Economic risk shifting in the construction industry

After the financial crisis of 2008, the engineering and construction (E&C) industry settled into a decade of slow growth and mixed financial performance. Despite significant investment in project management tools and technology to improve business processes and performance, the industry continued to experience projects going over budget and over schedule—occasionally spectacularly so. Construction owners consistently failed to achieve the cost certainty they desired, clouding investment decisions, and causing considerable frustration. Meanwhile, as a result of competition, contractors adjusted to increasingly thin margins—resulting in a race to the bottom.

Through industry mergers and acquisitions, many private E&C companies combined with larger publicly traded corporations. Shareholder expectations forced the largest E&C companies to pursue long-term, high-value contracts at a time when there was a surge in the number of public and private megaprojects. To win them, contractors gambled on fixed-price work, resulting in project failures that drove many E&C companies into financial distress.

Now, we are seeing the industry moving toward a risk-sharing model that helps construction companies and owners alike. In the future, project delivery and contracting strategies cannot be simply market-based, but must be based on the skills, qualifications, and proven track records of project participants. Customized delivery strategies and careful selection of contracting methods allow for more collaboration between owners, designers, and contractors and can optimize project outcomes. Strategies such as Progressive Design Build and Integrated Project Delivery are used more frequently due to their ability to engage contractors early while still controlling construction costs. While new approaches to project delivery may lead to higher planning and preconstruction costs, a value-based selection of architect and engineering firms, contractors, and suppliers can increase the chances of project success