Why contractors are still getting it wrong
Staffan Engstrom says stick to the devil you know to avoid leaving your business exposed.
KPMG’s 2015 survey of 109 global construction clients found more than half had experienced underperforming projects in the previous financial year. According to Climbing the Curve: “Only a third believe they have a ‘high’ level of trust in their contractors, with 60% describing the degree of trust as merely ‘moderate’.”
Indeed, poor contractor performance is cited as the single biggest reason for project underperformance, with more than two-thirds (69%) of survey participants ticking this box.
Why is this? UK contractors are among the best in the world, but the same mistakes keep being made. Look at the sad stories from Balfour Beatty, Shepherd Construction and GB Building Solutions, to name a few.
Every contractor has a bad project from time to time. When this happens, blame abounds: the site team blames the estimators and planners; head office blames the site team; the board blames the absence of good process; the MD blames the last MD; and everyone blames the design team. But by far the biggest error of even excellent construction companies is the result of taking on the wrong work. This is can be avoided.
Only do projects you understand
When you are struggling to get work, it is tempting to take on the wrong new project. The apparent benefit of those multi-millionbpound revenues can be irresistible when you have salaries to pay. Okay, so you haven’t built a project like it before, but surely it can’t be that hard for your excellent team?
Well, they may be excellent, but can they build this? It is critical when you bid for a project that you ask yourself: “Who is going to build this? Have they successfully done it before?”
If you can’t answer positively, don’t bid, and focus on finding work you can do well. Instead of being reactive, consider in advance the new markets that you would like to work in, so that you can hire the people that understand how to operate in them beforehand.
Know the client and its team
I once assessed a large construction business that had delivered 800 contracts in a period of three years. The overall margin difference between the contracts with new customers and those with existing customers was a massive 8.6%. The lesson is that having an existing relationship is often the key to success, particularly when embarking on complex or challenging work, where there is more potential for misunderstandings.
Having insufficient resources to deliver - whether it is project staff, labour or subcontractors - is a killer. However well you know how to deliver, you still need the resources on site that you can trust to do it well.
So that single-stage design-and-build contract you “really need” could end in disaster if you don’t know the client. Positive previous experiences make all the difference when considering the natural day-to-day tensions that occur around a complex construction project.
Of course, all companies must do work for new clients and their professional teams from time to time, or you would never expand, but try to keep the big risks to those clients that trust you.
Only bid if you can deliver
Having insufficient resources to deliver – whether it is project staff, labour or subcontractors – is a killer. Yet the temptation to take on a project that is “just in your sweet spot” can be great. However well you know how to deliver, you still need the resources on site that you can trust to do it well.
The acid test is not to bid on a job if you don’t know the names of the project manager, quantity surveyor and general foreman who will deliver it. Be proactive, and invest early in the people you need.
Use people who know the market
One of the best ways to deliver geographical growth is to bid for works in an adjacent geography, for existing clients who trust you. You can then pull the resources in from your core areas, thereby building local presence and experience.
Beware the next project without that client, however. Each geographical market behaves differently, and local knowledge of clients, suppliers and industry is critical.
Competent contractors and subcontractors focus on re-engineered solutions. The managing director of a large subcontractor I know insists contracts that lack scope to “re-engineer” projects out of problems and into profit are one of the biggest reasons for poor performance. You can either bid only on exactly what is specified, or look for jobs where your expertise gives you an innovation advantage.
Unfair contract conditions
Too often a “lucrative” job is available, the price is right, but the terms are unfairly harsh. There is no problem taking on risk, as long as it is risk you can manage. So don’t do it unless you know the client so well that problems are resolved without ever resorting to the contract. And make sure your bid managers see the contract lawyer as someone to work with, rather than someone to “get through”.
Contractors’ desire for rapid growth can lead them into all sorts of problems as they ignore the principles above, and bad contract choices erode margins and bank balances. This can in turn create doomed “dash for cash” strategies, where more wrong contracts are taken just because they bring short-term cash flow.
The secret for success is to grow your business sensibly and prudently, focusing on what you do well, and managing the balance between risk and opportunity.
Staffan Engstrom is an independent business and strategy consultant