Cost Savings from Lean Projects and Contractor Profit Margins

Given the importance of project profitability in helping to drive the adoption of Lean practices, it is critical to understand how individual players benefit from the efficiencies achieved in pursuing Lean.

Do the savings achieved improve the bottom line of the firm implementing Lean, or do they get passed along to their clients, whether that is general contractors or owners?

General (71%) and trade (72%) contractors who have implemented at least one key Lean practice agree that the savings they see from using Lean practices contributes to their bottom line and project profitability.

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Less than 10% of either general or trade contractors disagree that the savings are contributing to their bottom line.

In addition, 59% of general contractors find that the adoption of Lean practices by their subcontractors increases their profit on projects.

This finding makes sense, given the fact that the best approach to Lean is when all project team members participate, which makes scheduling and other factors more reliable.

Trade contractors in the in-depth interviews value their ability to be competitive and win business more highly than increased profit margins, so their business benefits from their ability to help the general contractor achieve a higher profit margin. One also reports that instead of increased profit margins, they now experience a consistent, reliable profit on projects, which they find to be even more valuable (see In-Depth Interview Findings: Benefits of Adopting Lean Techniques).

In the survey, general contractors also place a high value on their ability to compete.

41% agree that they benefit more from competitive pricing to owners on their Lean projects than they do from a direct increase in profitability, compared with just 14% who disagree.

This is a critical finding because it demonstrates that even firms that do not experience significant increases in profit from their adoption of Lean still experience strong business benefits.

General contractors who self-perform their own trades, however, have very different opinions on a few key points than general contractors that do not.

Even though the number of Lean respondents who do not self-perform some trades is too small to be statistically significant, there are clear trends that can be seen in the responses. They demonstrate that contractors who self-perform their own trades are more likely to see direct profits from their Lean efforts and more likely to find those profits valuable than the competitive edge they are afforded by Lean.

Adoption of Lean Increases Profit Margins on Projects

• Self-Perform Work: 68%
• Do Not Self-Perform Work: 39%

It is possible that firms that self-perform their own trades are able to better control their profit margins, similar to the trade contractor in the in-depth interviews, than those that do not, which could account for this finding.

Source: Lean Construction SmartMarket Report, 2013. Excerpt courtesy of McGraw Hill Construction.

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