Ten Reasons Why the Construction Industry's Traditional Business Model is Toast

Geoff Smith Portrait

BY Geoff Smith

POSTED ON NOVEMBER 12, 2011

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  1. Old Procurement Models Are Finished (for Subs too): And every project has its own. Sometimes it’s price. Other times, expertise and assumption of risk are the keys. Our international competitors often price the M&E themselves, then go to subcontractors for ‘component’ pricing after bid close. Previous relationships are crucial, except when they aren’t.
  2. Money Used To Control, Now It’s Becoming A Commodity: Which is harder to find, a great team of risk taking builders, a great design, or debt financing? You can’t build without money, but both equity and debt want security of return and will gravitate to – even compete for – the supplier of that secure return.
  3. Traditional Roles Are Blurring/ Merging: Engineering firms have become contractors, and General Contractors are controlling more of the design and subcontractor procurement practices, while mechanical subcontractors see projects where they think they should be the General.
  4. Unions Imperiled: Most labour law regimes haven’t changed in decades and are being easily bypassed by new (large, international) players. Unions often prefer decimation to change – see BC, and unrelenting loss of market share everywhere - and firms tied to them will either lose their own market share, go elsewhere, or change their business model.
  5. Prefabbed Everything: Mechanical plants, office tower washrooms, data centres, operating rooms – you name it – will be delivered by truck. This changes everything, for everyone.
  6. Pre-Design Financial Guarantees: Clients now want the whole thing (cost, quality and schedule) guaranteed before they complete their deals with clients. Recently, we had to guarantee price and schedule on a very large project on the basis of sketch drawings and aerial photographs.
  7. Concept Design vs Production Drawings: With the latter being done in ‘factory shops’, on computer, or by the relevant contractor, during construction.
  8. The Merger of Design and Long Term Facility Management: With construction as the bridge between (guarantor of?) the two, but with all three guaranteed by one party.
  9. Speed vs Bureaucracy/Control: Firms relying on systems and structure to maintain control and quality will, arguably, be too slow to survive. Critical decisions are being demanded on the spot, on much less information.
  10. Marketing: Used to be based on the reputation of the company, now it is based on the reputation of the individual across the table (or the shovel). Every single person is a brand, like it or not.

Who will win?