Let’s be frank: the warranty phase of construction is a financial black hole that
Let’s be frank: the warranty phase of construction is a financial black hole that is so strong, no general contractor’s wallet can possibly escape it.
Currently, there is no industry standard in place for anticipation of warranty costs or tracking warranty cost averages on a per project basis. Every dollar spent by the general contractor on fulfilling warranties with owners is a dollar of profit lost. “We just deal with [issues] as they come,” one GC of a major US construction company put it. Warranty issues occasionally occur because the owner didn't properly instruct their facilities teams regarding preventative maintenance measures. GC's, wanting to stay in the owner's good graces, will incur the hit anyway. Even when you think you've escaped the black hole, you haven't.
When it comes to total percentage of profit forfeited on warranties per project, the estimates we’ve received firsthand from GC’s range from 0.3% to 2% per project. Despite these figures seeming like a microscopic piece of the pie, consider first that the construction industry at large generates upwards of $1.3 trillion worth of projects each year [Associated General Contractors of America]. If the 2010 film The Social Network taught us anything it’s that, a) a tiny percentage of a substantial sum of money is… still a substantial sum of money, and b) don’t trust tech nerds with antisocial tendencies that wear hoodies to important business meetings.
So why do GC’s seem forever resolute to thinking about warranty costs as inevitable and unpredictable? Why does that one-year warranty period after a project’s completion have to be filled with so much nail-biting and staring at the calendar?
The obvious answer (drumroll):
The construction industry is extremely limited when it comes to using technology.
It may not be groundbreaking to you to hear that the construction industry is lagging behind nearly every other major industry in terms of technology adoption. To say that "construction is out of touch," is beating a dead horse that has so long decomposed that it’s unrecognizable; to continue beating it mostly just stirs up dust (gruesome image aside, no animals were harmed in the making of this paragraph). With that being said… construction is out of touch.
Below is a graph published by the McKinsey Global Institute. The construction industry ranks almost dead last in terms of digitization across assets, usage, and labor.
Similar to the lightsabers in Star Wars, red is bad and green is good. Thus, agriculture & hunting—the only industry that construction surpasses in digitization according to this study—is the Sith Lord of the whole chart. Chances are high that those guys don’t even have phones or know what year it is (we’re allowed to make fun of them because we’re above them in the chart).
There is, believe it or not, a silver lining to construction’s grasp of tech, or rather lack thereof. Compared to other industries, there is an unfathomable amount of time and money to be saved once digitization progresses in construction. That saving is imperative if builders are to remain profitable over the next decade and beyond to keep up with an escalating GDP that demands escalatingly cost-efficient infrastructure to be built.
From MGI’s 2019 study on industry digitization, there are five aspects of technology adoption that are vital to a company’s success in its attempts to no longer be out of touch:
1. Mobilization backed by own accountability, shared accountability, and shared responsibility.
2. A clear commitment to digital transformation.
3. Sufficient resources dedicated to that clear commitment as a core organizational priority.
4. The right investment in the technical talent needed in data analytics and digital, with chief officers playing supervisory roles.
5. Approach tech with flexibility; the moment things seem unscalable, withdraw funding and try again.
It should be stressed that all five of these points are symbiotic with the rest; leave one out and the house of cards collapses. The key phrase in #5 is “try again.” Upon failure, shake it off and start over with a renewed and unflappable commitment to making all five aspects work. To give up and stay stagnant technologically would spell doom for your business.
So invest in analytics. Find out which subcontractors are worth investing in over the long haul. Track equipment failure patterns. Make it a priority to convey preventative maintenance procedures to the owner upon handover. Because the warranty phase doesn’t have to be unpredictable—you can’t afford it to be.