Government's efficiency savings could drive more contractors out of business

18 August 2011

Martin Chambers, Shaylor Group

With the Government squeezing public sector costs and some recession-hit companies buying work with suicidal bids, the consequences could be dire argues Martin Chambers, framework director at Shaylor Group.

The government recently spelled out its ideas on how it expects to drive down public sector building procurement costs by 20 per cent.  A quick review indicates that ministers have gone for the soft option by demanding savings from framework contractors rather than by adopting a three pronged attack on costs by encouraging clients to improve their processes and demanding more focus on product innovation.

The government seems to be solely relying on contractors, almost individually, to push the demand for cost savings back through the supply chain instead of stepping right back to the beginning of the process to the client and specifying levels of efficiency and component development improvements and having them wash through in to the construction process. 

To me, this is headline grabbing short-termism.  The root of the problem is not inefficient construction; it is actually an absence of the creativity that leads to improved productivity.  The consequence of this approach, unless it is challenged, will be that the government will drive more constructors out of business.

We are already seeing companies fail as a result of pitching with bids 20 per cent below average in order to buy turnover.  However, some in the industry say there is nothing wrong with so-called suicide bidding. Their argument is that it is comparable to a supermarket pricing something as a loss leader.  Now, a supermarket puts a lot of products on a lot of shelves, and if it chooses to sell one at a loss to attract people into the shop that’s great.  They are buying business, but not exclusively by discounting baked beans. 

Construction doesn’t work like that.  You cannot under-bid on a consistent basis.  If you do you soon find that you don’t have a business, the client doesn’t have a contractor and the supply chain members don’t get paid. What pushes companies along that route is the mantra of turnover above anything else.  All buoyed by the belief that without work they will face having to make people redundant and losing capacity.  Businesses need to accept that right sizing isn’t necessarily a negative option.

The argument goes that there is a cost to making people redundant so perhaps by underbidding they can avoid that cost. Then they will look at redeeming the discount they give by squeezing it out of the supply chain.  Therefore you put the supply chain in the situation where it starts to suicide bid.

Contractors who are bidding at sensible levels at which they can make a reasonable return start to lose their suppliers because they go out of business as a result of the pain they are taking on the suicide jobs.  So you can end up with a compounding effect that ends in catastrophe.  It can become an amazingly vicious circle.

Unfortunately, some customers and their advisors are taking the view that if someone offers to do the job at a loss they are happy to accept it on the basis that if the builder goes out of business they can go to the next lowest price and still be in a good place.

I would argue that in these circumstances, professional consultants have an obligation to make their clients fully aware of the situation and the potential implications and to urge them to be more responsible.  After all with the best will in the world, anyone who has bought a job will try to recover the situation, either by cutting corners or, more importantly, by going into battle and taking the client to task for anything and everything that they perceive is not covered by the contract.

That results in a pretty acrimonious situation and I believe that people should consider not just at the finished product but also the quality of the journey. You can get to the end of contract and the builder goes home.  But you may have had the biggest punch-up along the way.  You may still have the right quality, but has it actually done anything for the relationship?  What does it make the client feel the next time he comes to the industry?

All that that kind of acrimony does is promote adversarial relationships.

A much better approach is to recognise that every job has to wash its face and bid realistically so that the business is sustainable.  Developing business that comes from repeat order clients and building long term trusting relationships has to be the key to success.

The alternative is that these pressures will result in a very significant increase in the number of businesses collapsing over the next 18 months, particularly with inflation driving up costs.  Some companies on fixed-price contracts are increasingly taking very significant risks by working on the basis that they won’t incur inflation.  And this at a time when energy, fuel and metal prices are rising meteorically.

There is work out there to be won.  What isn’t there is the same number of large projects that there used to be.  That is changing the focus of a number of large companies who are now working on smaller contracts and in sectors where they have not traditionally been involved.

With official figures suggesting that there will be no significant upturn in construction until 2013, it is likely that we will see increased polarisation within the industry, with multi-nationals at one end, specialist and local/regional contractors at the other, and a large piece of no-man’s land in between.

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