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Interserve MD reveals how construction arm will shrink

Interserve Construction managing director Gordon Kew has told Construction News the firm’s turnover will reduce over the medium term as it targets higher margins.

Mr Kew reiterated chief executive Debbie White’s recent prediction that the construction arm of Interserve will shrink.

“We are shrinking,” he said. “But it’s not a massive contraction by any means.”

He predicted that turnover would decrease by “less than 10 per cent” over the next few years as the company becomes more selective about the contracts it bids for.

Mr Kew said his “margin aspiration” was around 3 per cent for the UK construction business.

To help achieve this target, Interserve intends to increase standardisation in its construction work with more offsite capacity, which will “guarantee quality and programme” and reduce risk.

However, Interserve’s ability to invest in new construction methods will be limited.

“It’s fair to say any capex or investment decisions are under a lot of scrutiny,” Mr Kew said.

“I think in the short term in developing our offsite products there will be much more collaboration and partnership with our supply chain, rather than making any big investment decisions.”

Mr Kew rejected the suggestion that Interserve could get left behind by competitors with the ability to invest in these areas over the coming years.

“I think we’re pretty good at leveraging the technology that we’ve got,” he said.

Interserve waste treatment centre Sinfin Derby

Interserve waste treatment centre Sinfin Derby

A plant in Derby is among Interserve’s remaining EfW projects

EfW risks examined

Interserve’s capital investment is limited because of the £834m in total borrowing that it has to start paying down to meet financial covenants by June 2020.

Covering losses from energy-from-waste projects has been a major contributor to this debt, and chief executive Ms White has said Interserve should be able to draw a line under EfW losses by the end of 2018.

The company has one such project on which construction work is ongoing and three at the commissioning stage.

One lesson that Mr Kew said the company had taken from its EfW difficulties was to be more careful when assessing liabilities and risks.

“The risk share has got to be appropriate, and the risk should always sit with the person most able to discharge that risk,” he said.

“I think that when we get into an unbalanced contract where risk is passed onto a contractor but they don’t have that control over it, then you’re onto a rocky road.”

The construction MD gave the example of a contractor taking programme risk linked to planning approval being granted on the scheme when that element is managed by another party.

“If a client’s going for a site to get planning permission and there’s programme impact in that, then it’s not right that the contractor takes that risk,” he said.

Mr Kew argued that the industry took on too much risk during the recession, which then lasted longer than many expected and after which prices rose faster than some had hoped, further squeezing margins.

Under Ms White’s leadership Interserve now holds weekly review meeting of all potential bids as the firm focuses on reducing risk and improving profitability.

“We’re pretty ruthless at rooting out those [contracts] that don’t suit our operating model or aren’t going to deliver the margins or risk profile that we want,” Mr Kew said.

The regional businesses still have the freedom to go out and find work, he added, but there was now “more governance” over what the company actually bids for.

Debbie White Interserve

Debbie White Interserve

CEO Debbie White has rolled out weekly reviews of all potential bids

‘Killer’ uncertainty

Opportunities for new work in the UK will be varied across different construction sectors over the next 12-18 months, according to Mr Kew.

“My feeling is London is a little bit quieter, the regions a bit more buoyant,” he said.

“I think commercial [development] is back in the regions, PRS is very, very strong outside of London as well.”

The construction MD added: “I’m cautiously optimistic for the markets, but we’ve all got this spectre of Brexit that creates uncertainty, and uncertainty is the killer of capital expenditure.

“I think we’ll be looking for government to support the market during the next couple of years.”

The other uncertainty hanging over the industry is the fallout from the Grenfell Tower fire last June.

In the wake of the fire, Interserve carried out a survey of every tower over 18 m high that it had built in the past 12 years.

“It was a mammoth exercise in collecting the data about what products have been used and what level of fire inspection had been done,” Mr Kew said.

“But the results were quite pleasing […] all of the projects we constructed were compliant.”

Grenfell Tower fire burnt out exterior external_JC8T6M-2

Grenfell Tower fire burnt out exterior external_JC8T6M-2

The fallout from Grenfell is one uncertainty for Interserve and the sector

He confirmed that Interserve had not had to go back and remove any cladding on former projects.

However, there was one current project where assessing the cladding had “some impact during construction”, but this had been resolved and the project was now almost complete, he said.

In spite of Interserve’s financial problems over the past two years, Mr Kew said he was proud of what the construction division had achieved in that time.

“We’ve managed a great number of client relationships through difficult times and continue to deliver for them,” he said.

“We’ve grown the Paragon brand in parallel with that, and we continue to deliver a lot of challenging projects and delight our clients.”

With some of Interserve’s problems addressed by the recent refinancing, Mr Kew said he wanted the firm to become a leader in improving the industry’s reputation by being “easy to deal with” and delivering projects on time and in budget.

“That’s a very simple thing to say, but a very complex thing to deliver,” he said.

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