Construction And the Business Model Question

Companies across the construction industry approach their activities differently, depending on the products and services they offer. Business models vary, from general construction offerings to specialisms. What is important is the ability to adapt and change as economic circumstances dictate.

Anyone setting up a business to succeed needs to know exactly what they are doing, why they are doing it and how they are going to do it.

Coming up with an idea that fills a gap in a particular market is just the beginning; an entrepreneur needs to understand the dynamics of the market and how to plug that gap with the product or service they have developed. They must also make enough profit to continue operations for the foreseeable future.

They will inevitably adopt an approach to delivering the product or services of their business model.There are numerous business models, depending on what the company does and what it hopes to achieve.

Different Offerings, Different Models

The Harvard Business School (HBS) spells out a number of potential business models.

First, there is the ‘product’ model, where an item is produced for as low a cost as possible while maintaining a reasonable level of quality, with ‘the objective being to sell as many units as possible at as high a price as people are willing to pay to maximise profit’.

Then there is ‘service’, where assistance is offered to someone else for a fee. ‘To make money from your service, provide a skill to others that they either can’t or don’t want to do themselves. If possible, repeatedly provide this benefit to them at a high quality’, HBS says.

A ‘shared asset’ approach – such as a gym – charges customers to use the equipment it owns and operates. ‘Finding the right range of customers is the key to making a shared asset model work’, says HBS.

A ‘subscription service’, such as a regular supply of magazines or a streaming service like Netflix, requires a subscriber base, which is built up by providing reliable value over time while attracting new customers.

A ’lease’ involves obtaining an asset and renting it out for an agreed amount of time in exchange for a fee. HBS says ‘the key is to ensure that the revenue you get from leasing the asset before it loses value is greater than the purchase price’.

‘Reselling’ sees a company buy assets and sell them on at a higher price. Says HBS: ‘Reselling is the process through which most major retailers purchase the products they then sell to buyers. Think of farmers supplying fruits and vegetables to a supermarket, or manufacturers selling goods to a hardware store.’

‘Agency’ or ‘promotion’ is where value is created by marketing an asset, which an agent doesn’t own, to an interested buyer. A fee or a commission is earned for bringing the buyer and seller together.

Choosing a Construction Business Model By Specialism

So what kinds of business models is one likely to find in the construction sector? Variations on HBS’ business model types occur across the industry.

A company could choose to be a general contractor, offering construction services to a client. It can build the project for a fee and sourcing the materials and labour services through external suppliers and by employing subcontractors to do different jobs.

A firm could decide to undertake a ‘design and build’ activity, where it covers all the requirements to deliver a built asset like a house, from initial design to gaining planning, and then building the house for the client.

One could be a specialist service provider. This can include demolition expertise, delivering mechanical and electrical engineering services, embarking on refurbishment or fit-outs or installing specialist equipment, such as heating and ventilation equipment.

Alternatively, a business could be a supplier of materials, acting as a broker between the manufacturer of a building material and the construction company.

Pros And Cons

The success or failure of any of these approaches is dependent on a number of factors, not least the economics of the industry at any given time.

Contractors are required to bid for work. When competition is intense, they may have to submit a price for a construction job that does not result in significant profits, or even barely covers their costs. Margins in contracting rarely get above 2%.

No contractor is too big to fail, as shown by the demise of a firm like Carillion, the UK’s second largest construction firm at the time of its collapse. Charged with delivering two major hospitals and dozens of other infrastructure projects and seemingly impervious to the ups and downs of the sector, Carillion took on too many contracts that would ultimately prove to be unprofitable, with its subsequent indebtedness proving fatal.

Subcontractors and other suppliers can be badly affected by the collapse of a major contractor, on whom they depend for work and their economic survival. In the case of Carillion, suppliers were owed a staggering £2bn (AU$3.8bn); many folded after Carillion went bust.

Housebuilders’ fortunes can also vary; those with deep pockets and significant holdings in land can weather challenges such as high interest rates which depress demand, and ramping up activity when the economic landscape is more favourable.

Smaller firms, those delivering homes on tighter margins and without access to lots of capital, are more vulnerable to the shifting winds of economic fortune.

Diversification And The Need For Change

Given the forces at work, more companies are recognising that business models needn’t be set in stone. The need for greater certainty around delivery, along with efforts to minimise waste and boost efficiencies, has pushed many companies into switching the way they do business.

Some firms realise the need to diversify, while some embrace technology, notably BIM. Others see the benefits of using modern methods of construction, where before they may have used more traditional methods which in today’s economic climate run the risk of causing delays or issues with the finished product.

Meanwhile, the push towards a circular economy is making itself felt across the construction industry and prompting some firms to change their approach. A study by a group of researchers based in Canada and the U.S. examined the working practices of 81 construction companies around the world and identified opportunity gaps and areas for improvement.

Resource efficiency and greener buildings are part of the construction industry’s response to reducing the impact of its activities on the environment. The way buildings are being designed, built and operated are changing fundamentally.

As a consequence, business models are evolving to reflect the changes the industry needs to make to be fit for purpose in the 21st century. These can be challenging for companies but are often essential for their enterprise to thrive.

Driving Innovation: The Georg Nemetschek Institute of AI for the Built World