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Power swings towards the specialists

David Price

Power in contracting swings like a pendulum.

For a long time it has been concentrated with the tier one firms. Their ability to manage multiple packages of work across various disciplines was meant to de-risk projects and give clients and their funders greater confidence.

This capability has faded as some have diversified far beyond their original fields of expertise and lost that ability to effectively manage projects – Carillion being an extreme example.

In compiling this year’s Specialists Index, I was told by multiple subcontractors that tier one firms are being cut out on more and more jobs.

Construction management and other more direct contracts between clients and specialists are in fashion.

The reasons for this are easy to guess.

In the wake of the Grenfell tragedy and Carillion’s collapse, clients want to know more about who is actually doing the work for them. They want to understand projects better and know where the risk lies.

Naturally this leads them to the specialist contractors, who – after all – employ most of the labour, do the detailed design and often carry out the actual work as well.

So opportunity comes knocking for specialists to take more power – and they are well placed to make the most of this.

Many have made significant capital investment in recent years and also expanded their design and engineering teams, making them more productive and helping manage the extra risk they absorb on such jobs.

The returns on this investment are reflected in this year’s Specialists Index, which showed median margin across the top 70 firms hitting 6.7 per cent.

The growing strength of the specialists is not the end for tier ones though.

First off, CM does not suit every job and requires a sophisticated and experienced client to be successful.

Secondly, there is an important role for tier one firms in CM. We hear that the likes of Lendlease, Mace and Sir Robert McAlpine are all leveraging their track records as tier ones overseeing jobs in order to secure new CM roles from clients.

This will mean lower turnover for some, and Lendlease’s most recent results showed a £278m drop in revenue due to taking on more CM work . Yet at the same time, its margin went from 3.4 to 5.2 per cent.

Such work could increasingly appeal to tier ones as pressure on their models continues to grow – pressure which manifested itself last week with Kier’s £264m rights issue.

What was most interesting about this was that demands from stakeholders to pay suppliers more promptly contributed to Kier’s cash call.

The direction of travel on payments is clear, with the public sector likely to pressure tier ones to improve their payment performance, which will mean they need more working capital – making those skinny margins even less sustainable.

The power of the tier one model as we know it looks to be on the wane, with the pendulum is now swinging towards specialists. How far and how long it swings that way remains to be seen.

Read the 2018 Specialists Index for free and find out who’s up and who’s down

Readers' comments (1)

  • what goes around comes around, when I started most of the big contractors had their own labour, they shed their direct workforce to push that risk to the specialists, subbed out the work, controlled the cash and picked who they wanted, take out retention and debt levels and most of them are in trouble unless they have house building divisions making 30% profit, PM

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