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Costain to pass less profitable work to supply chain

Costain is passing traditional construction work to its supply chain as it targets a 4 per cent margin, its new chief development officer has told CN.

Mark Rogerson MBE, the former RAF wing commander who joined Costain from support services firm Serco, wants the firm to “grow and develop more scale”.

However, this is not to be done at any cost, as the company evolves into a “programme integrator” and tackles the UK’s £250 billion infrastructure challenge.

“I see us as a complex programme deliverer or integrator that manages the programme on behalf of the client,” Mr Rogerson told CN.

“Will there be contractors in our supply chain who are doing some of those activities that we traditionally did? I’m sure there will be. But will we be doing them ourselves? No.”

Mark Rogerson Costain

He said clients are now looking for greater expertise and understanding in areas such as environment and sustainable solutions, carbon management, supply chain management and asset management that enable a firm “to better optimise the through-life of an asset”.

Costain’s joint venture with Skanska has won five Crossrail jobs.

Costain is also working on the £400 million London Bridge project and, most recently, landed the £288m Magnox nuclear decommissioning deal with Balfour Beatty.

Mr Rogerson, whose Serco experience spans defence, nuclear and aviation, as well as time in North America, said contractor-client partnerships will be central to the successful delivery of a scheme such as High Speed 2.

These are already evident with clients such as the Highways Agency and on projects such as the £400m London Bridge transformation.

“The DNA of Costain has to be help our customers with the intelligent design, help engineer this intelligent design solution through the construction phase and then help them maximise the through-life value of the asset,” he told CN.

“It would be foolish for me to suggest for a moment that one organisation the size of Costain can deliver all of the programmes and projects that some of our clients want to do.”

Costain 4D Southern Water tunnelling utilities

Asked if Costain is targeting the sort of volume handled by rival Balfour Beatty, Mr Rogerson said: “My personal view is that anybody who’s leading an organisation like Costain, with its position as a FTSE-listed company, would want to be larger scale with greater depth of opportunity and capability, because that adds value to our shareholders.

“Do we want to grow and develop more scale? Of course we do, but we are not going to do that at any cost.”

Costain has flexibility for organic and acquisitive growth, with banking and bonding facilities of £465m and £130m in cash.

Its latest buys include industrial services firm Promanex and consultancy ClerkMaxwell.

However, analysts have suggested that Costain is ripe as a potential target at its current valuation and with its client base.

The move away from traditional construction activities means Costain will leave behind the days of a 2 per cent margin – a level described by Mr Rogerson, former head of operational efficiency at Serco, as “not acceptable”.

It reported a 2.5 per cent operating profit margin for 2011.

“Why on earth would we think we want work that’s offering us 2 per cent? I would expect to see this business operating at 4 per cent-plus margin,” he said.

“For me it’s about risk management and portfolio management. [If you’re in] traditional construction and continue bidding at a 2 per cent margin and get it wrong, you have a real problem because there is nowhere to go.

“Do we want to scale? Of course. But it can’t be and won’t be at the expense of quality work, where the risk is well understood and the value to our customers means more.”

But he added that the real impact and outcomes were going to come through the relationship “behind the contract signature”.

“The British contracting environment has come a long way in the last 25 years in terms of strategic partnerships, but I really don’t think that we have fulfilled the potential of what real partnerships mean,” he said.

“To get a 100 per cent partnership, there can’t be a blame culture.”

Costain has a forward order book of £2.4bn, 90 per cent repeat orders and a focus on complex economic infrastructure aimed at “meeting national needs” in areas such as water, rail, aviation, highways and energy.

Support services now represent 28 per cent of the £850m of revenue secured for 2012 and are on track to increase to 40 per cent. 

This target comprises the maintenance side rising to 25 per cent of the business and consulting to 15 per cent, both in the next two to three years or ‘mid-decade’.

 

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