Construction Business is booming, but are the risks greater than ever?

As the construction industry moves rapidly into the good times, confidence is high, times are good, people are spending and there is a large pipeline of work on the horizon. This is the time where clients, contractors, subcontractors and suppliers tend to relax and as I hear around the sites “enjoy the ride”.

It’s fair to say that the construction industry has seen hard times, and one would be forgiven for looking at the increased market activity as a well deserved reward for seeing it through. The following article is not about spreading fear of holding back the return from the recent downturn, I just wanted to write to express the need for caution at a time when many will throw it to the wind.

One of our roles at The Fleet Office is to consult on all things Fleet Management, included in this is strategic planning for whatever markets may arise. For some time now we have been working closely with our customers to prepare them for the challenges that lie ahead. With appropriate measures in place, the coming years look to be prosperous for all involved, however there are threats from a market on the rise which just need to be considered.

Supply and Demand – The numbers don’t lie!

At The Fleet Office we monitor over 2000 items of yellow gear, we have an incredible insight into utilization of plant and equipment around Australia. The numbers show a steady increase in the utilization of assets across the market. The graph below shows the average hours worked on a given types of machine (in this case articulated Dump Trucks, Excavators and Dozers) the data is from 200-300 of each type. In each case we have see utilisation triple since March 17, now we can only get so many hours out of a machine per month, and by our estimations we are close to peak utilisation in several categories of equipment already, with the trend continuing.

This is all good news right? well it should be, particularly for the suppliers of said machinery. Rates are on the rise which is a good thing for the suppliers. There are very few hire agreements involving “no minimums” or “unlimited stand downs” and rates are slowly but surely increasing, so the guys who have arguably had it the hardest over the past 18 months are seeing a return to profitability and an end of “the race to the bottom”.

The main risk here is that today, all over Australia, Contractors are starting projects which they may have tendered on up to 24 months ago (even if they tendered 3 Months ago the end effect is the same). Of course they priced the job to win the job, meaning margins were almost non-existent and the equipment rates of the day included. It goes without saying that a job won on such low margins simply cannot be completed for the same figures on the tender document and that the contractors will have to find ways to cut costs to make the job profitable. This all without mentioning the impending rise in rates for manpower.

So what can we do? As a Contractor, it is imperative that you keep a close eye on the rates and get this data into your job cost control systems as quickly as possible, this will at least give you the information to make informed decisions. If you have a fleet of your own, ensure you utilise it to it’s full potential. Keep your owned to rented ratio within sensible parameters. As we move from a time where equipment has been cheap, many bad habits will have formed whereby it is OK to keep an asset longer than necessary “just in case”. Our current customers can manage their utilisation and efficiency with our standard reports and dashboard. If you don’t have a monitoring system in place, invest in one. The right system costs very little and saves fortunes as well as improving operational effectiveness and safety.

As a supplier, enjoy the good times, but remember those relationships that kept you going through the tough times. Its a business and we are in this to make money, but the markets will reverse at some point. With this reverse in mind, don’t go out and buy 1000 Dump Trucks, be sensible and stay within your affordability zone. Keep a close eye on the who is paying the bills and be smart about walking away when things are not right. There are a number of suppliers that have been badly hurt by the collapse of Ostwald Group that all probably knew that the future was bleak but carried on going. Some of this was done with the very best of intentions and totally in line with my recommendation on having a good relationship, but a relationship where you are no longer getting paid is not a good one.

During the last boom in Australia we were able to import machines from overseas, mainly USA. At the time the $AUD was around equal to the $US and the construction industry in the U.S was almost non-existent. Finding and importing equipment was a smart thing to do and many of us were involved. Unfortunately, the $AUD has slipped against the $US and confidence has returned to the U.S construction industry. People are buying gear not selling and the U.S market is recovering from its over sale of middle aged machinery through the hard times. The short answer is, that this option is far narrower. In the case that you still want to go down this route (many will have to through necessity) do so with caution and where possible use a professional.

Innovate – Be an Uber not a Kodak

If you have a great idea about an App or system that you think might help you to become more efficient, profitable or just more attractive to clients, do it! The Construction industry is going through a much needed tech boost phase. The up and coming generations are now taking control of family businesses and the technology being employed is genuinely exciting. Giving clients the opportunity to monitor, measure and manage alongside you is the future. Even if the short term position is simply to demonstrate how you do these things, its still encouraging for all involved.

As equipment availability decreases, plant finder sites such as iseekplant will become the go to platforms for those who have used up their “good book” of contacts. I strongly suggest having a presence here is a good thing. This helps you to make contacts and develop customers who may have not had business with you before, diversifying your customer base, this will go a long way towards protecting you in the event of a large customer’s company going under.

Please feel free to contact us with any views on the topics discussed above at admin@thefleetoffice.com.au

 

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