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Innovation: Why contractors lose out

Because innovation is so common in the construction industry, it is taken for granted and goes almost unnoticed.

New components are used in combination with older, more familiar ones. Product manufacturers compete to bring fresh materials and components to market. It is then up to contractors to adopt them.

Construction firms innovate in spite of a variety of barriers, such as extremely low margins amid intense competition. Yet tendering firms, whether main or specialist contractors, are assumed to be providing the same outcome with the only differentiator being price – and the lowest invariably wins.

With low margins comes high risk. With margins typically at 2-3 per cent, a firm losing even £1,000 on a job has to do as much as £50,000-worth of work simply to return to the financial position it would have been in, had it not taken on the loss-making contract.

Fruits of labours lost

Not only do firms in the construction industry undertake new processes, work with new products and develop new management techniques, but the savings they achieve are ultimately passed on to their clients. They may benefit from the savings on their current job, but in the longer term, the innovating firms do not get to keep the fruits of their labour.

Any savings must be taken into account the next time the business tenders for work. If an innovation saves £10,000 then contractors will use that saving to reduce the value of their bids on future tenders in order to win the work.

“The financial beneficiaries of the new ideas in construction turn out to be the site owners”

However, developers soon learn that innovation reduces costs, and in turn, raise their bids when acquiring new sites rather than hold on to the cheaper construction costs arising from new innovations. The financial beneficiaries of the new ideas in construction turn out to be the site owners. So landowners receive higher bids as a result of lower construction costs.

Poor comparison

This contrasts with other industries. For example, as computer costs go down, computers become cheaper or more powerful for the same money. This means computer hardware suppliers increase their sales and hence revenues thanks to innovation.

They have an incentive to pass on price reductions to their customers to increase their computer sales. By contrast, construction price reductions do not increase contractors’ sales, partly because the total cost of a building is unchanged, as building costs go down but site costs increase.

And as developers do not build unless there is a need for building or renovation in the first place, they do not increase their demand in response to the price of construction work.

Stephen Gruneberg is a reader in the Faculty of the Built Environment at the University of Westminster

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