An increasing number of asset owners are seeking to outsource service and maintenance contracts for their assets over its whole lifecycle. These contracts traditionally are taken on by specialist facility and asset management firms, however in an industry continuously challenged by low profit margins is this model changing?
Having faced diminishing margins for capital projects, COVID-19 pandemic disruptions and sporadic revenues, embracing a business model that manages the full asset lifecycle throws construction firms a lifeline. However, it requires a complete change in mindset: construction firms must not only manage the building an asset but ensure it remains fit for purpose throughout its whole life, which adds even more complexity to core construction processes such as design, estimating and procurement.
The main reason that this new business model is gaining traction in the industry is that is addresses several key challenges including; low profit margins, low productivity and poor project delivery rates. But let’s expand on these further.
1. Low Profit Margins
This has been an industry challenge I’ve commented on for years and until the global construction industry increases its profit margins it will remain so. The full asset lifecycle model does provide one potential way of resolving this challenge permanently, the idea being that the service and maintenance contracts over an asset’s lifecycle are typically 20-100% greater than then actual project build costs. So, there are two obvious ways this can help increase profit margins, firstly reoccurring revenue is crucial for many construction firms and these contracts improve cash flow. Secondly, if a construction firm delivers the project to a high quality from the offset, they’re likely to experience higher profit margins in the maintenance phase as they won’t have to do as much work.
2. Low Productivity
It may seem obvious but when a construction firm is delivering the full asset lifecycle model there is more at stake, ensuring that a project is delivered on time is crucial as any delays will delay the maintenance payments. As a result, construction firms who deliver this model invest more in technology, assets and labor resources to ensure that the there is never any excuse for an asset being delivered on time.
3. Poor Project Delivery Rates
Another industry challenge I have commented on for a long time and will continue to be until it is resolved. Much like low profit margins, the full asset lifecycle model provides a clear way of resolving the challenge permanently. This is because more construction firms will use modern construction methods such as offsite and modular construction, the reason is that these methods are much more efficient, they allow for better quality and can be effectively monitored. Using them within the context of the full asset lifecycle is a clear way to ensure project are delivered on time.
So, the benefits are clear but the real question that construction firms need to consider is whether delivering the full asset lifecycle model is worth the risk?
In this whitepaper – Asset Lifecycle Servitization: The New Business Revenue Model For The Construction Sector discusses how profitability in the sector no longer resides in creating a building or asset, but rather delivering a total package spanning integrated project and lifecycle management. It’s an opportunity for constructors and manufacturers to significantly grow their business with exciting, long-term new revenue streams. It is no coincidence a recent report how a recent report by McKinsey estimates construction sector disrupters could share a $265 billion annual profit pool.1
IFS Cloud for Construction enables construction firms who are looking to adopt the full asset lifecycle model a solution that contains construction and operation and maintenance specific functionality in one single solution allowing for accurate end-to-end project control.
SOURCE: Kenny Ingram (2021 September 14) The New Business Revenue Model For The Construction Sector. IFS Blog. https://blog.ifs.com/the-new-business-revenue-model-for-the-construction-sector
