Insight

The recovery: Setting sail for uncharted waters

11 November 2013

We've navigated our way through the choppy waters of recession, but the long-awaited recovery is bringing a whole new set of challenges. Elaine Knutt and Denise Chevin report. Illustrations by Beverly Philp.

Maybe your business has been treading water for the past five years and has been lifted on a wave of new enquiries and opportunities – or maybe it’s been pitched into tough negotiations with suppliers over lead times and capacity. Maybe you’re snatching spare hours to go to your first job interviews for five years – or you’re an employer making inflation-busting pay offers to keep people in place.

As 2013 draws to a close, construction professionals throughout the industry are suddenly experiencing a different commercial environment, and having to adopt a different mindset to cope.

The upturn isn’t even and it’s not universal: private housing is still the driver; the long-discussed infrastructure investment boost is slow in coming; public sector work is likely to be well below 2007 levels for some time. But as Nick Clare MCIOB, head of commercial at Aecom, summarises: “There’s a definite change of mood. Yes, there are still nagging doubts whether the recovery is going to be sustainable, but anecdotally it does feel different. Generally I would say sentiment is improving.”

But as we explore, the upturn brings as many difficult dilemmas as the bump-along-the-bottom years. The cash flow and capitalisation issues that holed so many construction businesses in the recession are still around, and could scupper any business that gets trapped between fixed price contracts and rising input costs, or takes on larger projects with attendant higher start-up costs. Supply chain companies that saw margins squeezed and staff stretched in the recession are now in the privileged position of calling the shots.

But the industry didn’t just spend the last five years watching its headcount shrink (by 250,000) and its output slump (by 12.5%). It’s been targeting 15-20% cuts in out-turn costs; collaborating ever more closely along the supply chain; embedding sustainability in everything it does, and preparing the way for an ambitious BIM-adoption programme.

Now that the economic weather has changed for the better, will we forge ahead with all these new strategies firmly in place, or find that they’re dislodged by a new set of priorities?

Five steps forward, two back

Martin Chambers PPCIOB, framework director at medium-sized contractor Shaylor Group, isn’t pitching his expectations of the industry’s performance too high. “Five years of being more productive will have some influence. But attitudes and culture take a long time to change. We’ve taken five steps forward since the last recession, but there will be people taking two or three steps backwards. It’s hard to capture and keep everything we’ve done, and the ones that do are the standout organisations.”

As well as the individuals who have turned to other employment, the industry has lost thousands of SMEs in the supply chain. Clearly, there is the potential for a capacity crunch as more projects hit the market: Steve McGuckin of Turner & Townsend says that lack of estimating capacity is already having an impact on some specialist trades, and clients in the social housing sector are already having difficulties attracting main contractors onto tender lists.

The recovery in numbers

  • The CPA is forecasting construction output growth of 2.7% in 2014 and 4.6% in 2015, followed by 5.1% in 2016 and 4.9% in 2017.
  • Estate agent Savills’ index for September found private commercial development volume rising at the fastest rate since 2007.
  • A survey of development markets in Birmingham, Manchester, Leeds, Edinburgh and Glasgow by Deloitte Real Estate recorded a rise of 80% in new schemes starting construction over the last 12 months compared to last year.
  • In its latest survey the Federation of Master Builders showed that more than one in four small building companies are reporting increased workloads for the third quarter of 2013.
  • The number of new homes registered in the UK jumped 19% to 33,573 between July and September compared to the same time last year.

According to Nick Clare: “The market lost a huge amount of capacity so any small step up causes stresses. Contractors have cut back on estimating teams so the appetite for bidding has fallen because they are bound by estimating team capacity and it requires a disproportionate amount of effort. Contractors are being much choosier over what they tender for: asking who the client is, how well defined it is, particularly on a single stage contract.”

Meanwhile, the mix of projects has changed dramatically since the pre-2007 era: fewer new-build schools and hospitals, more small-scale remodelling on the one hand and transport and energy infrastructure projects on the other. That will require a shift in skillsets – and the industry is left delivering more with a lower headcount.

“If companies haven’t been using the last three years or so to get their businesses leaner and meaner, they’re going to have trouble accommodating the upturn,” says Rob Francis, director of innovation and business improvement at Skanska. “If you lose people and restructure, it’s important to restructure with the right sort of people for when the market comes back. We’ve hired experts in BIM, manufacturing and industrialisation techniques and engineering.”

The past five years have brought progress on delivering efficient projects cost-effectively; a reduction in levels of adjudication as collaboration (or economic pragmatism) kept disputes in check, and BIM has revitalised interest in collaboration and “rethinking” construction.

It would be a bitter irony if the upturn the industry has so eagerly awaited brought nothing more than tender price inflation, worsening relationships, and a risk-averse attitude to innovation. Below, we look at the industry’s hopes, fears and strategies to come out on top.

 

New directions in construction pricing

With more enquiries and invitations to tender coming in, will contractors be able to a) pass on rising input costs or b) price for margins more generous than the age of austerity has allowed? Aecom is already forecasting building costs rising between 2% and 3% each year for the next three years, and is putting general tender price rises at 3.4% for 2014; 4.6% for 2105; and 5% for 2016. That compares to a slight fall of -0.2% in 2013.

Among contractors and their advisers, there’s a general view that competition and the need to fill order books will keep inflationary pressures under control for the time being. CIOB president Peter Jacobs, who heads up the London region of Morgan Sindall, says: “It’s certainly a very busy market but I don’t think we’ll see margins rise until the second quarter of 2014 because there is still capacity in the market in most of the sectors.”

“After all this suicide bidding, prices are still suppressed,” adds Gemma Lennon, business development manager at Yorkshire SME Nu Construction. “We’re doing lots of quotes and estimates, but prices aren’t going out.”

"After all this suicide bidding, prices are still suppressed. We're doing lots of quotes and estimates, but prices aren't going out."

Gemma Lennon, Nu Construction

Brendan Sharkey, of accountant MHA McIntyre Hudson, agrees that the tables haven’t turned, just shifted slightly in contractors’ favour. “It will take a bit of time for the market to adjust, no one likes putting prices up. And if you do and you lose the project you’ve got no margin at all, there’s still that nervousness among bidders.”

Jonathan Hook, a partner at PWC, also agrees: “There are plenty of opportunities out there but I would say contractors are still in defensive mode and increased confidence is not yet being reflected in the prices. There seems to be a mentality that they have to be very price aware.” Hook says that any price rises in 2014 will simply cover rising input costs, with a recovery in margins unlikely until 2015.

On input costs, there has been much speculation over brick and block shortages, but the sector has responded that this was a short-term capacity issue. But Steve McGuckin, managing director of the UK programme and project management division at Turner & Townsend, feels that inflationary pressure could come through quickly in substructure piling and foundations, cladding and M&E. “Often these are the most complicated packages which need good people to work on site,” says McGuckin.

Keep to the right path on cash and collaboration

For many construction firms, the path to recovery will be strewn with risk. Larger, riskier contracts will need to be financed, and businesses won’t always have the necessary cash flow or ability to borrow from the banks. “You can end up running out of cash, even though in theory you’re in better times. Projects still have to stack up, but hopefully the banks will be more willing to lend,” says Trevor Drury FCIOB of Estia Consulting.

“When the volume of work is less, people can take it on at low margins by squeezing their subcontractors. As we move out of recession and into bigger jobs, some people won’t be sufficiently capitalised, while subcontractors will become more privileged in their positions, as demand for their services increase,” agrees Martin Chambers PPCIOB of Shaylor Group.

Another theme for the recovery, identified by PriceWaterhouseCoopers partner Jonathan Hook, is that cash flow will remain difficult. The very foundation of contracting, of course, has been that it’s a cash flow positive business. “A number of new trends are impacting on contractors’ traditional business models, including the advent of project bank accounts and clients increasingly becoming resistant to advancing cash,” he says.

If contractors have signed fixed-price contracts on low margins without anticipating the current acceleration in prices of materials or trades, they will be left vulnerable if they have still to secure packages. So to deliver projects within range of the fixed price, contractors will need to cement good relationships with their supply chain.

"It's essential contractors control input costs and keep specialist teams on board. That will certainly require good leadership. I also worry about the capability of the supply chain whose managers are being head hunted."

Steve McGuckin, Turner & Townsend

As Jason Farnell, director of advisory firm CR Management, says: “Specialists and suppliers may talk up problems and if you renegotiate with one, others will be looking to do the same thing. There is still capacity in the market for most trades, but it’s essential contractors develop good supply chain partnering.”

Steve McGuckin, Turner & Townsend’s managing director of the UK programme and project management division, echoes that sentiment. “It’s essential contractors control input costs and keep specialist teams on board. That will certainly require good leadership. I also worry about the capability of the supply chain, whose managers are being head hunted by main contractors at the moment. I wouldn’t say it’s an epidemic, but because main contractors tend to pay a bit better and life is a little easier they move if they get the chance.”

If contractors are tempted – or forced – to go beyond their established supply chains to seek specialist capacity, Shaylor’s Martin Chambers warns against contracting with “phoenix” companies emerging from the ashes of a mid-recession business failure. “I’ve seen it happening in previous recession. If the management team hasn’t changed and the mode of operation hasn’t changed, they might incur the same liabilities again,” he says.

Trevor Drury recently wrote on CM’s website about the noticeable decline in adjudications during the downturn, but warns they could become more common again. “As the industry grows again, you will have more projects, and some will inevitably have problems and disputes, so there will naturally be an increase in the number of disputes. I think we didn’t see an increase in disputes in the recession mainly because there were fewer projects anyway. And when people get really busy, they start to cut corners and make mistakes.”

Aecom’s Nick Clare believes he’s already spotted the trend. “Claims are going up, which is a sign of improving confidence, as claims require funding, and that’s difficult when cash reserves run down,” he says.

PWC’s Jonathan Hook sounds a final warning note: “People say there is more risk as we come out of a recession, so next year it is conceivable that firms will struggle. We have peaked in terms of failures and insolvencies, but these are
not exactly easy times yet.”

Navigating the recruitment market

As Construction Manager reported in June, the jobs market has come back to life, particularly for those at the front end of projects and in London and the south east. Since then demand has continued to rise. Major consultancies are looking to swell their numbers by as much as 10-20%, with Aecom looking for several hundred London staff.

But a theme expressed by many employers and recruitment consultants is that the most valued recruits are already in jobs, rather than freelancers or returnees, with the risk that poaching will open up gaps in settled teams.

“Recruiters will probably go for people tucked into jobs. As a rule of thumb, employers will have tried their damndest to protect their best people. So if you go out and head hunt, that’s who I’d go to,” says Martin Chambers, framework director at Shaylor Group.

The flipside is that employers are paying a high cost for keeping teams intact, says Andrew Szklarek, UK director at Project Resource, which specialises in recruiting for main contractors. “Counter offers are coming back on the consultancy side where people earning, say, £60,000 have been offered £10,000 to £15,000 to stay where they are. That’s something we used to see in the boom years.”

"People are looking to move because of the culture of the company they are in, or they may have been stuck in a location that's not been convenient, but have had to grin and bear it due to recession."

Rob Smith, The Management Recruitment Group

But Rob Smith, chairman of The Management Recruitment Group, which recruits for both contractors and PQSs, observes that money is not always the key factor. “The main reasons people are looking to move is because of the culture of the company they are in, or they may have been stuck in a location that’s not been convenient, but have had to grin and bear it because of recession.”

And Smith says that employers aren’t offering “silly” money. “They are not taking people on in case they win a job, which happened at the peak. But in the next 12 months we are bound to see confidence improving, which will have an impact on salaries in nine to 12 months.”

For employers looking to retain key staff and keep costs under control, Chambers suggests looking beyond pay packets to training, flexible working and supporting staff in personal projects. “Pay has its place, but it’s also about showing people they’re valued.”

Finally, not everyone is confident enough to hire. “We’re definitely not recruiting yet, that’s a long way off, we’re just working harder with the workforce we’ve got,” says Gemma Lennon of Nu Construction.

Plotting the way ahead with BIM

Innovation and BIM have been two of the buzz words of recent years, but the upturn – with more work available but less capacity to deliver it – will be the time to realise their potential. “Where is the capacity going to come from?” asks Tim Platts FCIOB, chair of BIM4SMEs. “By working cleverly and smarter, via BIM, or by companies from outside the UK moving in.”

One contractor ready for the challenge is Skanska, according to Rob Francis, director of innovation and business improvement. “We’ve set ourselves up in the recession as a far more collaborative, forward-thinking company, and we’ve upped our game on R&D investment. Over the next year, we’re looking to double that, mainly looking at the supply chain, offsite manufacture and modular production.”

He adds: “We’ve also been implementing BIM with a focus on the methodology, not just the hardware, and on the supply chain – that’s how we’ll pull ourselves out of the recession.”

"We've set ourselves up in the recession as a far more collaborative, forward-thinking company, and we've upped our game on R&D investment. Over the next year, we're looking to double that."

Rob Francis, Skanska

But architect and BIM evangelist Robert Klaschka feels that Skanska could be in a BIM minority, with leading consultancies still struggling to move to implementation. “Even the big project management firms are ignorant of the rules of engagement for BIM [such a PAS 1192:2 and the CIC BIM Protocol] or they haven’t spent enough time absorbing them. We need BIM to help with the bulge in capacity, but some bigger corporates are making minimal effort. People need to be constantly reminded it’s about making money through BIM, not losing it by investing in it.”

There has also been recent uptake of offsite fabrication, modularisation and Design For Manufacture, as well as the first “flying factories”. Companies at the leading edge are already thinking about linking BIM models to manufacturing, or even 3D printing, to create efficient, waste-free buildings and infrastructure projects.

“As a technology, I think 3D printing could develop fast and really take off,” comments John Eynon FCIOB, a member of the CIOB’s BIM Group. “If you look at the problem of carbon targets, health and safety and the housing shortage, that approach can tick a lot of boxes.”

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