Construction News brought the leaders of Bam Nuttall, Hochtief Construction UK, ISG, Mace and Robertson Group together for a panel discussion at the CN Summit 2016.
The group discussed the role of tier ones in the future, how to improve margins, mergers and acquisitions, skills, Brexit and more.
SF: Steve Fox – Bam Nuttall chief executive
SC: Sally Cox – Hochtief Construction UK managing director
PC: Paul Cossell – ISG chief executive
MR: Mark Reynolds – Mace chief executive
BR: Bill Robertson – Robertson Group chief executive
On… low margins
SF: “[Low margins are] a consequence of subcontracting everything and the huge level of competition in the UK. It is the most fragmented construction industry in the world. An industry of two million people with 200,000 employers so there’s a huge amount of competition.”
PC: “We were a PLC where there’s a constant drive each year to grow. There’s a dynamic, where you always chase more volume. We have now turned private so we’re empowered to make smart decisions and focus on margin. We’re hoping to buck the trend.”
MR: “Part of it is consultants and clients only think they should pay 2-3 per cent because it’s the going rate. Everyone talks about turnover and not margin. If I sat here and said our goal is to make 10 per cent margin, most of our clients would stop phoning me.”
“I do think there is unnecessary mark-up on mark-up, which is part of the issue with fragmentation. There is a point in the future about main contractors taking on more direct work around their skills and capabilities. There might be one or two who might have deep enough pockets to set up a manufacturing centre but they’ll be few and far between.”
SC: “We’re doing more and more upfront work on preparation for tendering and more and more info is being requested and that eats into our profit. The market being driven by the client is very low profit.”
BR: “There are not many contractors that bid at 1 per cent, there are all sorts of reasons for that. But there has been big learnings including too much reliance on the supply chain and a drive for volumes. We have been selective and volume is generated by the margins we can make in the market.”
BR: “I think the industry is at a period now where it’s changed from companies like mine 50 years ago when we started and McAlpine employing and training all their own people. It’s got into a picture where bigger companies were happy with 2 per cent because they subbed all the risk and work off to subcontractors.”
SF: “EY did a big report predicting consolidation in the industry, the theory was sound but the fundamental flaw with it was that construction companies aren’t going to buy other construction companies. If they’ve got cash to spend, they’ll spend it on something other than construction. You look at the PLCs, they’ll buy a services business and their businesses are shifting away from construction.
“This industry has the least barriers to entry, the consequence of that is there is massive fragmentation and [smaller companies] try to step up so the problem is self-perpetuating.”
MR: “I think you’ll see consolidation, but nothing huge. There’ll be a few big names might get together. I think we should be focusing on productivity and coming up with innovative ideas to drive some change in the industry. If I can walk into a client and say I’ll knock a year off your project, I bet I’ll get 10 per cent.”
PC: “The challenge for industry is that we need to improve. A mindset of expecting customers to pay more so we can improve is not realistic. We’re an industry that’s not changed much over the last 30 years. The tech industry is looming but none of it is properly embraced. The ones who get good margins will be the ones who embrace that change.”
SC: “It’s not just us who don’t like change, clients don’t either. Even when you get a good solution and something the industry should embrace and move on, we don’t necessarily move quick enough.”
MR: “Currently we spend around 1.5 per cent of our revenue on R&D, we’re looking to increase that to 3 per cent over the next 5 years. There is lots of R&D going on in the projects that we do day-in, day-out. What we don’t do is share those as an industry.”
SF: “Industry is very good at celebrating incrementally small innovation. We do pathetically small things. We’re still laying bricks, we’re still pouring concrete and everything we do on a construction site pretty much looks how it did when I got into the industry.”
SC: “I spent quite a bit of time in Australia and most of the bridges were fully precast, they came straight off a lorry. We need to start changing how we design things and how we fit them into the infrastructure we’ve got here. We need to look at making things robotic. We won’t necessarily need plant operators in the future.”
On… the ’Uber threat’ or ‘opportunity’ to the construction industry
PC: “I wonder will it be driven by customers. Certain global customers think differently. We built a significant data centre three years ago and it took us two years to build. Next year, driven by the customer, not us, with them driving it, we will build a bigger data centre in 12 months. The design is all automated, it comes with barcodes like a jigsaw puzzle. The [catalyst was from] a customer that was smart and made us embrace innovation.”
MR: “In a few years time [using BIM and clash detection] once you can see all those bits, you can buy things differently. Take a building: you can do the foundations and trenches pre-assembled; put a modular building on top; the plant room is done in pre-assembled package units with a third of labour and has all the data records in terms of flow rates approved; pre-fab toilets, bathrooms but using some elements traditionally.
“You use a drone to [do the snagging on cladding]; it can be done from an office in two days rather than on site in four days, up in the air.”
SC: “We talk a lot about diversity and I clearly go under the category of diverse… but if I look at ten friends of mine who are women, I promise none of them would want to be in construction because of the image we have.”
SF: “The industry needs a coordinated system so we can engage. Try and talk about STEM in schools, it’s easy. To talk about core skills and trade skills it’s really hard and I can’t fill our places, we’re unsubscribed.
“What we don’t know and we’re not very good at thinking about is what we’ll need in 10 years’ time. We have to appeal to the next generation in a completely different way, the jobs and skills need will be different.”
PC: “If you picture an industry that becomes more tech-led, you need less people. That’s one advantage with the shortage and the type of people you attract will be different to something more sophisticated. We’re a bit faceless, we’re not well-represented. If we can get those bits right, get a change of image, we’ll evolve into something better than we are.”
MR: “The capabilities are there, we now need to show young people in the industry. There have been transformational performances in health and safety, none of us mind sharing performance statistics, we sit down together. If we all work together and sign up to what Build UK has asked us to, I don’t care if it’s a Bam, ISG or Mace presentation, if it’s presented with passion and energy, young people will sign up.”
SC: “When you talk to youngsters about why they don’t stay in the industry or why they’ve left, they’ll look at the fantastic pictures of construction… then they see the terms and the hours. They want to be near home, they want to be out on a Friday night with their friends. We have to change how we portray they industry. They’re fantastic gamers, we definitely need that skillset, but we don’t go out and say ‘you could do that for us in a 9 to 5 job’, they don’t know what’s there for them.”
BR: “I don’t think it’ll affect us much. We have a good projected workload, we’re heavily public-sector dependant and the public sector have a big requirement at the moment.”
MR: “It’s definitely had an impact. We’ve had a couple of projects stalled or cancelled in London. We’ve had the implications of the pound fluctuation impacting on our subcontractors and we’ve seen volumes drop next year. We’ve seen clients think it’s an opportunity to take 0.5 per cent to 0.75 per cent off our margins.”
PC: “We had three projects put on hold following the vote but all three came back onstream, the last of which was last week. That’s encouraging. Our forward order book is looking pretty flat. We’re not anticipating a big impact in 2017 but like many others thinking about it further down the line. Our Munich and Frankfurt offices are gearing up for growth, perhaps we might lose in one area or grow in another. The other thing we’re conscious of is the mobility of people.”
SF: “Our work is predominantly public or regulated sector. [Andrew Neil: “You might get a boost then if the chancellor releases money in the Autumn Statement”]. Normally the chancellor releases money and it goes to consultants and we see it about four years down the line. Of the couple of private sector jobs we’ve got, one of them did stop.
“A potential bizarre consequence is if we do stifle the labour market, it will drive up prices. That may force the issue with changing the industry. We are dictated to by our client base and their consultants, plus European procurement rules, so it’s difficult to change anything. But perhaps those things might enable us to accelerate the change we desperately need.”
SC: “Biggest concern is just the uncertainty. We have a lot of people who move between Europe and the UK for work, so making sure that’s still open, I’d be very surprised if it wasn’t. We’ll need skills from everywhere, so hopefully that will remain.”
Catch up on all our coverage from the Construction News Summit 2016 here: https://www.constructionnews.co.uk/home/cn-summit-2016