~By Trevor Woolston
Yet another large construction company is in trouble, Ebert Construction going into receivership owing millions of dollars.
This is on the heels of Fletcher Construction announcing massive losses and having to undergo major restructuring to survive.
There’s a lesson in this for all businesses, stop working on ridiculously low margins.
In New Zealand we are getting into a mind-set where no matter what the consequences, cut the price to get the work and it’s leading to far too low margins to sustain profitability.
This practice is taking place in the road transport industry as much as it is in the construction industry with transport operators dropping prices just to get the work.
Every day we are hearing about contracts changing hands where existing service providers are being undercut on price in some cases by significant amounts.
There are some more efficient transport operators out there than maybe some others but when it’s all said and done there’s not that much fat in too many transport rates that would allow for major price reductions especially with issues such as traffic congestion, fuel prices and driver shortages affecting the industry.
There have been some very good business publications written on the subject of maintaining profitable margins throughout all businesses.
It works on the premise that if you employ a company to provide a service or product and you negotiate a rate that gives them a good working profit margin you will get better services or products. This is based on the fact that the supplier company will be able to employ better staff, use better equipment, deliver higher levels of service and make the end user company more efficient through these benefits.
It’s a theory of leaving a bit more in every job for everybody.
Too many acquisition personnel today are working on the premise of cutting back supply contracts to the lowest possible denominator leaving nothing in the job for any contingencies. This leads to companies cutting corners in performing their tasks and also means there is nothing left in the job when things go wrong.
I’ve never heard of a trucking operation where things never go wrong, in fact with running mechanical plant in New Zealand with below standard infrastructure in many areas there is real need for contingency margins.
Just looking at our current driver shortage situation, operators need to look at better freight rates as the real effect of the driver shortage will be the need to offer better pay rates just to get drivers to complete these contracts.
There is another line of thought in business and some companies are very successfully applying it and that is regularly reviewing their business and dropping their bottom performing portion of their business. Some companies apply 20% to this exercise and they review this business and drop those that do not reach certain profitability levels.
Now this may sound radical but in fact it makes good sense. If the bottom 20% or whatever level you set it at is performing poorly then it allows you to provide a better service to your better customers and also it gives you capacity to attract better business to replace it.
If business as a whole starts to embrace the philosophy of leaving more in every deal then the New Zealand business scene would improve immediately.
The cost to New Zealand business of events such as Ebert’s failure are far reaching and end up costing individuals and the economy millions of lost dollars.Don’t let your business go down the same road.