By Luiz Gustavo Santos, partner at FALCONI

After three years of deep depression, construction service companies had hoped the market would pick up in 2018. However, the economic situation is still uncertain. Even in this context, important management actions can be taken to improve results. In some cases, they will be indispensable for the survival of companies.

Although the expected recovery in demand has still not occurred, there are opportunities to  increase sales. Therefore, companies from the sector must focus on improving conversion rate of proposals. An initial step in this regard is better qualification of opportunities in relation to attractiveness (values, potential margin, etc.) and competitiveness (experience, technical expertise, etc.). The core issue here is having criteria that focus on and give priority to the commercial operation. Another important point for improving conversion rates is formulating winning proposals. There is much that could be covered on this topic, but three points are worth highlighting: comprehensive study of the customer’s demand or need, adding of value in engineering terms (highly valued by private customers) and budgetary skills (historical productivity and indirect basis, competitive prices among partners, etc.). 

Improved margins in projects is another element to be addressed. There are normally important differences between margin sold and margin delivered by projects. This difference is due to deadline delays and project costs. After examining various completed projects, we concluded that deviations are associated more with failures in processes than the specific characteristics of each venture. A few examples are budgets with over-estimated productivity parameters or not tailored to project execution conditions, project compatibility flaws, inadequate planning of the work, excess emergency purchases, inadequate management of amendments, contractual claims and rework, and project execution losses.

Expenses are another results booster that must be carefully managed.  Focus should be placed on personnel expenses since they normally represent between 60% and 80% of total expenses. In this sense, there is a parameterization so that each department has adequately sized overhead teams. On the commercial side, teams should be assembled according to potential value or number of qualified opportunities. The budget department follows a similar logic, but uses the number of proposals submitted (and not qualified) as the criterion. Construction teams must be proportional to construction costs incurred and HR must be proportional to the total number of employees. Finally, the administrative-financial aspect is according to equivalent revenue.

A reference value to see whether a company in the sector is keeping its expenses under control is 6% on equivalent net revenue. Figures higher than this indicate opportunities for improvement and optimization.

Construction service companies are still waiting for the sector to pick up.  However, even in the midst of uncertainties, there are opportunities to improve results. Improvement of proposal conversion rates, reduction of project margin losses and optimization of expenses are some existing options. 

Source: O Estado de São Paulo Newspaper, FIABCI-Brasil column – July 2018