The Supply and Demand Curve of Construction
In economics, everything comes back to the supply-and-demand curve. This curve states that when supply meets demand, you maximize price. In the real world, and especially in construction, we don’t know at what price we will win the project. We do know at what price we’ll be profitable. This article isn’t about pricing. Today, we are talking about constraints within construction.
Engineering and Contractors have the same constraint. Before we get into what that constraint is, we first must define a supply or demand-constrained business. I first heard this from Alex Hormozi, and it makes so much sense. When you look at a business, you want to know its constraints so you can figure out what business you are actually in. This phase, “what business you are actually in,” had confused me for a while until I heard it phrased this way.
A demand-constrained business is a business whose growth is only constrained by how much it can sell. The demand that they can generate for their products and services. For example, a software company and a big box gym are demand constrained. Because for every incremental unit sold, there is no proportional increase in operational expenses.
For demand-constrained businesses, it comes down to the more they sell, the more they make. On the smaller scale of demand-constrained businesses, once they are past their fixed costs of operations, the rest is profit. Take a big box gym. Their costs are primarily in opening the gym. The cost of the building and equipment. Take all of that into a single monthly payment. Add in the cost of utilities and payroll, which won’t vary much on a month-over-month basis. This fixed operations cost is what they need to generate in revenue to break even. Every dollar generated past this point (minus the extortion fees of the government aka taxes) is profit for the gym. In this business, they just need to sell more.
Now let’s look at a supply constrained business. Which is every business within construction. Both engineering and contractors. Let’s say that you sold 100 projects. Which is amazing! Problem now is, you don’t have enough people to do the work to get paid. Since, in construction, we front the money, time, and effort to do a project. Then at the end of the month, bill on a percent complete of the project.
In order to get paid, work has to be done. That’s the only way this works. And to do that, you must win work. While at the same time having the workforce to execute on the projects won. If there is no supply (people) to perform the work, then you aren’t getting paid, your reputation is trashed, and it becomes less likely that you’ll win the next project.
In this business, you are only as good as your last project.
Maintaining standards isn’t good enough. The bar has to continually be raised. Because if you aren’t raising it, your competition is. Meaning you might lose that next project, and when that loss happens, you might never get that client back.
When you are continually raising the bar, you are continually training and improving your people. Because in a supply constrained business like construction, we are constrained by not only how many people we have, but how many qualified people we have on our team.
100 unqualified people might be as good as a single qualified person.
The real business that we are in is people. And the more that we can improve the capacity of the team, the more projects we can do. The more projects we can do, the better our resume. And the better our resume, the better the projects we are able to win. Which means we can then work with more premier clients. Those premiere clients pay better, pay on time, and value our expertise.
The more you can remove the tedious tasks of your people, the faster you can upskill them. Whether that’s using pre-fab for construction to reduce the tedious tasks on site. Which also quickly increases the skills of the people doing pre-fab since the repetition of the tasks is at a faster rate. Which increases learning speed and allows them to upskill faster.
Pre-fab increases the productivity of the entire project while also having each team member work at their highest skill level. Talk about true maximization.
For engineers, it’s using automation software to take out the tedious tasks of drafting. Once the elements are placed, it’s then having younger engineers take the first pass through the drawings. Coordinating device locations and cleaning up tagging and annotations. Allowing the Senior Engineer to have the last pass through the drawings and picking up items that the Junior Engineers just don’t know about yet. Creating a learning experience for the Junior Engineers and allowing the Senior Engineers to maximize their productivity and value.
When you look at a project or a firm from its constraints, you can easily start to see the areas for improvement. As we are supply constrained, we want our people to operate at their best possible across all levels of the organization.
If a Junior Engineer or Apprentice isn’t performing to the level they need to, it brings down the productivity of everyone above them. Which is why training and development is so key to having an organization that runs smoothly. When Senior folks take the time to review work, provide constructive feedback, and help correct the work, projects move forward and the team gets better.
Looking at your firm as a series of bottlenecks and removing the ones that affect your business the most, and continuing to attack each bottleneck until it is fixed is how you’ll be able to grow your business.
For some seasons, it might be sales that are the bottleneck of the business. Other seasons it might be operations. In others it might be finance. Whatever the constraint of your business, attack it. The better you get at seeing and removing these hurdles, the better off you’ll be.
Remember, construction is a supply constrained business. Meaning that when you upskill your workforce by removing tedious tasks and focus on training, the whole organization improves. ?