Midas chief executive Alan Hope has called on the industry to push for margins of 3-5 per cent by convincing clients to change procurement routes.
Mr Hope told Construction News that contractors needed to increase margins in the medium to long term by showing clients the value of service they can deliver.
He was speaking after the Bristol-based contractor reported a turnover of £213.6m and a pre-tax profit of £1.6m for the year to 30 April 2017 in its latest results, shared exclusively with Construction News.
This compares with a turnover of £215.8m and a pre-tax profit of £0.2m in its previous year’s results.
Contract wins in the past 12 months include a deal to build one of the UK’s two government-backed nuclear colleges in Somerset.
Mr Hope acknowledged the group’s current profit margin of 0.7 per cent was “a fairly solid performance in a difficult few years for the industry”, but added that he had ambitions to push up the company’s margins in the short term.
“I’d like to get to north of 2 per cent as quickly as possible, because the wafer-thin margins that the industry is operating on are just not sustainable,” he said.
“Over the medium to long term as an industry, we have to improve our position in terms of what we get paid for what we do.
“For me, we provide a strong service that adds a lot of value for our customers’ projects; we’re providing an essential service for society, and we’re taking on board the management of a lot of risk.
“Really, for all that we’re doing as a construction industry, we ought to be making 3-5 per cent net margins as the norm.”
Over the past 12 months, a number of leading contractors, including Balfour Beatty, ISG, Laing O’Rourke and North Midland Construction have all set themselves a long-term margin target of 5 per cent.
To achieve these margins, Mr Hope said contractors had to convince clients of the benefits of different procurement routes, particularly negotiated and two-stage tenders.
“Single-stage, lump-sum tendering is just the wrong procurement route for what we do; just sticking out a competition with half of a design and saying, ‘Whoever gives me the cheapest price, I’ll use them,’ isn’t right,” he said.
“If you’re having a building built for you, you’re not buying a tin of beans; you’re buying a whole team of people who are managing a whole design and development process, and who are managing a lot of risks for you.”
He said Midas has focused on shifting its revenue away from single-stage bidding, with 80 per cent of the firm’s projects now won on a negotiated basis, through two-stage tenders, or through frameworks.
“You have to get a proper period of time to manage and understand the risks [on a project] and work with the whole team to get it right.”
Around 20 per cent of the company’s work is still won through the single-stage route, however, although Mr Hope said this was on a “very selective basis”.
“Our first conversation [with a client on a single stage tender] would be about doing it in a more collaborative way.”
He also called on the industry to improve customer focus and collaboration with clients to help push up margins.
“[Customer service] is an area where I think the wider industry needs to improve; you talk to a lot of customers and they don’t look forward to having a building given to them, because they’re late and over budget.”
More than 75 per cent of revenue this year has been on a repeat-business basis.
Mr Hope also revealed the firm was “moving on two fronts” on regional expansion, with Midas looking at further expansion in both the South-east and in Birmingham.
The contractor is opening an office in Leatherhead to serve the South-east, as well as an office in Longbridge to cover the West Midlands.
“We’ve been asked by more and more of our clients to move up into the Midlands. We’re not going there to chase competitive tenders; we’re going there because our existing customer base is asking us to go there.”
He added that the firm would continue to focus on its busiest sectors: student accommodation, retirement living, education, public sector frameworks and residential, which the contractor delivers through its Mi-Space housing arm.