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How to learn lessons from the recession

To the great relief of those still standing, recovery has reached the construction sector. But, as the outlook improves, it’s important for contractors to reflect on the lessons learnt – often painfully – during the downturn.

Coming out the recession will pose its own challenges but, having weathered the storms of recent years, there are some lessons in areas contractors should now focus on to drive performance and reinforce resilience.

Supply chain insolvency

Many contractors were exposed to the risk of subcontractor or supplier insolvency, something that may still feature in the early stages of recovery. But this could have been mitigated through better visibility of the supply chain.

Contractors should be exploring more advanced supplier risk assessments, rather than just relying on credit agency scores.

Robust compliance programmes and mitigation strategies can avoid over-reliance on a small group of subcontractors, ensuring teams negotiating contracts fully brief those who manage risk and protect margins.

Cash management

Closer management of working capital was essential during the downturn. The typical response was for procedures, such as weekly cash calls, but improving working capital performance requires the whole business to ‘think cash’ and understand their impact on performance.

“Contractors need to think about how they retain and develop their top talent”

With an estimated 80 per cent of working capital typically wrapped up in 20 per cent of current projects, contractors can also look at building separate cashflow forecasts for major projects.

Delaying payments to subcontractors is not the answer; this risks damaging the business and supply chain security. A more collaborative approach, bringing in supply chain finance and training subcontractors to manage finances, will strengthen performance and resilience.

Skills and training

There have been concerns that investment in workforce training and development has been inadequate.

“Cost control needs to be part of daily conversations about improving profitability, not just a response to market developments”

As the downturn hit, cost reduction programmes saw talent budgets reduced even further, which, coupled with falling employment, led to gradual ‘deskilling’ in the industry.

As growth returns, contractors need to think about how they retain and develop their top talent. Key to this is understanding the organisational strengths and where the company, and market, are headed.

Cost control

Cost control, vital during the downturn, will remain critical as clients look for savings and margins face pressure from construction cost inflation. Cost control needs to be part of daily conversations about improving profitability, not just a response to market developments.

Contractors will need greater appreciation of project terms and the real cost-to-serve, and learn from the performance on ‘bought’ projects to educate the business development teams about more sustainable pricing strategies.

“Data should no longer be seen as separate from day-to-day operations but a window into business operations”

With many contractors now stretched to deliver projects won on low rates, releasing tightened tendering and estimating controls as growth returns is vital to ensure the pipeline is sustainable.

Scenario testing the metrics that boards are willing, or able, to flex at tender stage, and how this affects the business strategy, will allow prudent and informed decisions to be taken during the tender process.

Business information and systems

Finally, as boards looked for greater insight into risk, operations and pipeline, contractors should question whether they had the right kind of information and systems to manage under challenging conditions.

Crucially, could their data be working harder to identify contracts with profitability challenges and eliminating wastage to deliver order books on thin margins?

Data should no longer be seen as separate from day-to-day operations but a window into business operations, through which new insights can be identified to find cost savings, serve customers and keep staff safe.

Jack Kelly is head of contractors group at Deloitte. Read the full report, Building blocks for growth

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