Where to find opportunities to cut construction costs

Have been spending some time reading about buying companies. One piece of advice is to buy suppliers that supply customers with a product or service which represents a small piece of the customers’ own business, but for which quality is crucial.

For example, find a pipe-threading company that cuts pipe threads for oil and gas exploration companies. Pipe-threading is a very minor part of cost of drilling and operating an oil well, but a mistake in pipe-threading that holds up a profitable well for even a few days can be extremely painful to the well operator.

The reason these kinds of companies are interesting targets is that they can frequently raise prices without their customers caring much. A 10% increase in price on a service which represents 5% of the total cost of a project results in a 0.5% increase in total project cost… in other words, a rounding error which the customer probably won’t care about.

The ability to raise prices over time without much push-back from customers is likely to result in pretty high margins. That’s why you want to buy those companies.

Why do I bring all this up, on a blog focused on buying and renovating apartment buildings?

When you are thinking about how to get your construction pricing down, it is natural to look to the big ticket items first.

But it’s worth looking also at your smaller cost lines, the ones where you’ve kind of been ignoring price increases, because they didn’t feel significant to the overall project. It’s in those areas where there may be surplus margin you can negotiate away.