Construction Industry – Business Model

The business model for the construction industry tells the story about how the industry works, defining who the target customers are, how the business makes money, and what the customer values. Most of the construction projects originate by clients as concepts of public or private utility, and actually delivered by many players in the industry.

Clients provide investment, different contractors bid for the opportunity to perform the work, and finally, the project is executed and delivered. Let’s explore the business model of the Construction Industry.

Organizational Setup & Management Structure

Each agency associated with the construction industry has its own particular organizational set up compatible with the nature of its work load. The detailing will depend upon the size, the geography of the area of interest, nature of activities, and complexity of the problems faced by it.

The majority of construction projects are situated far from the head office and from one another. It is, therefore, almost impossible to provide continuous supervision or control over the routine and day-to-day activities and problems of project sites. The physical distance itself will decrease the degree of management controls and hence, increase the workforce autonomy. Improvisations have to play an important part in many "here and now" decisions at construction sites.

It makes imperative that at s construction project site there is a widespread delegation of decision-making powers through all levels of the organization right up to the operative level. This contrasts markedly with the manufacturing industries where rules, procedures, and method statements can be formed and applied more rigorously to the job tasks. Thus, the availability of trained and skilled human resources at all levels of management is much more important in the construction sector than any other sector of the industry.

Stakeholders in Construction Work

In general, there are various groups of stakeholders involved in a construction project. Each group contributing a specific component, examples are the owner group, the engineering group, and the construction group.

The Owner or Client

The owner group supplies the "need" of the project and the finances required to fulfill this need. They are the driving force behind the construction industry. Their demands for housing, commercial facilities, industrial products, and infrastructure are the chief motivation to build. After determining the need and deciding to build, the owner is accountable for the following primary duties:

Developing the program and outlining the needs and requirements of the end-users
Determining the quantity, extent, and character of the project by defining the scope of work
Creating the overall budget for the project, including land acquisition (if necessary), development, design, and construction costs
Providing the funding for the project and making periodic payments to the designers and the contractor
Clients are looking for the most economically feasible proposal
Clients need certainty and confirmed timelines for delivery

The Engineering Group

The engineering group consists of area experts like architects, structural designers, and construction managers. These area experts supply the specifications, method statements, designs, and schedules of the project and perform supervision and quality control functions.

The Construction Group

The construction group consists of a matrix of contractors executing the various work packages.

Contractors are looking to making a sustainable and predictable margin
Contractors want to remain “competitive” in the bid
A scalable method to understand and quantify risk on projects
The work is done and delivered to time
Understanding risks in proposed work

Heavy Use of Technology

The use of various new technologies and deployment of project management strategies has made it possible to undertake projects of mega-scale. In its path of advancement, the industry has to overcome a number of challenges. However, the industry is still faced with some major challenges, including housing, disaster-resistant construction, water management, and mass transportation.

Functions in Construction

1. Designing and Planning

Construction planning is the specific process construction managers use to lay out how they will manage and execute a construction project, from designing the structure to ordering materials to deploying workers and subcontractors to complete various tasks. Construction planning involves identifying all the required steps to build a structure, splitting them into defined activities, ordering these steps logically, and determining the necessary materials, manpower, and equipment.

2. Construction Execution

The construction industry is dependent upon increased collaboration and joint working between clients and the whole supply chain. Construction execution refers to standards, methods, and practices used during the construction phase of a project to successfully deliver the object that is being constructed. Providing direction to labor, meeting all the regulatory requirements, and supervision of a project from early development to completion is part of the execution phase. The ultimate goal of construction is to deliver the project to the full satisfaction of the client’s demands both in terms of functionality and budget.

3. Inspection and Supervision

Inspection and supervision are required at every step to make sure that the required tasks are being performed required to complete the construction activities. Progress is constantly monitored and changes are being made accordingly. The construction project manager spends most of the time in the step of monitoring and depending on the information that he gets redirects the tasks and maintains the control of the project. There are several unknown factors in any construction process that could cause the cost of projects to increase, programs to be delayed, and the quality of builds to be compromised. These introduce two aspects that come into play around commerciality and risk, and which party incurs additional costs is frequently an area where disputes arise between clients, consultants, and contractors. Furthermore, given that construction works often incur a significant amount of money, the stakes are high in terms of the final bill for clients and the level of profit attained by contractors.

4. Construction Finance

The financial structure of the construction industry is also different from other industries. The capital requirement on a construction project is classified below:

Fixed Assets: Investments in permanent assets, e.g. tools, plant & equipment, formwork, machinery, centering & shuttering, etc. For small projects, there is a low capital requirement in fixed assets. This encourages many non-serious and untrained persons to enter into the construction market. These contractors work on shoestring budgets with briefcase offices with practically no spare capital for training, R&D, and establishment. Their competitive advantage lies in lower overhead and operational costs, Quality, safety, and productivity become the natural causality under these circumstances. These firms have very little capability of absorbing fiscal shocks, and hence, they have a very high mortality rate and go out of business very quickly. The number of bankruptcies in construction is almost equal to new entrants to in its fold.
Short-term Finances: to meet the cash flow requirements at construction sites; earnest money and security deposits
Investment in the future: This includes investment for the future like education, training. research and development of human resource and technologies
Overheads: Overheads in salaries and establishment expenditures, advertisement and public relation expenditures essentially required for procuring contracts, legal expenditures, and similar such specified and unspecified fund requirements
Loans and Advances: More often than not, the construction is carried out on credit and mobilization advances, bank loans against securities. Some capital is always blocked in form of earnest money, security deposits, delayed payments of bills, etc., putting financial strains on cash flow requirements.
Capital Market: Recently, there is a growing trend in the country, of construction firms entering into capital market and raising capital in the form of equity shares, and debentures, and venture capital

5. Human Resources & Skilled Labor

The construction industry offers many types of jobs and positions for all types of workers, those with degrees, those without, skilled workers, and unskilled workers. Degreed professionals in the industry typically work as architects, engineers, project managers, or site managers. These professionals may also be part of sales and marketing or other jobs such as advertising, human resources, and accounting that are part of every company.

Non-degree workers or those with associate degrees or certifications may be hired as design technicians or assistants, site supervisors, customer relations or service representatives, materials coordinators, or similar positions.

Skilled workers must usually complete formal training or an apprentice program and they typically focus on a specific trade such as brickwork or masonry or welding. Unskilled workers are hired as laborers on construction sites to operate equipment and provide the physical labor needed.

Up until the 1960s, the management tasks associated with large construction projects were typically handled by civil engineers. But in 1965, faculty from nine universities gathered in Florida to form the Associated Schools of Construction. Now they offer a standardized construction management curriculum leading to an exciting new career choice, one for which there is increasing demand.