Construction

Don’t Complain,
Improve Your Game

Affordable housing is in short supply, and we also need more schools and preschools. These are typical jobs for project developers in collaboration with construction trades. But contracts in the sector have abruptly fallen off. The economy is weak, and bankruptcies loom. “To survive in the construction industry, you’ll now have to restructure — regardless of what role you play,” says our author Roland Sitzberger. He is a civil engineer, an experienced industry expert, and Partner at Porsche Consulting.

04/2024

Complex and complicated: All the participants in construction projects should ideally work closely together right from the start. Industrialized production can lower interface losses, save time, and increase quality.Porsche Consulting/Thomas Kuhlenbeck

When the con­struc­tion indus­try fal­ters in the wake of a boom, a domi­no effect typ­i­cal­ly sets in. The pieces at the front of the line begin to fall, while the ones at the back are still stand­ing strong. Seem­ing­ly strong. While the first com­pa­nies are start­ing to slump, other mar­ket play­ers are still fill­ing their order books from the boom phase. And then? Then it will hard­ly be pos­si­ble to keep busi­ness­es from declin­ing; it’s just a mat­ter of time — like with dominos.

The pieces at the very front, which are affect­ed early on, include the project devel­op­ers. These are spe­cial­ized com­pa­nies that iden­ti­fy sites, con­cep­tu­al­ize suit­able prop­er­ties, and arrange fund­ing and per­mits. Indus­try experts antic­i­pate a major mar­ket shake­out here. A bleak mood is spread­ing. After the devel­op­ers, it will be the trades’ turn if they don’t take prompt action. A new and unusu­al mind­set — for the con­struc­tion sec­tor — is need­ed, name­ly, a focus on cus­tomer needs instead of indi­vid­ual suc­cess. Tra­di­tion­al thought pat­terns that pro­mote spe­cial­ized and oper­a­tional iso­la­tion instead of col­lab­o­ra­tion are out­dat­ed, as is skep­ti­cism about indus­tri­al­iza­tion. With­out a cross-trade approach to pre­fab­ri­ca­tion, whether of 2D ele­ments or com­plex mod­ules, the sec­tor will no longer be viable in the future. If for no other rea­son than the short­age of skilled work­ers and spe­cial­ized exper­tise, which are need­ed for new tech­nolo­gies. Espe­cial­ly in civil engineering.

Too aggressive, too expensive

The switch from “turn­ing down work because order books are full” to “active­ly seek­ing work and cus­tomers” is dif­fi­cult for many com­pa­nies in the real estate and con­struc­tion world. And it’s not very help­ful to ascribe clients’ abrupt cau­tion to the rise in mort­gage rates alone. Even when inter­est rates on loans go down, the prob­lems will remain. And gov­ern­ment sub­si­dies are not the answer for long-term sta­bil­i­ty and resilience. No, the sec­tor needs to learn from under­ly­ing mis­takes if it wants to pro­tect itself from seri­ous risks.

Niklas Köster, a pro­fes­sor of real estate man­age­ment at Hamburg’s Fre­se­nius Col­lege, lists some of the main rea­sons for many project devel­op­ers’ dif­fi­cul­ties, which have dra­mat­i­cal­ly increased in 2024. “The prob­lems are espe­cial­ly severe for com­pa­nies that have moved aggres­sive­ly into the mar­ket, acquired a lot of over­priced prop­er­ty, and now are unable to go through with their projects,” writes the expert in the “Han­dels­blatt” busi­ness paper. With­out finan­cial reserves from rosier times or solid rental income from exist­ing prop­er­ties, the road will be rough. The con­se­quences are grad­u­al­ly rip­pling through the entire indus­try, and can only be curbed by a com­pre­hen­sive new approach. Coor­di­na­tion, col­lab­o­ra­tion, and pro­vid­ing solid over­all per­for­mance “from a sin­gle source” are com­pet­i­tive advan­tages that can save the day, par­tic­u­lar­ly in hard times. In short: Don’t com­plain, improve your game!

Where is the added value?

Com­pa­nies that want to attract and retain cus­tomers need to align them­selves to these cus­tomers and their needs. Qual­i­ty, reli­a­bil­i­ty in price and per­for­mance, punc­tu­al­i­ty, first-class coor­di­na­tion, inno­v­a­tive thought, and per­fect ser­vice are the time-hon­ored com­pet­i­tive keys to win­ning lucra­tive con­tracts. With the con­struc­tion boom hav­ing sub­sided, cus­tomers are tak­ing a stronger posi­tion. As shown by a sur­vey from Porsche Con­sult­ing, they expect added value from providers. A “two-bed­room apart­ment” is no longer enough. Instead, they seek sophis­ti­cat­ed, holis­tic con­cepts that com­bine hous­ing and qual­i­ty of life into attrac­tive products.

How­ev­er, offers of this type are in short sup­ply. Unfor­tu­nate­ly, devel­op­ment projects in the hous­ing sec­tor gen­er­al­ly start by look­ing at the prop­er­ty, pos­si­bil­i­ties for con­struc­tion, and antic­i­pat­ed rental income in their busi­ness cases. Build­ings are tra­di­tion­al­ly viewed from the out­side in. What shape will the struc­ture take, and what will its façade look like? The result­ing shells will usu­al­ly con­tain more or less homo­ge­neous one‑, two‑, or three-bed­room apart­ments. Devel­op­ers take this approach to gen­er­ate return-opti­mized con­cepts, but these are often stan­dard solu­tions with­out much character. 

Planning — and then what?

Whether for res­i­den­tial, com­mer­cial, or indus­tri­al build­ings, a large num­ber of project devel­op­ment com­pa­nies have tra­di­tion­al­ly left the actu­al imple­men­ta­tion to other play­ers in the sec­tor. Their teams typ­i­cal­ly con­sist of busi­ness advi­sors, sales spe­cial­ists, attor­neys, archi­tects, and engi­neers. But what comes after the plan­ning, the offi­cial per­mits, and the con­tracts with buy­ers and investors? Con­struc­tion itself has tra­di­tion­al­ly been quite frag­ment­ed in nature and there­fore sus­cep­ti­ble to imped­i­ments, dis­tur­bances, delays, and short­ages — even under the direc­tion of a gen­er­al contractor.

Spe­cial­ized teams from Porsche Con­sult­ing have been active in the con­struc­tion indus­try and large-scale projects for near­ly three decades now. Right from the start, the con­sul­tants have observed the fol­low­ing: in many places there is a sharp divide between plan­ning process­es and imple­men­ta­tion. Only a few con­struc­tion com­pa­nies have thus far suc­ceed­ed in bridg­ing this divide. Pre­cise­ly here, how­ev­er, is the oppor­tu­ni­ty that could enable the sec­tor to mas­ter its cri­sis: project devel­op­ment should no longer be con­sid­ered fin­ished when the ground­break­ing cer­e­mo­ny is over. 

As con­sul­tants, we rec­om­mend inte­grat­ing the trades into the pre­lim­i­nary plan­ning stages. The ideal set-up here includes shared office space with inter­dis­ci­pli­nary teams. This ini­tial col­lab­o­ra­tion is advan­ta­geous for all con­cerned. Con­sor­tiums can be formed early on that work hand in hand until the owner receives the keys — with the aim of shared over­all suc­cess. Sub­se­quent busi­ness oppor­tu­ni­ties are also in the cards. Why shouldn’t sat­is­fied new own­ers com­mis­sion their facil­i­ty man­age­ment and tech­ni­cal main­te­nance ser­vices from what are now trust­ed busi­ness partners?

Much greater use of innovations

Com­pa­nies that want to keep their ambi­tious per­for­mance and price promis­es should also look into advanced con­struc­tion tech­nolo­gies. Pos­si­bil­i­ties in the realm of ser­i­al and mod­u­lar con­struc­tion are rapid­ly under­go­ing fur­ther devel­op­ment — from sim­ple grid schemes to high­ly flex­i­ble yet nonethe­less stan­dard­ized solu­tions. Com­po­nents of indus­tri­al­ly pre­fab­ri­cat­ed build­ings are known for reli­able qual­i­ty, short­er pro­duc­tion times, cost advan­tages, and sched­ul­ing ben­e­fits. The con­struc­tion indus­try can already point to intel­li­gent solu­tions here, fueled by real inno­va­tions in mechan­i­cal engi­neer­ing and com­plete­ly dig­i­tal­ized process­es at smart fac­to­ries. The best way to achieve cus­tomer-cen­tric solu­tions these days is with the help of pre-struc­tured or mod­u­lar con­struc­tion sys­tems. And for this, the sec­tor needs indus­tri­al­iza­tion — along its entire chain.

Regard­less of how belea­guered the con­struc­tion econ­o­my might be, the sit­u­a­tion also offers oppor­tu­ni­ties. They require a will­ing­ness to con­sid­er new orga­ni­za­tion­al forms, to opti­mize coor­di­na­tion and col­lab­o­ra­tion, and to inte­grate tech­no­log­i­cal inno­va­tions in every stage from pre­lim­i­nary plan­ning to build­ing occu­pan­cy. Once again, the auto­mo­tive indus­try can serve as a model here. With­out close coop­er­a­tion and inte­gra­tion of all depart­ments right from the early stages of vehi­cle devel­op­ment, the industry’s high­ly com­plex series pro­duc­tion lines could never run smooth­ly and yield the cars that each cus­tomer has indi­vid­u­al­ly con­fig­ured in advance. 

ABOUT THE AUTHOR
Roland Sitzberger, Partner at the Porsche Consulting management consultancy, heads the construction and real estate division. His specialties include industrializing production.Porsche Consulting
Roland Sitzberger, a civil engineer and Partner at Porsche Consulting, joined the management consultancy in 2013. He had previously led a department at an international engineering company specializing in transport and infrastructure planning. Today he advises companies, developers, and suppliers in civil engineering, infrastructure, and plant construction. The emphasis is on safeguarding and increasing companies’ competitive and future strengths in project-based settings. With future-oriented development of products, services, processes, new business models, and high-performance organizations, he guides successful transformations by large companies in the construction and real estate sector.
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