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Specialist main contractors: The industry’s silver bullet?

The growing trend among groundwork specialists of taking on all enabling works up to superstructure has seen profit margins at some firms hit 14-18 per cent. Is this the industry’s silver bullet? Binyamin Ali investigates.

Fragmentation is undoubtedly one of the most challenging aspects of how the construction industry operates.

There are specialist contractors for every stage of enabling works, superstructures, envelopes, materials – the list goes on.

When building a residential block, for example, all of these parties have to be separately contracted into the job, get themselves up to speed, and collectively build a safe and compliant building.

With the main contractor typically managing and subcontracting all those fragmented stakeholders, this creates risks that are partly responsible for the industry’s notoriously low margins.

What if, however, a client doesn’t want to use this model? What if they want a single contractor that can deliver most, perhaps all of the work themselves, can mitigate risk by removing the need to subcontract to specialists, and can offer improved surety of programme and delivery as a result?

From the ground up

A number of enabling works contractors identified this gap in the market several years ago, expanding their businesses to offer a range of integrated services as a result.

At the same time, the past 12 months have seen the industry come under increasing pressure to change its ways on several levels, ranging from the adoption of technology to supply chain relations.

Among many groundwork specialists, this is leading them to realise that they can change their business models to offer more services and act as main contractors, all while strengthening their profitability.

Keltbray was founded in 1976 purely as a groundworks contractor, steadily growing to incorporate demolition in 1984. Today the business can handle all enabling works in-house, from asbestos removal and demolition through to excavation, piling and concrete superstructure.

“Those enabling works boundaries have widened quite significantly – they have grown to include [all those elements],” says Keltbray group MD for commercial Vince Corrigan.

Specialists 2017 Demolition Erith Contractors

Specialists 2017 Demolition Erith Contractors

Because many projects in London often have a rail element, the group also added a rail division that targets this work either separately or as part of a wider contract. “In the rail world, we do rail civil engineering, rail piling and rail overhead electrification, [which] is probably the single biggest chunk of that rail entity,” Mr Corrigan explains.

Offering multiple services under one roof means taking on more risk, which means Keltbray is able to command a higher rate of return. “We look to have a gross margin position of between 14-18 per cent,” Mr Corrigan says. “Any firm that’s not trading at those levels is not really sustainable to continue with that model of self-delivery and investment within their own businesses.”

Clients benefit from less programme overlap and fewer interfaces between contracting parties, which mitigates some of the risk on a job. And because a client is dealing with a single contractor, Mr Corrigan argues, it is easier to be flexible in the event of unforeseen changes.

Keltbray is only able to deliver a building up to a point, however. Clients that use the company’s services up to the concrete superstructure phase must bring in a main contractor to handle the remainder of work.

Nevertheless, the substantial gross margins on offer, combined with the ability to mitigate risk across the whole enabling works phase, means that other groundwork specialists have followed suit.

‘The model is the right one’

Construction News spoke to one specialist demolition contractor that is also changing its business model to offer integrated services.

Until now the contractor had tried to have a series of jobs on its books, each worth £1m-£5m and all focused on demolition and early-stage enabling works.

Following a review of the business and the market, however, the company realised it was “dealing with a lot of the risk at the front end of the job, and so the view was taken that the right thing to do was to broaden the offering”, says one director at the firm who wished to remain anonymous.

The contractor has added to its offering and developed its skillset over the past 18 months to enable it to serve as a principal contractor. This means that, like Keltbray, it acts directly for the client and has complete control of the site during its time on the project.

Demolition_materials_rubble_site_construction

Demolition_materials_rubble_site_construction

“I think there are a lot of people realising the model is the right one and growing beyond their core capability to offer a widened offering to the market,” the director says.

This new approach offers advantages over the conventional model where the client would bring in a main contractor at the start of a job, which would mean “you buy the risk through the main contractor and into the trade contractors, so you pay for the risk at an inflated rate”, as the director explains.

Furthermore, if a groundwork specialist develops the methodology and design for the demolition, excavation, piling and basement, then the technical details will be more developed when the main contractor gets involved on the job, they argue.

Since the change in its business model, the demolition contractor has switched from having a high number of low-value contracts to a small number of high-value jobs.

Though the company is keen to steer clear of the ‘main contractor’ label, the scope and type of work it is handling directly for the client mean it is undeniably fulfilling this role. This can lead to friction between specialists and main contractors as they champion to the client the benefits of their preferred routes to complete the job.

“There is a little bit of overlap there and that can be seen to erode the main contractor’s scope – and inevitably it does,” the director says. “But if we take a step back and look at what’s best for projects and what’s best for the clients, then it is the right approach.”

This doesn’t mean they have “an appetite to be at war with main contractors”, they add. Rather, they are “trying to provide alternative solutions that better fit projects in the marketplace”.

Complete package

JRL is another specialist capable of offering a range of integrated services in-house.

Unlike the two aforementioned businesses, however, JRL started out as a concrete works contractor in 1996, and has expanded backwards to incorporate the full suite of enabling works.

In addition, the company acts as main contractor and has an M&E and drylining division. In late 2017, JRL completed the purchase of McMullen Facades following the collapse of its parent company Lakesmere, supplementing its in-house envelope division, UK Facades.

As a result, the company can singlehandedly deliver a building all the way up to the completion of drylining, with only the finishing trades left to subcontract.

“There is a little bit of overlap there and that can be seen to erode the main contractor’s scope – and inevitably it does. But if we take a step back and look at what’s best for projects and what’s best for the clients, then it is the right approach”

Once again, the driving force behind the company’s expansion of services was a desire to find a better way of managing risk. “Wherever we’ve seen a problem or a place where somebody else might let us down, our way of dealing with that has been to take that package on, bring it in-house and manage the risk, rather than subcontract it and hope to get away with it,” says JRL Group director Kevin Keegan.

The company’s largest main contract packages are in the region of £180m, Mr Keegan says, while the concrete structures business remains the cornerstone of the company and “ideally” forms part of any contract the business signs.

The group expects to post a turnover of around £500m in 2018, supplemented with a projected £50m from McMullen.

Mr Keegan says the margins JRL works to “are not huge”, but the oversight and control provided by its model makes for steady levels of profitability.

Is the model sustainable?

Keltbray’s Mr Corrigan believes its expanded approach offers a sustainable model through the peaks and troughs different types of work experience.

“The cycle [from] when demolition might start to go quiet, you’d be waiting another 15 or even 18 months before structures started to go quiet, because of the development programme,” he says.

“The cycle [from] when demolition might start to go quiet, you’d be waiting another 15 or even 18 months before structures started to go quiet, because of the development programme”

Vince Corrigan, Keltbray

Keltbray’s rail division had been facing an extended trough, however, due to a lack of clarity from Network Rail over electrification work in CP6 and beyond. This led the contractor to form a partnership with Canadian infrastructure firm Aecon that will target Canada’s 10-year $11bn rail overhead works programme.

Speaking to CN last month after the agreement was announced, Keltbray managing director for infrastructure and rail Phill Price said: “We were in a position, frankly, where we either downsized, which we didn’t want to do, or looked at where else in the world there was greater clarity of government commitment to spend.”

Keltbray is also close to agreeing a deal to purchase Spie’s distribution and transmission business, which provides design, build and refurbishment services for overhead power lines in the UK.

McGee CSCS card check

McGee CSCS card check

The contractor plans to continue with its model of self-delivery for these works. “In the utilities world, there are a number of major clients as opposed to one single client called Network Rail – so to that extent, its diversifying us,” Mr Corrigan says.

JRL’s Mr Keegan meanwhile says the group’s acquisition of McMullen was made with diversification in mind. “McMullen is a unitised system façade contractor, and that was important to us with the growth in tall buildings,” Mr Keegan says. “We think that looking at ways of improving the McMullen business and growing that business to cope with the growth in the tall building market is what [we should] be focusing on, rather than anything new.”

Other groundwork specialists that have expanded their services to encompass enabling works up to the superstructure stage include Careys, Erith and McGee.

The increased popularity of the model is no coincidence. As some of the margins being achieved illustrate, these specialists are playing a different ballgame to the rest of the industry.

All three specialists CN spoke to were at pains to point out that the model does not work for every project, and therefore should not be dressed up as a silver bullet for the industry.

But as all three were equally keen to highlight, their approach can offer a major advantage in a world of increasingly complex jobs.

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