Construction business strategy

Construction industry is cyclical as it highly depends on investment cycles in the economy. This is why it is always badly hit by recession.

construction-mix

Only the most skilled businesses will survive i.e. those who will implement newest techniques and build creative solutions based on true original ideas. Therefore knowledge management becomes one of key factors in construction competitiveness. Companies must play the market game and participate (at least) at regional level. Times when construction work was awarded on a “social need” basis rather than company’s competitiveness are hopefully gone. Not to mention very loose performance criteria applied in the past by state engineers over contractor during execution.

 

Construction in Serbia: time for consolidation and digitalisation

 

The ’perfect storm’ of infrastructure investments has arrived in Serbia. According to the Ministry of Construction, Transport and Infrastructure at the beginning of 2018 the total value of infrastructure projects in Serbia stood at €16bn while contribution of construction to the national GDP grew from 4,3% to 6,2% over the past 2 years. This is mostly due to current synergy of four investment boosting forces: (1) China’s investment in building infrastructure in the countries which lay on its New Silk Road, (2) EU’s assistance in developing infrastructure of EU membership candidate countries, (3) Turkish regional interests in Western Balkans exercised via investment in regional road infrastructure and (4) Serbia’s own decision to build gas interconnection from Bulgaria plus 20,000 apartments for its military, police and security services. Unfortunately knowing the weaknesses of Serbia’s construction companies I wonder if even this perfect investment storm could initiate major recovery for them i.e. boost growth and international competitiveness. What I am positive about is that it definitely won’t happen without major change!

Large construction projects have been (almost exclusively) awarded to foreign firms. Chinese, Russian, Turkish and Greek companies could now be joined by Croatian contractors who were invited to participate in local tenders by the Serbian president during his last visit to Zagreb. I have nothing against foreigners but why domestic contractors consistently fail to bite the largest piece of the cake? According to latest interviews some government officials in Serbia appear to agree with my view that local contractors lag behind foreigners in contract management capabilities. I see some specific reasons for that.

Both incomplete transition and last recession kept GDP growth near or below zero for quite some time but those years are hopefully behind us. Current modest growth will soon surpass 3% (according to MMF, World Bank, EU), but Serbia badly needs 4%-5% level to start catching up the EU. Unfortunately times of crises made negative impact on construction companies, especially on those with couple of hundred employees or less. One third of those companies were closed. The survivors, irrespective of size, went through few painful cycles of cost cutting including staff reductions. However these incremental cost cuts didn’t bring any significant increase in internal process efficiency nor improved international competitiveness. In the same time some experienced artisans, foremen and engineers left to join foreign competitors in search for regular and higher earnings what further reduced local construction capability.

On the other hand even small construction projects become complex in specifications and additional demands such as the one to keep the environment safe. Under these circumstances those who lag behind in project management capabilities often make delays and budget overruns. Being already financially inferior to foreign competitors (struggling with project guarantees), this poor record in some of project deliverables set local contractors even further from investors’ and financiers’ trust.

Where is the solution? In my opinion further organic and incremental improvements are not enough to turn around the current state of domestic builders. They need a quantum leap to bypass the competitiveness gap, but who can afford it in current situation, not to mention questions like: what and how to change or who will lead it?

For better understanding of the local construction environment all construction companies here fall under SME definition according to high US and EU standards. It partly explains their financial, technological and organisational inferiority to foreign competitors – from both the West and the East. Serbian contractors are not competitive enough to win large projects nor they have internal capacity for making that „quantum leap“ which would take them into „premier league“ at the regional level at least. Good example is digitalisation in construction industry. While foreign firms bring digitalisation through the front door counting on its potential our construction leaders still look at external players for survival – primarily local authorities as well as foreign contractors for potential subcontracting opportunities. Many don’t even dream of digitalisation.

According to Kai-Stefan Schober from Roland Berger there is no alternative to digitalisation. Not even at construction site. Domestic contractors must jump in that train a.s.a.p. For those who are not familiar with the subject digitalisation can be defined as the way business encounter interconnected information and communication systems at each link of its value chain. It is about tools and business processes that are based on information and communication technologies.

The development of digital technologies seriously disrupts the industry balance. It opens the door for early adopters to improve productivity and construction skills (consequently reduce the risk of artisan shortage), increase profitability, project management efficiency as well as sustainability of a business as a whole. For example, the development of these technologies allows for growth in modular buildings which could now be completed faster and with less material.

According to McKinsey’s the 5-D functionality can integrate design, costs and time schedule in a 3-D system. Next generation of 5-D BIM (Building Information Modelling) is a 5-dimensional representation of physical and functional characteristics of any project. This method takes into account costs and time schedule and add them to 3-D parameters. It also takes into account details such as geometry, specifications, and aesthetics as well as thermal and acoustic characteristics. 5-D BIM platform enables project owners, managers and contractors to identify, analyse and record impact of even a small change on costs and time schedule. Visualisation and intuitive nature of 5-D BIM methodology gives contractors greater chance to uncover risks and make better decisions.

Construction companies can achieve significant improvements in their business processes – from supply chain to labour planning – by adopting the LEAN methodology which helps in optimisation and reduction of all kind of waste. LEAN methodology can identify and reduce almost all of non-value-adding activities – both at customer’s side and those inconsistencies which occur as a result of poor resource synchronisation. World Economic Forum estimate that LEAN methodology and principles could reduce project duration by 30% and costs by 15%.

Now is the right time to consolidate and restructure Serbian construction companies in order to achieve their greater efficiency and competitiveness. It hasn’t happened for decades, specifically since the “golden era” of Yugoslavian contractors during seventies and eighties when domestic construction project management skills were for the last time levelled with international competitors.

The door for potential consolidation of 2 major construction companies in Serbia was open in 2017. “Energoprojekt” and “Napred” are now under the majority ownership of one man although the state still holds significant minority shareholding in “Energoprojekt”. With that comes the capacity to seriously influence all future decisions. Therefore, in my opinion, the state should join forces with other (private) shareholders and bring necessary resources, knowledge (e.g. digitalisation) and experience not excluding a new (foreign) investor and/or industry change specialist(s) with a goal of creating one internationally competitive, digitalised and LEAN construction company for mutual and wider social benefit.

“Energoprojekt” and “Napred” are probably the best example but the industry mustn’t stop there. Consolidation in construction industry should become a trend. The state should use the above example as a pilot project to learn and attract followers among construction community during the process. Project participants can later encourage other contractors to follow and provide them with guidance and assistance in merger procedures, restructuring, digitalisation etc. It would create stronger companies as well as more financially, resource and particularly HR capable to adopt new processes and technologies what would, as a result, make them more competitive and trustworthy to both local and international investors.



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