Foundations - Good to Great
Jim Collins’ best selling book, Good to Great, compares companies and their direct competitors. The book answers why some companies are able to outperform their competitors and the overall stock market and why others cannot.
According to the 2022 ENR Top 600, two specialty foundation contractors control roughly 30% of the $7.5 billion foundation and excavation market. Since the ENR number includes excavations, it can be assumed that the 30% is actually an underestimate of how much of market value the two companies hold in strictly the specialty foundation sector. In the spirit of Jim Collins, this article will look at some potential reasons why some companies dominate the foundation market, while others are fighting for market share.
Outperformance Reason #1: Emphasis on Foundation Engineering Expertise
Almost everyone with a big enough piggy bank can buy a few drills or pieces of equipment and call themselves a drilling company. What differentiates the great companies from the good companies is the geotechnical engineering expertise that the great contractors are able to provide to their clients. Owners will hire a geotechnical consultant to provide a site investigation of the project site and also provide recommendations for foundation solutions. The successful foundation contractor will attempt to get involved early in this process so they can provide additional opinions on what ground engineering solution is best for the client’s needs. By embracing the role of being the engineering ‘expert’, great specialty foundation contractors are able to build relationships, and help steer the client to mutually beneficial designs or take over the design role completely.
Great foundation companies also invest in their engineering departments because it opens up specific markets that have high barriers to entries and therefore are less price competitive. Jet grouting or other specialized grouting techniques are perfect examples. Jet grouting is based on a set of parameters such as flow rates, rotation rates, and extraction rates. These rates can vary widely based on different soil types. There is no standard that tells anyone what rate to use for different soils types. The specialty foundation company must rely on the experience of its engineers to design a proper set of parameters for the given soils and the project requirements. The companies that have this specialized knowledge are then able to compete in a very small market where the margins can be much higher than in the markets that do not require this kind of knowledge.
Outperformance Reason #2: Ruthless Investment in Labor Performance
Specialty foundation contractors have 3 major costs on a project, they are material, labor and equipment. One of the easiest costs to control is the labor cost. Great foundation companies do an incredible job of controlling labor costs. Minimizing labor costs in specialty foundations is about doing everything possible to hit the target number of piles that need to be installed each day to make money. This may mean reducing the time it takes to set up between piles, or ensuring that everything is always prepped and ready for the next step of the installation process.
One thing that may be different about specialty foundation companies from other companies is that often their crews are made up of mostly traveling workers. This is done for 2 reasons. #1; it is not practical, competitive or even safe for these contractors to train local hires to run the highly specialized equipment used in most techniques. More importantly though, the traveling workers have shown the company that they are willing to do whatever it takes to hit the “installed piles per day” metric safely, and consistently. This is where the great companies are differentiated. The great companies will do what it takes to retain the craft workers that show these qualities. The company can offer these workers lucrative per diem and benefits, or the possibility of promotions to drill rig operators, foremen or even superintendents. By looking out for and taking care of their craft workers, the great companies build a loyal crew that helps the company hit their labor targets.
Outperformance Reason #3: Investment in Equipment.
If you look at the top foundation contractors. They both have huge equipment fleets. This provides 2 advantages over competitors. The first advantage is that they have a variety of tools that can be used to solve the more complex jobs. Similar to how specialized foundation knowledge opens the company up to projects with higher margins, more complex jobs with specialized equipment requirements will also allow the great companies to compete with less bidders and command a higher margin.
The second advantage is the increased margin that is captured at the end of the year through equipment rent. Companies that charge for rent of company owned equipment are able to keep the cash rather than having to pay it out later to a rental company. At the end of the year, after all of the equipment loan, maintenance and other costs are paid, there may be some additional cash left over that translates to profit. Obviously, companies also know when it is cheaper to rent equipment rather than pay for shipping and mobilization.
Companies that are successful often do something different than their competitors. In specialty foundations, this is no exception. Becoming a top player in a specific market is no accident and the great companies often leave clues about how they accomplished it.