Hang on, what about the margins?

This is not to pick on Laing O’Rourke or Balfour Beatty but we have to start somewhere, so why not at the top? They are, respectively, the biggest private contractor in this industry and the biggest listed contractor in this industry.

On Tuesday, Laing O’Rourke posted a turnover of £4.3bn and a pre-tax profit of £18m. Let that sink in. That is a pre-tax profit margin of nought point something or other. A return to profit from last year’s annus horribilis, when it shipped £288m, is welcome for sure, but £18m?

Earlier this year, Balfour Beatty posted a turnover of £9.6bn and a pre-tax profit of £244m. Doesn’t sound too shabby, but that is a pre-tax profit margin of around 2.5%.

Another way of putting it is this: in their last set of results, Laing O’Rourke and Balfour Beatty had a combined income of a shade under £14bn and made a pre-tax profit of £262m. A 5% margin, the holy grail in this industry, would be £700m.

This is madness. £14bn is an awful lot of sleepless nights and work and angst for not very much. So, frankly, why bother?

In the past few years, Laing O’Rourke has spent more money on legal bills – £40m – connected to a dispute in Australia than it has made in its last three financial years, which, for the record, is £21m.

How does an industry like construction continue to function when a company – sorry Laing O’Rourke, it’s nothing personal – is losing £288m in a single year? At the end of July, Sir Robert McAlpine said it had lost more than £100m in its last financial year.

These really are staggering amounts and no one is really that surprised by it all. On the industry wends its way… problem job, risible margin obliterated, lose a ton of money. It might be simpler to stick it in a wheelbarrow, pour petrol on it and set it alight.

This sort of stuff keeps going on. If contractors were supermodels, they would not be getting out of bed for this.

There is no doubt that more contractors are pausing before taking on some jobs because of the risk involved

Laing O’Rourke’s new chief executive, Cathal O’Rourke, says that a 5% margin is achievable for contractors. It should be because 5%, compared to some industries, is hardly sparkling stuff.

So, let’s look at it this way. For Laing O’Rourke to post a pre-tax margin of 5%, its pre-tax profit last year would have had to have been £215m. Just to repeat, it made £18m last year.

For Balfour Beatty, 5% means a profit of £480m, pretty much double what it made in 2023.

More and more, the issue of margins and risk has come to the forefront of firms’ thinking. There is no doubt that more contractors are pausing before taking on some jobs because of the risk involved.

And why would a contractor say to a client, “happy to do it lump sum, fixed price and I’ll take on all the risk” just so that firm or developer can square it off with the funder? No one is obliged to do this stuff – but they do.

>> See also: Marginal gains: Why contractors need help to make a bigger profit

>> See also: ‘The industry is broken.’ The soul-searching begins as London M&E specialist succumbs to familiar foes

>> See also: Firms going bust, millions lost and all for a next-to-nothing margin. Who in their right mind would want to be a contractor?

One chief executive of a very big contractor put it like this: construction, he said, is a bit like a Ponzi scheme. Firms need to keep doing jobs one after the other to pay for the last job. It’s all about cashflow, in other words. And why? Because of the way the industry is set up.

Companies don’t go bust because of poor margins – they go bust because they have burned through cash and, literally, run out of the stuff. That’s why some are prepared to look the other way, take on the job they know is a bit iffy simply because of the upfront payments and hope that they don’t get whacked too much. It’s head-shakingly crackers.

And here it feels pertinent to point out this: of all the things that have been said and written about Grenfell, guess what? The lowest price won the job.

Maybe it’s something to do with the end of summer, the mass return to work and the autumnal chill but, once again, it feels like we’ve been here before with this sort of gloom.

There are doubts, real or imagined, about the future of two major firms in the sector. One is Lendlease, which is currently up for sale, and the other is ISG, which was set to be sold “in the coming days” 10 weeks ago. Were these two to disappear, will there be enough contractors to carry out all this work that the government, for example, wants the industry to do?

Construction is a fantastic industry and does amazing things. Everyone in it keeps saying that, but it’s true. What is also true is that the current contracting model is shot. It doesn’t work. The whole thing needs ripping up and starting again.

Think about all the takeover deals that have been signed recently. None have involved contractors. Maybe Lendlease will get bought and ISG will be rescued. But those things haven’t happened yet.

Perhaps, in a way, the overseas firms who keep buying up UK consultants or shelling out for significant stakes in them – Turner & Townsend, Hoare Lea, Gardiner & Theobald, to name a few – are passing a withering judgment on the current contracting model. In old fashioned parlance, “wouldn’t touch it with a barge pole, mate”.

There are things that can be done better by contractors: productivity, greater use of off-site, more innovation, cutting waste and duplication, less war-war and more jaw-jaw. But here’s an idea: why not just pay contractors more?

It does no one any good for a company such as Laing O’Rourke, which employs 11,000 people and operates a self-delivery model, to be making such a pitiful return

Not all will stick it in their back pocket. There are many sensible firms out there, trying to do the right thing.

Cathal O’Rourke says margins have to improve because, quite frankly, no firm can survive on margins of 0.04% or whatever it is. It does no one any good for a company such as Laing O’Rourke, which employs 11,000 people and operates a self-delivery model, to be making such a pitiful return.

The historically low margins, O’Rourke says – and he’s talking about 2.5% to 3% here – are “not sustainable and act as a significant handbrake on the sector’s ability to invest in the transformative technologies that will create a step-change”.

Mandate a margin – a sensible one – stick to it and let firms invest in the things that will help them to build better, more quickly and more efficiently rather than make silly decisions simply because the system is stacked against them.

Dave Rogers is deputy editor at Building