Consulting giant’s move into the contracting arena has posed not only questions over whether it will work but what this means for the wider contractor community.
“Being a really good consultant doesn’t mean you can be a really good contractor.”
This comment from a director at one of the major established UK contractors sums up what many in the industry are thinking, after Construction News revealed that consulting giant Aecom has set up a contracting arm in the UK.
Contractors operate on a very different financial model, after all, plagued by the kind of tight margins that make consultants wince.
This might deter some of Aecom’s peers from pulling a similar move. But in a market where demand is consistently outstripping supply, maybe there’s more logic here than the doubters give credit for.
The US-headquartered firm certainly has the financial power to make it work. It posted revenue of around $19bn for the year to 30 June 2015, which will undoubtedly help shoulder the burden of setting up a new business.
But stepping aside from whether Aecom can make its venture into uncharted territory work, what does the news mean for established contractors?
Should they be worried? Or is this something they should embrace and learn from?
Foreign ties offer advantage
Overseas clients are itching to find a route into the UK development market, particularly in property – a market on which Aecom has signalled it will focus its efforts and which will certainly be one area of opportunity for the firm.
It counts Chinese developer Greenland and the Malaysian-backed Battersea Power Station Development Company among its long list of international clients that are either looking at or have recently begun developing in the UK.
These relationships may give Aecom a strategic advantage over contractors that are only just beginning to build ties with overseas clients.
“The problem is that when a project is all delivered through one organisation, you don’t necessarily get the questioning you should get”
New entrants may find Aecom’s ‘one-stop shop’ approach appealing, as it aims to offer clients a range of services from design through to completion.
“If I was an overseas developer and somebody I knew and trusted came along and offered me a package, I could see how that could be quite attractive,” one construction chief executive concedes.
But for more traditional UK-based clients, the model is anathema.
As one high-profile client argues: “The problem is that when a project is all delivered through one organisation, you don’t necessarily get the questioning you should get.”
This client describes the move as “rather weird”.
“I find it quite strange that an organisation, which is a consultant, is thinking of being a main contractor as well,” he says.
Earlier engagement adds value
For him, it is vital when developing a project to have a number of different partners considering and scrutinising it.
But that doesn’t mean some of the more traditional players can’t be swayed, particularly if Aecom is able to help them save money along the way.
On a typical project in the UK, for example, a client will select an architect to design its scheme, after which it will go to planning and then go out to the market to find the right contractor.
“The key to delivering good-quality value-for-money construction products is in design – a trick that the industry misses regularly”
But with rising cost inflation, the market too often comes back with a figure that is well in excess of the client’s budget, meaning the client either has to increase its budget or cut costs through design.
So could Aecom add value for clients here by engaging early with the design so the client has certainty over its budget before it goes to planning?
“The key to delivering good-quality value-for-money construction products is in design – a trick that the industry misses regularly,” one executive at a major contractor says.
This was where it was anticipated that Balfour Beatty would focus when it bought Parsons Brinckerhoff in 2009, although that merger ultimately failed. Here, Aecom has an opportunity to learn from the past.
Will contractors turn their backs?
The one thing that is certain is there’s certainly plenty of work out there.
As Aecom’s UK construction services director John Hilton told Construction News last week: “The sky’s the limit”.
But can the division make this leap alone?
One executive at a tier one contractor speculates that it is more likely the consultant will look to form joint ventures with other contractors to share some of the risk.
If that proves to be true, how open will established contractors be to working together?
“Maybe some of the big contractors that spend a lot of time, effort and money with Aecom will reflect on that”
Many of them may be naturally reluctant to help a rival onto the ladder.
Another consideration is the wider impact this will undoubtedly have on Aecom’s existing relationships with contractors – many of whom are clients.
“Maybe some of the big contractors that spend a lot of time, effort and money with Aecom will reflect on that,” one potential rival points out.
Another contractor goes a step further, suggesting contractors currently using Aecom for infrastructure design may turn their backs on the firm.
The cultural shift that Aecom will need to make in the meantime is huge.
Its response to resourcing, construction risk and project delivery, including health and safety, will be a major challenge for the consultant.
The industry will also be required to change its mindset to view Aecom as more than a consultant – a point that Mr Hilton accepts as a real challenge but one he is ready to face.
As more clients enter the UK, the property market will continue to evolve and traditions may fly out the window.
Against that backdrop, being able to offer a suite of services might end up looking like a pretty smart move.
Aecom reaction: Construction News on LinkedIn
Richard Graham, director of rail networks, CH2M
It seems that there might be parallels with Balfour’s acquisition and sale of Parson Brinckerhoff.
Does a client want or need a one-stop shop for its consulting and contracting services?
There are issues of potential conflict of interest and whether with many good services providers for each service in the market there is a value-add in having both service offers as part of the same overall enterprise?”
Craig Hatch, director of asset management, WYG
The cultural differences between the two business models make this difficult to pull off, but this model is more likely to succeed as a consultant-led model than an acquisitive constructor-led model.
The different margins cause problems, but the standalone business may help this.
Andy Stanford, director, Walsh
In modern-day construction, ‘contractors’ are becoming quasi-consultants.
Very few employ direct labour and it could be argued that many are now a multi-disciplinary consultant of project managers, planners, risk managers, logistic advisers, health and safety advisers, accountants and surveyors.
Harold Rousselle, vice-president, Pomerleau
Conflict of interest should be a concern. In Canada, we have seen public clients add in their tender documents prohibition to bid if related companies have been involved and rendered services to the public client on that job.