks, such as preventing and negotiating rework.
Cost increases (labour, plant, and materials)
Price shocks and a skills gap are putting profits at risk in the construction industry. To protect their bottom line, companies need to take these factors into account during the estimating and pre-construction stages.
Advanced construction estimating software can help estimators by providing access to the most recent prices listed by suppliers. This can help companies to accurately estimate project budgets and avoid overspending.
Labor costs have also increased in response to the skills gap. This means that companies need to factor in labor costs when estimating project budgets. By taking these factors into account, companies can better protect their profits and ensure that their projects stay on budget.
Access Construction software is designed to protect your profits
Access Construction can help your construction company embrace digital transformation and give you the tools needed to both protect and boost your profits. We provide construction estimating software and ERP software designed specifically for the industry, with a huge range of features and reports built by and for construction experts.
*Please note: This is a commercial profile.
Alex Gillham
Digital Content Manager
The Access Group
Tel +44 0845 345 3300
carol.massay@theaccessgroup.com
