Preparing for a construction industry slowdown

After the boom comes the bust?

In speaking to Australian construction industry stakeholders and experts over the last two months, we have found broad agreement that further pain lies ahead for the industry. Current economic conditions and looming recessionary forecasts, along with sustained supply chain and labour issues, are expected to drive industry contraction in 2023 and early 2024.

This is hard news to hear for an industry that already accounts for 31% of all insolvencies; impacts will continue to be felt in the residential construction sector which has already seen a number of large firms including Porter Davis, Probuild, Condev, Waterford Homes, and Pivotal Homes enter insolvency. Even the industrial and heavy industry sectors, which have been buoyed by increased levels of government investment in infrastructure projects, as well as the rebound of mining commodity prices, won’t be able to escape some of the pain ahead.

Making it through the slowdown

Whilst there may be further pain ahead in the short term, the longer-term outlook means that there are strong growth opportunities for those who best prepare for and effectively manage their commercial and operational risk over the next 12-18 months. The industry is expected to record an average annual growth of 3.1% from 2024 to 2027 and medium-to-long term industry fundamentals remain strong. Additionally, $9.6 billion of investment in infrastructure projects across the next four years will be followed by $120 billion in investment in transport infrastructure projects in the following 10 years, providing the industrial and heavy industry sector with a positive outlook ahead.

3 main opportunities for construction firms to address now

The main objective constructions firms should have in mind is how best to weather the interim slowdown. To come out the other side of the downturn in the best position for growth, PCG have identified 3 main opportunities for firms:

1. Tighten Procurement Practices

The power of procurement as a lever to improve productivity and help mitigate pipeline, supply chain, and labour uncertainties has been consistently proven across recent construction industry cycles. Our work with clients across the sector has highlighted that companies with the best procurement practices have margins 5-10% higher than those with lower maturity, and that 10%+ savings are available to those who apply these best practices, including:

• Reviewing contracts and ensuring that terms and risk mechanisms best reflect current operational conditions: this can be as simple as adding rise and fall clauses to standard building contracts that allow fixed price sums to change based on cost fluctuations, through to more advanced techniques.
• Consolidating contractors/suppliers and building longer-term relationships: building strong longer-term relationships improves procurement function collaboration, driving improved value for money and project outcomes.
• Contracting for what is coming, not based on what has happened: when establishing new contracts or recontracting, procurement functions should be continually reviewing industry and economic conditions and applying this knowledge to procurement risk management plans.

2. Rethink Project Controls

The economic impact of COVID, followed by the post-COVID construction surge, saw many builders just trying to land and complete projects whilst struggling to manage complexities brought on by supply chain and immigration constraints and cost inflation, let alone put in place effective project controls. However, with the impacts of the industry slowdown already widespread, effective project controls can not only help ensure survival but also provide the margin protection and cashflow required to invest in capturing the growth potential on the other side. To take steps to improving project control effectiveness and maturity:

• Ensure the basics are in place: Make sure there is a robust and standardised stage-gate process to identify, eliminate or mitigate project risks before they can impact project cost, schedule or margin.
• Leverage cross-functional expertise: Now is the time to have more sets of eyes reviewing projects, to maximise the understanding of true project performance and drive informed decisions.
• Copy and paste outperformance: transition from just proactively managing the risks associated with underperformance to also identifying, accelerating and replicating areas of overperformance and opportunity.

3. Build a Lean culture

Lean Construction practices are rapidly growing in popularity to combat the low levels of productivity improvement that have been observed within the industry over the past 20 years; averaging only 1% per annum compared to 3% for the total economy. The application of Lean Construction practices provides another mechanism to de-risk short to medium term market conditions by decreasing fixed and project costs, improving project delivery throughput, and maximising project visibility and control.

Embedding these disciplines now, and throughout your most reliable sub-contractor base, will help ensure that new processes and associated benefits can be embedded and replicated on all projects going forward.

Need some help?

Our specialised industry and practice teams at Pacific Consulting Group can help you work through these opportunity areas and prepare for whatever economic and business conditions are ahead.

Contact us to find out more about how we can help you to prepare.