Monday, October 24, 2022

Contractors Recalibrate Business Models

Today’s economy is putting the squeeze on everyone. No one knows this better than general contractors. Faced with material shortages, a tight labor market and shipping delays, they are caught between the rock of a 10.8% inflation rate[1] in building costs and the hard place of meeting client expectations. Although balancing costs and expectations has always been part of the job, the degree of difficulty has increased dramatically with the current volatility in the market.

“The last two years have been super challenging in ways we’ve never dealt with before,” said Alex Miller of EMJ, a nationwide construction services company with offices in Chattanooga, Dallas, Charlotte and El Paso.

While there is no silver bullet, some general contractors like EMJ are finding success by recalibrating their business models around teamwork and transparency to cultivate a spirit of partnership among their clients, their subcontractors and themselves.

“What we’ve realized is you need to communicate much more openly about prices and costs so that everyone is willing to work toward a common solution when a problem arises,” said Miller, senior vice president of preconstruction for EMJ in Chattanooga. “We get really good feedback from clients when we share exactly where every dollar is going and how we came up with that number. If later on things don’t go according to plan, we’ve set a baseline that helps us move forward rather than point fingers.”

The same approach can resonate with subcontractors, or as EMJ calls them trade partners. In many markets the number of construction projects far exceeds the number of trade partners, giving them newfound leverage to bid high to protect themselves against any curveballs – real or perceived – that might come their way. But it doesn’t have to be that way.

“We encourage our trade partners to share information about their risks so we can involve the client and tackle their concerns together,” said Keith Starkes, vice president for preconstruction with EMJ in Dallas. “This gives our trade partners the confidence to provide the best possible price knowing we will work together to make things right if a legitimate concern arises. We see this is a great way to build lasting relationships rather than worrying only about the short term.”

The need to adapt is flipping the script in many other ways as well. Some trades are in such short supply in busy markets that EMJ has enlisted trusted trade partners from sluggish markets to travel to places where the labor force is spread thin. Another approach: lengthening the construction schedule so the work can be done by smaller crews. But this has to be done carefully to ensure client scheduling expectations are still being upheld.

Contractors also are rethinking their subcontractor selection process. Contractors customarily select subcontractors many months before their scheduled start date. But start dates are more tentative now to due labor and materials shortages. At the same time many subcontractors are busier than ever. If anything delays the start of a project, they may be unable to accommodate the delay because they are committed elsewhere.

In the current environment, it could be better to wait to select subcontractors once the start date is less vulnerable to the swarm of factors that could cause delay.

“Waiting might also make additional labor available if a trade partner who was previously committed to another project experiences a sudden cancellation,” Starkes said.

While waiting might be wise when procuring labor, the opposite is true for procuring materials. Today’s shortages not only raise prices, they create long lead times for materials like electrical gear.

“Two years ago that wasn’t anything you concerned yourself with at the start of a project,” Starkes said. “Now you have to order certain materials right away so they will arrive by the time you need them. If it turns out we can get our hands on them early, we will ask clients to make funds available so we can buy them immediately  before their price and availability changes.”

The need to keep their fingers on the pulse of so many variables is leading more and more developers – who may nor may not be current clients – to ask contractors for a final gut check on the accuracy of their pro formas.

“Three or four years ago, they wouldn’t have asked for our help with that,” Miller said.

By going the extra mile in all sorts of ways, contractors can turn today’s challenging environment into an opportunity.

“We know our work will leave a lasting impression with our clients, showing that we really worked hard to ensure they had an exceptional experience and their project was a success,” Starkes said.