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Tier ones dreaming of 'test tube' margins

David Price

Galliford Try construction chief executive Bill Hocking used an interesting metaphor to explain tier one margins when I spoke to him this morning.

“I liken tier ones at the moment to an egg timer,” he said – specifically the hourglass shape.

“At the top you’ve got […] clients, designers and consultants, then you’ve got the squeeze in the middle which is the tier ones, and then [below are] the tier twos and threes who are making sensible money.”

This metaphor was reflected in this year’s CN100, which revealed that the top 30 contractors – almost all tier ones – are making an average margin of 0.6 per cent, while those below – mainly tier twos and specialists – are averaging 2.5 per cent.

Continuing his shape-based metaphor, Mr Hocking argued that “tier ones have got to turn that egg timer into a test tube”, reducing the squeeze by making margins closer to those of the rest of the supply chain.

In the absence of a productivity explosion, we must recognise that there is only so much profit to go around.

For the tier one share of profits to grow, you would have to see a simultaneous reduction in margins for other parts of the industry.

It is hard to see an argument for subcontractors giving up their margins for the sake of tier ones, so we are left looking at clients to make a change.

One of the main factors preventing profit flowing from the top down to tier ones is that some clients see contractors as interchangeable and are happy to award jobs to the lowest bidder.

The challenge for tier ones is to prove they can offer something more and give clients total confidence in a project being delivered safely, on time and to budget.

Such confidence comes when a contractor has a track record of meeting these criteria.

Yet many major contractors are seeing their success stories overshadowed by high-profile problem projects – Balfour Beatty and Galliford Try’s embattled Aberdeen Western Peripheral Route being one such example, as the latter highlighted in its results today.

Lessons, we are told, have been learned from the last few years, and firms say they are walking away from more work, especially when it comes to fixed-price contracts and onerous terms.

For clients to decide it’s worth paying more for a better contractor, tier ones need to push back and prove their value on a consistent basis.

In the longer term, fundamental changes such as large-scale offsite construction have the potential to offer improvements.

But in the short term, proving their consistent value is the best bet for tier ones to boost their margins.

This depends, of course, on reputable firms not giving into excessive client demands by undercutting the market.

This week’s ONS data shows the sector is growing, shifting power back towards contractors and allowing them to be more selective.

If tier ones use this growth period to prove the benefits of paying more for quality contracting, then we could see a longer-term shift in their profits.

A perfectly equal ‘test tube’-shaped supply chain is unlikely, but the squeeze on tier ones could at least be eased.

Readers' comments (2)

  • I've said it before, collaboration, let everyone win with agreed returns, ie cost plus, let the industry use innovation to give best value, let teamwork be the winner, then you get the test tube results for all.

    PM.

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  • What a poor analogy

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