An end to exploitation
Construction’s recovery means that clients that have had the upper hand since the start of the recession now have to find ways of persuading contractors to work for them - so expect a lot more collaboration.
The state of the industry can be accurately summed up by the recent strong results from brickmaker Michelmersh. Brick prices are rising, to £348 per 1,000 from their previous level of £343 per 1,000. Apparently this inflation will continue through 2014 and some are starting to talk about a national brick shortage. The construction industry is back in business!
The challenge now is no longer one of survival through recession but expansion during recovery. Our industry is not the same one coming out of the long, dark slump as it was going in, and there are already signs, from the contractor community especially, that it is not back to “business as usual” with client-led demands shaping the response of a desperate industry hungry for work.
Sir David Higgins, newly installed at the head of HS2, has recently been keen to tell the industry that he wants a more ambitious, shrunken timeline to get the mega-railway under way. The supplier response has been muted, to say the least.
There is a new forthright confidence being displayed by firms that had to fight for work to survive post 2008 and now, having escaped, bloodied but unbowed, appear determined not to return to being treated as the poor relations in the new construction era.
Contractors in particular are clearly looking to re-establish their margins in order to pay off loans, provide dividends to shareholders and reinstate their balance sheets. The housebuilders are fine, their shareholders cannot believe their good fortune. For others, however, the times have been tough.
The industry has shrunk by 40% over the past six years and it is noticeable that the major subcontractors, for instance, are now much more sophisticated in their approach to controlling workload. Some argue that they may not work for clients with whom they do not have an established track record. Therefore for those planning new buildings and drawing up a schedule of costs, it’s not just about rising development prices but also the fact that the supply chain has been shrunk. Areas such as sub-structure, cladding and M&E are vital to the building going up and contractors will no longer be rushing to cut their throats to bid for whatever work is going. The firms around today simply don’t have the capacity to take on a lot of extra work and will not over-extend themselves as they may have done in the past.
There is a new confidence being displayed by firms that have survived the recession bloodied but unbowed and appear determined not to return to being treated as the poor relations in the new construction era.
The top contractors will now choose for whom they work and they often want an established relationship, a strong client covenant, a limited competitive tender process and guaranteed payment terms. In time there will be more suppliers coming back into the market but it will take a while for the industry to bounce back and so, on the basis of supply and demand economics, prices will inevitably push up.
One of the indicators of contractors starting to flex their muscles is their recent criticism of the introduction of project bank accounts, where all suppliers are paid for their work from a single pot, removing the main contractor’s ability to manage the flow of cash downwards. Firms like Mace and Kier have warned that project bank accounts could lead to price increases.
It is argued that working on schemes with a project bank imposed will no longer be quite such an attractive option for contractors in the future if cash flow is more difficult. Project bank accounts are becoming established practice in public sector projects, and while not judging the rights and wrongs of the case, you have to ask whether prices will have to rise in the long term as contractors realise that they will need to start making money in other ways.
I note that Kier’s outgoing chief executive Paul Sheffield has been quoted as saying: “If your construction business is no longer going to generate the levels of cash that it used to, why would you get out of bed for one or two per cent?”
I am not sure that we would have seen such robust views expressed in the past. There is an implicit message here: “We want the work of course, but we are not going to work without reward. And at the moment you need us more than we need you…”
The client always has an option to walk away but conversely the actions of a government facing an election and courting an industry that represents 6% of GDP with projects like Crossrail and HS2 mean it’s more than likely that they are going to soak up labour and expertise. Which in turn will affect prices for the general market.
So perhaps it is not surprising that while on the one hand HS2 says it wants to telescope construction timelines, it is also keen to adopt a collaborative and partnering approach. I suspect this is out of a sense of necessity rather than just to reduce costs and improve timelines.
It may well be true that in the short term the buzz word doing the rounds will be “collaboration” rather than “exploitation”, because for clients this will be only way of getting things built in the recovery phase.
Richard Steer is Chairman of Gleeds Worldwide.
Opinion piece first published in Building on the 10th of April 2014