“I mean, it’s hopeless isn’t it.”
That was Sir John Armitt’s response when I broached the subject of contractors’ margins on Friday.
Presenting him with the findings from Construction News’ CN100, in which we found that the UK’s largest 25 contractors were working with average margins of 1.2 per cent, the ICE president was clear.
“With margins like this there is nothing left for proper investment, risks become all dominant and it doesn’t take much for things to go the other way and get into serious trouble no matter how large [the company is].”
”Project margins that hit double figures and net margins of 4-5 per cent: that is where the industry should be,” Sir John said.
But how is this improvement achieved?
Having transformed the fortunes of Costain in four years and chaired the Olympic Delivery Authority, Sir John has seen it from both sides, and thinks changes from both sides is what is required.
Firstly, clients need to come up with procurement methods that spreads risk and prioritises value over cost and bottom line.
“With a focus on cost, contractors’ approach is about how can we [remove] staff here, how can we make cuts on plant here, and the net result is the problems we see firms getting into.”
Alliancing and framework models used in the public sector seem to be the answer, with Sir John singling out those used in the water sector and those by Highways England and Network Rail as good examples.
“With these we will see things finished on time and on budget and, importantly, contractors making better margins.”
But the burden should not fall on clients alone.
Sir John thinks an approach has been adopted by the UK’s biggest contractors that is too generalist and is hitting their bottom lines.
More vertical integration is needed, he says, with construction firms needing to look to the past to pick up bigger margins in the future.
“Not to get all grumpy old man on you, but it didn’t used to be like this: in the 60s if you looked at the Laings, Taylor Woodrows and Costains they had everything in-house – design, plant departments, M&E.
“We went the other way further than any country. Gradually that knowledge and specialist competency is lost, as it disappears to specialist contractors.”
If specialist contractors’ margins are anything to go by, it seems they are increasingly taking advantage of this specialist knowledge.
Sir John believes the UK’s biggest contractors could take a leaf out of their overseas competitors.
“You look at your Ferrovials, Bouygues, Skanskas and Dragados and they have much deeper in-depth competency and as a result offer more value to clients and get greater margins.”
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