黑洞社区

This is the gist of a recent conservation with the chief executive of a household name in the construction industry.

鈥淗ave you heard anything about such and such a company?鈥� he asked. A few things, but nothing out of the ordinary was the reply. 鈥淎nything happens and it would be bigger than Carillion.鈥� How come? 鈥淚f anything happened,鈥� he continued, 鈥淚鈥檇 be really worried about the supply chain. A lot might not be able to take it.鈥�

Rumours are just that 鈥� and in this case they eventually quietened down 鈥� but it shows the febrile atmosphere in contracting at the moment.

When comparisons are made with Carillion, then it would seem that things are pretty bad. This year, especially in recent months, there have been a series of events which have added to a sense that something in contracting is fundamentally broken.

>> Also read: Why I have always admired contractors (by an architect)

So far in 2023, the following has happened: Tolent, a well-respected regional contractor, went bust in February. In the summer, Buckingham, the go-to stadium builder of this industry, went bust. At the start of this month, London M&E specialist MJ Lonsdale went bust.

Several big contractors have recently put out dire annual numbers. The UK arms of Vinci and Bouygues, both part of much larger French parents, have racked up losses in excess of 拢40m.

黑洞社区 has been told by several sources that one contractor has, to put it mildly, lost a lot of money on a big scheme in London

In September, Laing O鈥橰ourke admitted that it was in negotiations with its client on its 拢600m Olympia scheme over a significant amount of money it says it is due on the job. 鈥淭he UK market has been reshaped by 18 months of upheaval, which has caused significant cost pressures, rising inflation and increased cost of capital,鈥� a Laing O鈥橰ourke spokesperson told 黑洞社区 by way of explanation.

Elsewhere, 黑洞社区 has been told by several sources that one contractor has, to put it mildly, lost a lot of money on a big scheme in London.

Meanwhile, the HS2 leg up to Crewe and Manchester has been cancelled by the prime minister, meaning gaps in workloads need to be plugged. Now the housebuilder Vistry is putting the squeeze on its supply chain by asking them to agree to a 10% cut on prices for existing and future jobs.

The discussions have been 鈥減ositive鈥�, the firm says, but it feels worth mentioning that it went to subcontractors asking for the cuts, not the other way around.

This week, financial advisory firm Kroll said administrations among construction companies are on the rise this year and Sarah Rayment, its managing director, said: 鈥淚t is unsurprising that construction continues to lead the way, with traditionally low margins leaving little breathing space.鈥�

It all feels that right now is an incredibly difficult time to be a contractor 鈥� much  harder than normal.

Construction lawyer Rudi Klein, for so long a champion of the specialists, said: 鈥淭he supply chain is facing its greatest risk from upstream insolvencies for at least 15 years. Trade credit insurance is being withdrawn or reduced, thus increasing the risk for those SMEs which can still afford the premiums.

鈥淭ier 1 contractors are underbidding more and more and clients are putting off start dates for projects, adding to desperate pressures already on the supply chain. Clients, especially public sector clients, have not internalised the seriousness of the situation.鈥�

In its latest accounts, Vinci blamed the impact of fixed-price contracts for sending it to a 拢44m pre-tax loss from a 拢24m profit last time 鈥� a swing of 拢68m.

Inflation and subcontractor failures did for Bouygues鈥� numbers, too, with that business slumping to a 拢42m loss.

Both are part of much bigger organisations in France but the bean-counters across the Channel in Paris will surely only put up with so much before they wonder: why bother?

Vinci singled out two fixed-price jobs where it had lost money. In the accounts, the firm said that 鈥渋t had decided to stop entering medium and long-term contracts if they do not include fair price adjustment clauses鈥�.

Over the summer, John Sisk said its performance had been hit by the ongoing effects of covid-19 as well as 鈥渢he impact of energy costs on fixed-price contracts鈥�.

I think we have a very testing 12 months ahead. The consultant and client world needs to step up and take responsibility for the health of our construction market

Major industry client

Buckingham鈥檚 administrator Grant Thornton said the firm was hobbled by 鈥渟ignificant and increasing losses鈥� on several sport and leisure schemes, which it put down to 鈥渋nflationary pressures鈥�. Buckingham went down owing the supply chain 拢108m. Two firms were owed more than 拢4m each.

There is a pattern emerging here which makes it seem inevitable that more and more contractors will simply not tender fixed jobs because the risk is too great.

鈥淚 think we have a very testing 12 months ahead,鈥� one major client said. 鈥淭he consultant and client world needs to step up and take responsibility for the health of our construction market.

鈥淪top pushing risk down the supply chain. It鈥檚 far too fragile right now.鈥�

>>See also:Why are you still participating in the race to the bottom?

>> See also: Marginal gains: Why contractors need help to make a bigger profit

>> See also: Laing O鈥橰ourke and client in talks over cost of design changes on 拢600m Olympia scheme

Those who have been in the industry a while sense there is a storm brewing. 鈥淚n a relatively short space of time, we have had covid, then inflation following [the] Ukraine [war] and there is less work around,鈥� says one boss. 鈥淚t has weakened a lot of organisations.鈥�

Those firms with good balance sheets 鈥� Morgan Sindall, Galliford Try and Balfour Beatty stand out among the listed contractors 鈥� seem better set to withstand the headwinds. John Morgan at Morgan Sindall Bill Hocking, his counterpart at Galliford Try, have both stressed the importance of building up a decent balance sheet.

In August, announcing improved interim results, Morgan Sindall chief executive Morgan said: 鈥淥ur strong balance sheet, with a substantial net cash position, allows us to continue operating efficiently and effectively and to focus on making the right decisions to drive for long-term sustainable growth.鈥�

A month later it was the turn of Hocking to pipe up for financial prudence. Galliford Try remained debt free in the year to June, he said, and had average month-end net cash of 拢135m.

Hocking added that subcontractors were reassured by the company鈥檚 balance sheet. 鈥淚t鈥檚 very important because they know they will get paid.鈥�

In its interim results, Balfour Beatty boss Leo Quin called his firm鈥檚 net cash position of 拢695m 鈥渟ector-leading鈥�, which gave the company 鈥渃onfidence in profitable managed growth鈥�.

Those balance sheets have not just happened overnight, as one rival chief executive admiringly points out. 鈥淭hose firms are plcs, they鈥檙e not lifestyle businesses. You can鈥檛 take money out of a business to finance a lifestyle. You have to leave money in for the rainy days.鈥�

Not everyone who experiences financial peril does that, of course. Some are just caught out by a job that goes wrong at a price that was wrong in the first place.

What other industries put people at huge risk for a 3% margin 鈥� if you鈥檙e lucky?

Industry consultant

But the problem is that, with margins so thin, it doesn鈥檛 take much for a small issue to snowball and become much bigger and much more serious. 鈥淲hat other industries put people at huge risk for a 3% margin 鈥� if you鈥檙e lucky,鈥� says one consultant.

鈥淭he focus should be on quality, people and doing a good job 鈥� not lowest cost all the time, which will always drive behaviours in an inevitable direction. This inevitability will always result in disappointment.鈥�

In the absence, then, of any definitive answer as to what to do, perhaps it is time to revisit the words of Scape chief executive Mark Robinson from earlier this year.

This is what he told 黑洞社区 in April. 鈥淟et鈥檚 fix the profit for the delivery partners so they can worry about delivering the project and focus on the project.鈥�

In other words, set profit margins at an agreed figure 鈥� his is 5% 鈥� and it will revolutionise how clients commission work and how the industry operates.

Clients would have transparency and not have to wonder whether budgets were being inflated by firms to squeeze more money out of jobs. And contractors could be left to get on and build what they have been asked to without steeling themselves for post-project disputes.

鈥淎rguing about cost does affect productivity and, if you fix it, all that goes away,鈥� Robinson added. 鈥淭his one change could revolutionise how clients commission work and how the industry operates.鈥�

Call him naive, an idealist, living in la-la land or whatever. But right now Robinson鈥檚 proposal seems a pretty decent shout. Firms should go bust because they are incompetent, badly run and do a terrible job. But not because the cards are stacked against them and the best they can hope for is a 1% profit.

Dave Rogers is deputy editor of 黑洞社区