Throughout the course of a career there will be certain topics of conversation that seem to ebb and flow with the tides of time. One minute they are all anyone seems to be talking about, and the next they have fallen out of fashion. There are often no discernible reasons as to why they float in and out of our own personal narrative, yet over time you come to accept this inevitability, and in some cases even draw comfort from their reappearance.
One of the topics that continues to present itself in my narrative, is the subject of meagre margins in the construction industry, and our seemingly reluctant acceptance of them. Over the years this complex topic is something which has punctuated my career time and time again, yet of all the discussions I’ve ever had, frustratingly, never seem to reach any sort of conclusion. Ending typically in a forlorn yet mutually acceptable sigh of “what can you do!?” The precursor to each party wandering off to their respective ends of the office to deal with something they might actually be able to solve.
For as long as I can remember the reality of consistently poor margins has dogged the UK Construction Industry, with typical pre-tax margins for the top 100 contractors in 2022/2023 ( https://www.theconstructionindex.co.uk/market-data/top-100-construction-companies/2023) ranging from 1% through to 3.5%. There are obviously exceptions to this range, on either side of the profit/loss scale, but it is quite safe to say that if you are making north of 3.0% you are performing in line with expectation.
But why do we accept this as the norm, and why do we struggle to break the pattern?
This is a question that has occupied my thoughts for years, and as you will appreciate, there isn’t a straightforward answer. There are however some key factors to consider, which do go along way to shaping and informing the circumstance within which we consistently find ourselves.
No two projects are ever the same
It may sound obvious, but whilst we often deploy similar construction techniques time and time again, almost every project is entirely unique. Whether that be location, scale, or timeframe, no two projects are ever identical. In fact, the phrase ‘reinventing the wheel’ is very applicable, as we often re-invent the wheel every time we apply our skills to a new scheme. And that’s not because we want to, it’s because the circumstances we are facing dictate that this needs to be the case. This reality means we need to take stock of new risks, carefully plan for things we haven’t done before, gather and deploy the appropriate resources, and all for the first time every time we build something new. And whilst this approach is very familiar, it leaves us open to a disproportionate amount risk consisting of what I like to call the known unknowns (those risks we are aware of and can plan for) and the unknown unknowns (those risks we don’t expect). Quite unsurprisingly, it’s the unknown unknowns that create the most amount of uncertainty.
The market constantly shifts
Construction projects are rarely done on a whim, and as such many schemes are years in the making. Often being conceived and priced in a completely different timeframe to the one in which they are eventually delivered. And whilst contracts often try their best to take this into consideration, changes in the economy can drastically impact the cost of a project almost overnight, and sometimes with detrimental effect. The most recent, and perhaps most extreme example of this scenario, being the impact COVID-19 had on the industry. It is therefore perhaps unsurprising that even the most well priced projects can struggle to stay in the black when the market unexpectedly swings.
In a similar vein the Market also influences the way in which contractor’s approach tendering. When work is slow, and a contractor’s order book is light, they may be more inclined to sharpen their pencils in the pursuit of turnover, resulting in what is often described as “the race to the bottom”. This practise is all too commonplace, resulting in projects being too competitively priced from day 1, leaving very little in the way of room for error. And whilst it would be unfair to suggest that this approach is adopted by all contractor’s, it is true that the actions of the few impact the many.
Change is the norm
Even the most well-designed projects will experience change and our contracts are set up to deal with it. However, change is an inevitability, and depending upon the magnitude offers up risk and reward in equal measure. The volume of change on a project is often commensurate with the financial success of the project, but this is intricately linked to the project team’s (client and contractors) ability to deal with it. This ability is shaped by experience, but moreover people’s willingness to deal with the change in an appropriate manner. Naturally however, the inevitable discussion around culpability for change, and ultimately responsibility for actioning and owning the change always presents itself. Sometimes this resolves with ease, and sometimes it doesn’t. Regardless, change has an overwhelming influence on which way the profitability pendulum swings. And whilst we dice with often the finest of margins, sometimes one change is all it takes to swing from a win to a loss.
The importance of a low price
Up to now I have spoken a lot about contractors, but it would be remiss of me not to mention the important role clients play in influencing contractor margins. After all it is the client and their team of consultants that ultimately make the decision about which tender to accept. And whilst we are seeing improvements in the way in which clients score their tenders by placing more weight on health, safety, design, environment and quality. We still can’t escape the inevitability that price sits front and centre when it comes to making the final award, even if no one is willing to admit it. And why wouldn’t price be important!? It obviously is, however, better emphasis needs to be placed on achieving the correct project value to start with, as appose to simply selecting the lowest tender.
Low barriers to entry
The construction industry is a bit like natural eco-system, with its ability to thrive being influenced by both internal and external factors. The balance of these factors being fundamental to its success yet are rarely controlled by the industry itself. We’ve already discussed how the wider economy impacts the market, yet another often overlooked influence is the clear lack of barriers for entry into the marketplace in the first instance. In many areas of our industry there is simply nothing stopping anyone just deciding one morning that they are going to start a construction company. Sure, it isn’t quite as simple as I am perhaps making out, however when you compare construction to the likes of the health, insurance, legal, accountancy or manufacturing sectors setting up a construction firm is quite straight forward (relatively speaking). And therein lies the problem.
No real conclusion
They say that insanity is doing the same thing over and over again and expecting different results. And at a macro level I think this is true of construction. Of course, we have made progress with the likes of offsite manufacture and ever more effective ways of doing things, yet for the most part we still go about delivering projects as we always did. So perhaps we shouldn’t be so surprised that we keep seeing the same old inconsistent and low returns for all our efforts.
I certainly don’t know what the answer is, but what I do know is that construction is crying out for a paradigm shift in the way we procure and deliver projects. We are yet to have our own iPhone or assembly line moment, but it is time we started to think very differently about how we go to work. Otherwise, we will be found guilty of doing the same thing over and over again, expecting different results which will never come.
By, Ben O'Connell
Commercial Director, at Vinovius
