Eyeing the Bottom Line
Construction companies had some of the biggest sales drops for 2003 — why are they happy about it?
Construction may be booming now, but not all construction companies showed stellar revenue figures last year. Of the companies experiencing more than 10 percent revenue drops, five were construction companies: Robert M. Kaya Builders (36 percent), Koga Engineering & Construction (28 percent), Maryl Group (23 percent), Group Builders (22 percent); and Sen Plex Corp. (12 percent). But don't shed a tear for these companies yet. Despite their revenue drops, at least four of these companies reported that they remained profitable by being more selective in their projects, processes and employees.
The most dramatic example was Maryl Group, which president Mark Richards says had a sixfold increase in profits between 2002 and 2003. "It's all about the projects you choose," says Richards. For example, a one- or two-story, stick-frame, resort-residential project the company worked on in 2003 was less risky than a high-end, luxury, concrete-poured-in-place project in 2002. "The latter had more challenges in terms of design, fits and finishes than the former," he says. "Some projects are riskier than others, with respect to the bottom line."
For Glenn Nohara, president of Koga Engineering & Construction Co., and Lito Alcantra, president of Group Builders, selectivity meant concentrating on their own specialties and staying away from general building contracts. For Koga, this meant focusing on contracts for earth work, utilities and roadwork, a strategy that resulted in profits exceeding expectations by 25 percent. "We've stayed with what we do well. Now we try not to be so much revenue-driven, but we were still profitable in 2003," says Nohara. For Group Builders, the niche was finishing, which includes interior work, acoustics, masonry, cabinetry and millwork. Alcantra says, "In the past we used to do general building, but we had to give up that market because it's so competitive." This year, although its revenues decreased, he says Group Builders earned $900,000 in profits.
Karen Nakamura, chief executive officer of the Building Industry Association, says the focus on the bottom line rather than the top line is one of the lessons learned from industry slowdowns of the past. "Contractors had to cinch their belts in the 1990s and figure out how to cut costs. We're seeing companies doing a lot of efficiency studies," she says. The result: Construction companies have streamlined the way they build. Richards of Maryl Group espouses the design-build approach, in which the architect and contractor team up on a project rather than having the owner play referee between them. "We find that we add more value in the process, we're delivering the product quicker, at a lower cost to the customer, and everyone is happier," he says.
Onsite efficiencies have also come from investing in new equipment. According to Nohara, "We make sure we're not keeping a lot of old equipment that's costing us more in repairs than buying new." Such purchases can reduce both maintenance and labor costs. For example, Group Builders replaced its traditional stationary scaffolding with a motorized version that functions like an elevator. Alcantra says, "In the past, we had to build the scaffold, then dismantle it. Then after we finish, the electrician comes in and builds their own scaffold, then they have to dismantle theirs when the other trades come in." Because the motorized version is more versatile, Group Builders can leave its scaffolding up and let the other trades use it for a fee. According to Alcantra, this has reduced down time and trimmed labor costs by 20 percent.
Nohara says judicious hiring helped his company hold on to profitability despite lower revenues. "[In the past], when we didn't keep track of what we can handle, we increased our revenues to the point where we had to bring in more people. When the revenues tailed off, we tended to keep the people. So now we limit our revenues to what we could handle with the people we have," he says. This could become more challenging as work volumes increase. Both Alcantra and Richards say they will be hiring more employees by the end of the year. Nakamura is confident that these companies are ready for the future: "In a growing economy, they're not just jumping to hire for hiring's sake. They're investing in quality." That's an investment that could reap profits for years to come.
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