During the recession everyone was looking forward to the inevitable time when it would be over and things became that bit easier. The truth is the absolute reverse for contracting. The death toll of companies has been pretty high and the number of majors posting eye-watering losses is worrying.
One troublesome project in a portfolio is tolerable, but when the whole portfolio is riven with problems it suggests something fundamentally amiss with the way we do business.
Bidding low to win projects with the expectation that variation will bring the profit back seems to have failed. Any mileage made has been swallowed up by increases in supplier prices. Clients too are becoming better at ensuring they don’t go down the variations route. In that case the contractor is in big trouble with no escape route.
"Bidding low to win projects with the expectation that variation will bring the profit back seems to have failed. Any mileage made has been swallowed up by increases in supplier prices."
But it would be wrong to attribute blame to the contractor. Clients and advisers being prepared to entertain such nonsense are as much to blame. While everyone wants a good deal, the industry needs a reasonable return to enable it to serve its customer better. Margins of 1 or 2% are hopeless. There is no chance of investing for the future. No chance of improving productivity. And no chance of a stable workforce.
While some contractors have house building arms to cushion these issues, this misses the point entirely. Contracting needs to be profitable itself, not cross-subsidised by housing.
Try telling a house buyer that 20% of the price they are paying is subsidising an underpriced project elsewhere. There is nothing like providing value for money, yet the scenario does not deliver this. As volumes go up, housing quality is dropping to pre-recession levels.
Balfour Beatty has committed to an extensive business training programme for its staff, which may go some way to solve its problems. But it does raise a question about the ability levels in the industry. Sometimes it might be as simple as just saying “no” to a project.
Listed companies certainly have a harder time saying “no”. Management’s push for turnover growth at what seems like any price has consequences throughout the organisation.
Overall, it is a depressing picture. Is our industry capable of pulling off a different business model? Over the years we have had the Latham and Egan Reports, the Movement for Innovation, the Wolstenholme Report and the imposition of BIM – but nothing seems to have changed much. I’m optimistic but others might think there is more chance of finding life on Mars.
