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FM's competitive market calls for new solutions

As activity increases and competition heightens, FM contractors face more demanding clients and a growing role for building information modelling.

“Just being able to change a light bulb or paint a wall isn’t enough anymore,” says Katy Dowding, managing director of Skanska UK’s facilities services business, when asked about the changing landscape of FM.

The provision of services has become an increasingly important part of the mix for contractors, as their clients have simultaneously become more sophisticated and demanding in terms of value.

“Clients want more for their money,” Ms Dowding explains. “They are looking for intelligent FM providers.

“You have to be able to intelligently inform them about what to do with their asset and how to manage it from a sustainability perspective. All these things are important now.”

*Norland’s results are for the 39 weeks to December following change in financial year-end; previous data was for 12 months to March

It isn’t hard to see why more is being asked of providers. Put simply, more is being spent on FM, despite the relative hiatus in new public sector capital spending resulting in a lack of new FM contracts in the run-up to this year’s election.

Of the top 10 FM providers by revenue, eight grew their turnover in 2014/15.

Exponential growth

The consensus is that the next 12 months will see growth accelerate exponentially as long-planned projects - and the FM requirements that go with them - finally come to market.

CN100 2015_Turnover growth top 10 FM

“There was a lot of hesitation around tenders pre-election,” Ms Dowding says. “But what we’re starting to see is that the gates are opening again.

“Plans that were started prior to the election and then put on hold have come out now there’s more certainty. Having a majority government, regardless of colour, helps that; into 2016, I would expect to see a continuation of growth in outsourcing.”

Central government contracts in particular have been slow to come to market, according to Ms Dowding: “They’d come out with one form of procurement and then they’d reshape it and look again.”

Kier’s FM managing director Steve Davies echoes this, claiming that both public and private sector FM procurement stalled as the election drew nearer.

“The councils have been waiting to see what happened to the political landscape, and private sector clients as well,” he says.

“I think clients have gone out to the market with a tender for work and have been slow in making their decisions. Tender deadlines have slipped.

“I think clients have been extending existing contracts to see what happens in the future; a lot of people were waiting for what happened in the election.”

Tight public sector

Even setting aside any election-related slowdown, those providers heavily geared towards the public sector are finding themselves working to tighter and tighter margins.

In a report on the sector, covering both hard and soft FM, published shortly after May’s election, investment bank Liberum found that outsourcing was still unpopular among consumers and claimed government outsourcing contracts had “become increasingly uncommercial”.

“There was a lot of hesitation around tenders pre-election but the gates are opening again”

Katy Dowding, Skanska

The report quoted Serco chief executive Rupert Soames, who said that in recent years “the terms of government contracting have become quite incredibly harsh”.

Interserve has also indicated it will see a 12 per cent profit hit next year due to wage hikes under the government’s new national living wage.

Despite these concerns, Liberum predicts growth in the UK’s FM market of 5 per cent for both 2016 and 2017, contrasting that growth with a stagnating market in the rest of Europe.

For some, increasingly demanding contract terms are an indication that buyers in the market are becoming more discerning, despite the expectation that there will be plenty of work to go around.

Evolving landscape

“One of the things you do see more is that, whereas before people would have given all their FM to one provider, now they put it all out to competition,” Ms Dowding says. “FM providers at the top of the tree are those that keep evolving and offer a wider range of services.”

Mr Davies agrees that clients have become more sophisticated in how they procure services, suggesting this could lead to more consolidation among providers. “When clients procure their services, they have become more expert,” he says.

CN100 2015_FM highest and lowest operating margin

“Those organisations that offer the whole service will be seen to be major players in the market. Those small, niche players will become prime targets for bigger organisations that want to offer more services to clients and can acquire those skills. Buying expertise into your organisation is a smart way of growing your business.”

While FM contracts that piggy-back onto new capital projects have been in relatively short supply as public and private sector clients waited for a new government, providers focused on servicing existing facilities were seeing an upturn in work.

Mitie, which tops the FM table, completed its exit from M&E during the last financial year.

Though that decision saw the group take a financial hit, it has left its FM arm unaffected by the notoriously mercurial construction market.

“We have no exposure to main contractors and that’s been a positive for us,” says Mitie group corporate affairs director John Telling. “If a development project doesn’t happen it won’t affect us.”

Mr Telling adds that his firm has seen “no hiatus” in work over the past year. “I think the economy was in a significantly better place than before the [2010] election; people were generally feeling more confident about things.”

But even those with a business focused on the public sector can see a healthy pipeline opening. Housing is expected to yield plenty of work over the next
12 months and beyond.

“The housing market will accelerate rapidly,” Mr Davies says. “There are significant projects round the corner and the stock will grow quickly.”

Private party

In the private sector, growth in new commercial schemes is likely to produce more FM work in its wake, according to Ms Dowding. “What we’re seeing is this boom in building driven by the commercial office sector that we will see turn into maintenance contracts going into 2016 and beyond.”

Whether in the private or public arenas, one part of the FM mix that will become increasingly important is how providers use technology - particularly BIM - to deliver better services.

“Those organisations that offer the whole service will be seen to be major players in the market”

Steve Davies, Kier

Mr Davies says BIM has become so vital that he is looking to hire a specialist to lead his team’s technology push. “I see it as a good thing to get involved with construction colleagues to make sure we’re designing a building that’s fit for the future.

“Our BIM expert would look at better use of space and reduce the risk element. If we model it right in the first place, it will help adjust risk in the future and be more accurate with what we give to clients.”

Ms Dowding agrees that BIM “will play an increasingly major role” for FM providers.

“The big thing with BIM is how you use that information for intelligent asset management.

“We can use BIM to look at alternative maintenance regimes or lifecycle models. It’s about collecting data to be more intelligent about how to manage the building.”

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