Construction Company Operations Case Study

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COSC 620 – Construction Company Operations Individual Assignment #1 Name: Jayakrishnan Radhakrishnan Nair Sindhu UIN: 624000258 1. Why are most construction companies small in size? A. Construction is a huge, complex and high risk industry. To survive in such a competitive environment, most companies try to find their own niche markets where they can prove to be successful. Most construction projects are awarded to one of the local contractor within a certain proximity to the job location, so that their expertise on local labor, materials and market conditions can ensure the success of a project. This results in these companies executing a major part of their jobs in the region they are based out of. They remain profitable and content with…show more content…
One of the reasons for the low profit margins for construction companies is the competitive bid process for awarding jobs. Traditionally in the construction hard bid, the job is awarded to the lowest bidder. When the market competition is tough and economic conditions are stringent, construction companies have to purposefully bid really low in order to just get the job for themselves. This low bidding system eats into the profit margins that the companies could be making. Some companies who want to venture into a new market sector also intentionally bid low to make way for future opportunities even at the cost of minor losses. Another factor that affects the overall bid and in turn the profit margins of the general contractor is the markups of the material, labor and equipment expenses from the subcontractors. Subcontractors need to think about their profits as well, which comes out of the same bid amount to the owner. The only way to make higher profits is to attempt high risk jobs where the competition is minimal and the payoff is higher. Even then construction jobs are highly unpredictable, and inclement weather, unforeseen conditions, design errors or safety issues can easily increase project costs and cause schedule delays resulting in liquidated damages that ultimately comes out of the contingencies and contractor profit
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