Early contractor involvement is “vital” if firms are to address productivity and profitability issues, according to two major contractors.
Speaking at 2015’s Construction Industry Summit, Mike Putnam, CEO of Skanska UK, and Paul Sheffield, managing director of Laing O’Rourke’s European business, argued that early involvement was key to tackling slow productivity growth and tight margins.
In a panel discussion, Mr Putnam argued that current profit margins needed to be “pushed up” while contractors still felt the effects of the recession.
“Our aim should be to push margins up, and improving key productivity is a key part of that,” he said.
“You can see better productivity and cost effectiveness when you get involved early with both the client and the supply chain.”
But he warned that there was “no silver bullet” for the industry’s productivity problems.
Peter Hansford, who will leave his role as the government’s chief construction adviser in November, echoed the sentiment, saying that profit margins were “clearly unsustainable,” but added that low margins should drive firms to “become more productive”.
“The business models we’re seeing in construction are no longer the most appropriate for how we become a first-class industry in the next decade,” he added.
According to the 2015 CN100, profit margins for the UK’s 100 largest firms fell to just 1.9 per cent, down from 2.4 per cent last year.
In a later panel discussion, Mr Sheffield agreed that there was still significant pressure on profit margins, adding that engagement was needed “before you even go into procurement” to ensure projects were as cost-effective as possible.
“I’m a huge believer in early engagement, where we can see exactly what the customer wants,” he said.
“We need to get everyone – contractors, designers, architects, clients – in the same room from the off to make sure everything is planned properly.”
Mr Sheffield said that the “rocket-fuelled” growth that the industry had seen over the past two years had “actually been quite destructive,” piling extra cost pressures onto contractors.
“There’s a belief that revenue growth means profit growth, but it’s not true”, he said.
Laing O’Rourke’s European business reported a £53m loss in its latest accounts for 2014/15.
The contractor, which is ranked the third largest in the UK in this year’s CN100, blamed “cost inflation and delays” on three UK contracts won during the recession for the financial hit.
Mr Sheffield added that there was no “five-minute fix” for the industry’s profitability problems.
“We have to remember we’re on a five-year journey to 2020,” he said.
“It’s about collaboration and sharing risk between client and contractor.”