Razor Thin Margins Make Construction Ripe for Innovation

http://www.plangrid.com/blog/razor-thin-margins-make-construction-ripe-for-innovation

by rsuttongee • 13 years ago

33 43 13 years ago

leashless• 13 years ago

There's a long path-not-taken on housing. Most things in our society have gotten a lot cheaper per unit service in the past hundred years or so, including many entirely new categories of services. Housing has stubbornly resisted change, with the result that an ever-larger portion of our culture's capital is tied up in providing housing. And housing hasn't gotten any more useful, either.

http://hexayurt.com gives some notion of how radical that shift could be when it arises. Industrial panels (of whatever kind) directly into owner-build housing. Free Hardware. You may laugh, but half the world lives in cinderblock-and-tin-roof shacks and worse.

Nobody said the innovation had to start here, or look like what we do now.

coolsunglasses3• 13 years ago

Housing has gotten cheaper for the actual cost of constructing the house, but other things have eaten up what could've otherwise been consumer surplus.

rwmj2• 13 years ago

Hardly? I'm still paying hundreds of pounds to get plumbers and electricians and roofers to fix things in my house.

Compare the £3500 I paid to have a new boiler fitted[1][2] to what £3500 would buy you in technology these days.

[1] Can't DIY it: I'm legally required to have a Gas Safe fitter to touch anything related to the gas supply.

[2] Replacement of open vented system with combi. Replacing like-for-like would be much cheaper, I know.

sjm-lbm• 13 years ago

Indeed, it actually seems like we've gone the other way. During the first half of the twentieth century, buying and living in Ikea-esque "Kit Houses" was actually not entirely unheard of. The Wikipeida page for Sears Catalog Homes [1] actually lists the price range as between "$12,590 and $55,390 in 2008 dollars," which certainly seems like it could be price competitive with other methods of new home construction, even taking into account costs like land, etc.

[1] http://en.wikipedia.org/wiki/Sears_Catalog_Home

VLM4• 13 years ago

My grandfather did that in the 50s with my dad helping a little. You need to scale for sq footage, the average American house has increased from 1000 sq ft to something unaffordable recently. By sq foot its probably not so much of a deal.

Apparently it takes only a couple weeks for one man to build a house, but the labor involved in general contracting to get the subcontractors to do their thing exceeds the time spent swinging a hammer. He sub'd out to dig and pour the foundation, some electrical, gas, some plumbing...

For those of a certain generation it was how you proved to the employer that you could complete long complicated projects, basically the equivalent of completing your college degree (which was hard to complete during WWII)

This is still done on a regular-ish basis for large garden sheds and garages. Home Depot and others will dump a pile of wood at your location with some plans and bulk pack of nails and other hardware and a weekend or two later you'll have a garden shed.

The permitting and inspection process is more about revenue generation than safety.

justin662• 13 years ago

http://hexayurt.com gives some notion of how radical that shift could be when it arises.

That's interesting stuff, but all we really need to get the ball rolling is to remove the financial and regulatory speed bumps that prevent people from buying prefab homes. It's not like it is some kind of mystery how to reduce the cost of building a home...

EDIT: I was thinking more in terms of the way lending and building ordinances very strongly favor building a house on site vs. trucking it in, as opposed to the really... insightful... stuff you guys have mentioned.

sliverstorm3• 13 years ago

It's not like it is some kind of mystery how to reduce the cost of building a home...

Agreed! Just remove all those pesky restrictions about fire safety, earthquake safety, tornado safety, electrical safety, and you can put that house up for real cheap :)

platypii• 13 years ago

Something like this, where they put up a 30-story building in 15 days in China. Super impressive timelapse:

http://www.youtube.com/watch?v=Hdpf-MQM9vY

lsc• 13 years ago

There's a long path-not-taken on housing. Most things in our society have gotten a lot cheaper per unit service in the past hundred years or so, including many entirely new categories of services. Housing has stubbornly resisted change, with the result that an ever-larger portion of our culture's capital is tied up in providing housing. And housing hasn't gotten any more useful, either.

Yeah... but a lot of that is we don't /want/ housing to get cheaper. Most voters will vote to keep housing more expensive.

jessriedel2• 13 years ago

Um, doesn't thin margins mean generally mean the industry is mature and most things have been tried? I guess if you hold constant the "degree of difficult" for innovation, then large revenue make an industry "ripe for innovation". But this applies just as well to Apple, right? A 1% increase in efficiency in a $100 billion industry nets the same profits, regardless of the existing margins. Or am I misunderstanding?

pg• 13 years ago

No. Amazon is famous for seeking out low-margin businesses; that's what attracted them about AWS as a business. Walmart is another example.

lquist2• 13 years ago

Do they seek low-margin businesses? My take was that they looked for industries where they could comfortably price lower than anybody else. Case in point: tablets. Traditionally a fairly high margin business (on a unit basis), and Amazon comes in at a price that is only feasible because of the Prime play.

corry• 13 years ago

"Most things have been tried" <-- but the idea is that 'new things to try' are popping up all the time. My read on the article is that low margins show things have been optimized already, so new things that further optimize it will be welcome (to some players).

notahacker• 13 years ago

Problem with "new things to try" in construction is that many of them require significant investment in physical infrastructure or research and development to meet (often justified) regulatory requirements. That doesn't fit well with low margins and high vulnerability to economic cycles.

lquist2• 13 years ago

Um, doesn't thin margins mean generally mean the industry is mature and most things have been tried?

No, it usually means it's a commodity business. Innovation can be a defensible competitive advantage. As mentioned in the article, because of operating leverage, a fairly small innovation can yield significant profit growth.

kevinpet• 13 years ago

A thin margin is a little like being highly leveraged.

Spacely Sprockets buys sprockets at about $9.50 and sells them at $10.

Cogswell Cogs makes cogs from scratch for $5 and sells them at $10.

If these companies are "the same size" meaning they generate roughly the same profit, then SS is selling 10x the volume of CC. If they can both cut costs by 10%, then SS's profit almost triples, while CC's only increases by 20%.

This cuts the other way too -- if you are operating at thin margins, a small change can push you into unprofitable. If you have fat margins, your profits just decline.

dllthomas• 13 years ago

A very useful perspective, thanks!

jessriedel2• 13 years ago

Thanks, this was the only reply I got that gave me a decent explanation. I guess it all boils down to defining business size by the amount of profits rather than by revenue or assets. The article's claim, then, is contingent on the cost of a single unit of innovation being set by this size metric and not the others. I'd say this is a very non-obvious assumption, but at least I now understand the claim.

Can anyone give an argument for why the cost to reduce costs by 1% should be a function of profits rather than of revenue or assets?

jw_• 13 years ago

Hadn't thought of it this way - thanks.

kalininalex• 13 years ago

Some businesses are fundamentally high-margin, and some are low-margin. It mostly depends on the amount of raw materials involved.

For example, Microsoft (software) is a high-margin business. Their cost of raw materials is low, so 77% of revenues goes to pay for R&D, other expenses, and then profit.

Apple is a lower, but still a high-margin business with healthy 37% of revenues remaining after paying for the cost of materials and assembly. Apple can charge significantly more for their devices than they pay in raw material costs. But it may change, so Apple investors are generally watching its gross margins. For example, last year Apple's margin was 47%, i.e. it declined quite a bit since then.

Amazon (as any retailer) is a low-margin business. They move a lot of products, but 89% of the revenue goes to pay for those product. So only 11% of the total revenue is available for R&D costs and profit.

InclinedPlane• 13 years ago

A low margin business means that your competition will have extreme difficulty lowering their prices.

However, it's very rare for there to be fundamental, physical limits to the internal cost of doing business. Which means that if you can do that better (through manufacturing improvements, supply-chain improvements, what-have-you) then you can undercut your competition only slightly while reaping significant profits.

And, because your competition is running on such low margins they can't easily compete with you. So, from a pure price perspective, you either get to retain your higher profit margin while being price competitive or you simply eat the majority of the market before it has a chance to settle to a lower price-point, which is win-win.

It does, however, mean that you need to put in a lot of hard work.

smackfu• 13 years ago

That chart sure could use a label showing what years it covers.

Bjartr• 13 years ago

This is half plug and half relevant to the article, I like to think we're worth knowing about.

I work for Ekotrope[1], we're looking to make those margins bigger and help build green at the same time. Believe it or not, they're not mutually exclusive and we know how to make it happen.

[1] http://www.ekotrope.com

josh2600• 13 years ago

A formula for disrupting Construction in the United States:

* Pre-fabricate everything

* Assemble onsite using non-union labor

* Move away from "Cost-Plus" pricing structures

Construction has Razor Thin Margins for a number of reasons, not the least of them being the incentives associated with Cost-Plus bidding. Non-Union labor and Pre-fab would literally upend the industry.

The problem, as with most mature industries, is policy-based and not technical in nature.

Construction is as ripe for Innovation as Medicine, and an equally difficult water to navigate.

Avshalom• 13 years ago

You're missing the step that includes a decades long pr campaign to destigmatize pre-fab housing.

VLM4• 13 years ago

On the way. Believe it or not my parents house was so old they built the cabinets and original doors onsite by hand! Back in the old days they literally dropped off a pile of raw wood, none of this prefab cabinets, prefab windows, prefab doors, etc. They even hand laid tile rather than using a fiberglass tub surround.

Zigurd2• 13 years ago

I saw a relatively small apartment building go up in Cambridge MA a couple years ago, built from prefab modules. I very much doubt the rent is lower than the site-built buildings down the street.

One-story modular houses in trailer parks have a stigma, perhaps for a reason. Can you think of any other type of modular construction that has a PR problem?

Zigurd2• 13 years ago

I don't understand the focus on margins. While bigger margins would be nice, it seems like modular construction would have a more direct effect on turnover rather than margins. Maybe the term "profitability" would be more accurate.

Ultron• 13 years ago

Disruption may be in finding gold where others see garbage, like the Banana King did: http://cbpowerandindustrial.wordpress.com/2013/04/10/you-cou...

Razor Thin Margins Make Construction Ripe for Innovation

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