February 27, 2017

As the reality of an uncertain 2017 for Singapore sets in, the knee jerk reaction is for construction businesses to become more risk-averse. However, failure to take some degree of risk is unacceptable in any business. Here are 5 ways we think construction businesses can leverage for positive growth amid an uncertain economic environment.

1. Know your strengths

A business must recognise its unique strengths and shortcomings in order to deploy the right strategies to exploit opportunities and counter threats. A risk assessment can evaluate the viability of its strategy, possible operating risks, downside of a potential business opportunity and vulnerabilities of its business model. Many local construction businesses list a good track record, high quality grading/ratings and deep financial reserves as key strengths. However, identification of these strengths is merely the first step. Equally importantly is the business’ ability to successfully articulate these strengths to secure larger and more lucrative projects.

2. Cash is king

There have been an increasing number of construction companies winding up due to financial difficulties and liquidity constraints. Construction businesses must therefore be wary of overstretching their finances or embarking on over-aggressive expansion plans. Debt financing through bonds is one of the common solutions to achieving scale and growth. However we are all aware of the debt crisis facing sectors such as oil and gas. Market pandemonium could trigger banks to tighten credit and exercise margin calls. Companies need to regularly stress-test cash reserves to see if they can honour debt obligations in such situations.

3. Diversify and acquire

Diversification
The economic slowdown has affected private sector construction with demand shrinking from $14 billion (2015) to $10 billion (2016). The decline was due to fewer projects coupled with the property cooling measures introduced in 2013.

On the flip side, public sector construction demand increased by 19% to $16 billion due to a heavy surge in civil engineering works. With orders expected to rise in 2017, businesses should consider picking up the needed capabilities to bid for such projects.

Acquisitions
The Singapore Budget 2017 showcased the government support for international partnerships as well as their intention to fund businesses that purchase innovative services to raise productivity. These, in addition to the S$700 million public infrastructure projects brought forward to 2017, poses clear opportunities for companies to consider strategic acquisitions.

4. Take productivity seriously

Construction businesses need to leverage more on productivity as a catalyst for quality growth. The sector’s productivity quotient remained stagnant in 2016, despite the introduction of S$250 million Construction Productivity and Capability Fund (CPCF) from the Building and Construction Authority (BCA) in 2015. Companies that are serious about improving productivity should plan for the intensive cost of capital needed to modernizing building techniques. The construction market is starting to accept the need to pursue productivity as a ‘new normal’ in order to make the quantum leap into the next phase.

5. Leverage technology

Aside from the Smart Nation initiative, other equally lucrative and attractive possibilities exist for construction businesses looking for new technology-driven opportunities to improve their own productivity or enter into new markets.

  • Traditional commercial/corporate rental business models are being challenged by the growing interest in shared offices and co-working spaces. To the engineering and real estate players, this could signal a future trend that favours the construction and buying of such asset classes.
  • Construction businesses can leverage new technologies to refine the way structures are designed as well as build them faster and more efficiently. Intelligent costing systems can reduce computation errors and take the guess work out of project estimations and margin setting.
  • Construction companies are also poised to adopt the advancements of connectivity between devices linking home or office users to the places they live and work. This connectivity when designed and factor into construction plans, improves usage monitoring, increases savings for utilities and ultimately forms an important value proposition to adopt more advanced construction technology.


Conclusion

The key challenges in implementing these 5 growth concepts are often attitudes of complacency and a mindset of self-doubt. Companies need to realise that grants and funding from government agencies are not a ‘quick fix’. Enterprises that have succeeded in achieving business growth have unlocked their internal locus of control, taken direct responsibility for implementation and as a result, driven positive change in their business models.

 

Authors: Jasmine Chen, Ng Shi Qian and Dennis Lee (risk advisory division, RSM)


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