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Contractors' troubles could herald a return to basics

David Price

Giants of construction have suffered a torrid start to the year. 

Carillion has collapsed, Interserve’s financial health is reportedly being monitored by Cabinet Office officials and Skanska is cutting thousands of jobs.

It feels like we’ve already had a year’s worth of news and we’re barely two weeks into 2018.

Carillion is by some distance the biggest story, not just for construction but for the country full-stop.

But now, as the focus widens after the initial shock of Carillion’s demise, sights turn to Interserve’s difficulties over the past 12 months.

The Financial Times reported today that the Cabinet Office had set up a team to monitor Interserve’s financial situation. The company’s shares dived 15 per cent on the news, but had recovered most of that within a couple of hours.

The Cabinet Office played down the story, insisting Interserve was not comparable with Carillion.

While the company revealed last week that its debt would hit £513m this year, its lenders have handed it both more short-term finance and time to get its house in order.

As one analyst said, Interserve is “no Carillion”. Nevertheless, right now it’s certainly not a poster child for success in this industry.

And as bad things come in threes, Skanska joined the army of gloom today by announcing it would cut 3,000 jobs worldwide following a drop in profit.

To be clear, Skanska is in no way in a position similar to Interserve, let alone Carillion. But there is an important similarity between these three to consider.

All three run (or in Carillion’s case, ran) diversified operations across construction, facilities management and development. These require different financial support – from the high cashflow of FM to the high capital investment of developing – as well as different management expertise.

And if one area gets into trouble it’s hard to ringfence the problems. Lack of payment on, say, a large contracting job in the Middle East starts to put strains on the cashflow needed to maintain a large FM operation.

In cases where these problems compound, they can lead to serious difficulties – as we’re now all witnessing with Carillion.

Last year’s CN100 showed the tiny margins some contractors were operating on, and the health of the current contracting model has been questioned for some time. The collapse of Carillion does, it seems, bear out some of those concerns.

But it could be a marker, a point where things have to change and lead to 2018 being a transformational year.

Contractors shedding some of their peripheral operations is on the cards and in its announcement today Skanska said it was looking to “focus on core business”.

The opprobrium that has rained down on Carillion since its demise for its attitude towards subcontractors has once raised the question of how the industry treats SMEs.

But if the days of the enormous diversified contractor are coming to an end, what replaces it might already be here.

In the past few years businesses such as Keltbray and JRL, especially since its acquisition of McMullen Facades, have diversified their expertise, offering groundworks, structural, building envelope and other services to clients, bringing specialisms in house.

The difference with this diversification is that they’ve stayed within construction and haven’t ventured into materially different areas.

They’ve accepted the risk of carrying out work usually done by subcontractors, but are confident it’s one they can manage and consequently reap rewards from.

In their last accounts, Keltbray and JRL registered margins of 15.7 per cent and 5.6 per cent respectively. These kind of returns won’t be ignored by others.

So perhaps the most transformational thing we’ll see in construction in 2018 is a return to the basics of building.

 

Readers' comments (1)

  • How about a return to the basics of contract risk management and accounting? When will main contractors learn that if you do not price risk into a tender for fearing of losing it, risk still has to be costed into projected job margin and any projected impairments, in advance? Moreover, dumping risk into the supply chain and not paying sub-contractors for 120 days is unprofessional, fatalistic and cynical.
    All main contractors need to maintain complete records of all their contracts and not have them dispersed across seven different ledgers. Carillion did not even observe basic risk management and financial practices and it twisted and perverted accounting rules.

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