Leader: Contracting - it's a fine line

Margins, margins, margins; everyone’s talking about them. When a new contractor boss first settles into the hot seat, they often think they have the ultimate solution to what is the perennial industry problem of not making much money. They’ll set out to choose the sectors they’re working in carefully, cut their costs accordingly, do their diligence better than most and they’ll talk about innovation. Innovation, by the way, is usually another way of either screwing the supply chain or cutting costs. They may even underbid for work to increase their revenue just to satisfy an expensive infrastructure and their flash new corporate offices in the city. Why would any firm do that just to make up the year’s numbers? Because when it comes to contracting, revenue and size matter to clients even if being unprofitable doesn’t. 

So what magic margin numbers are we talking about here? The likes of ISG’s Paul Cossell and Balfour Beatty’s Leo Quinn have spoken in the past about an ambitious 5%. Others privately point to anything above 1% being good, with 1% being the norm. The truth is analysts do not really believe there is any science behind calculating margins – rather, it is determined by myriad complex and largely uncontrollable considerations such as the market and the economy, along with fluctuations in the cost of materials. 

There’s an underlying positive culture that we should be very wary of disrupting – it’s what makes the vast majority of projects get there in the end with a sense of style

As we gear up for the annual contractor results season next month, you can expect to hear all of these determining factors being analysed in depth. But margins really come down to three things. First, the sectors that contractors choose to operate in and how familiar they are with them and their specialist supply chains. Second, internal considerations. Basically, how organised and innovative the contractor really is. So how it manages its costs, for example, its approach to pricing jobs as well as its own diligence processes, not to mention its understanding of and appetite for risk management. Finally, the external factors such as the wider economy and regulations, materials pricing, the capability of its supply chain and workforce and how its competitors are behaving in the market. 

The debate about margins has come into sharper focus, of course, due to Carillion’s collapse and the resulting parliamentary investigations. Solutions being bandied about once again are project bank accounts, retentions overhauls and legislative solutions forcing contractors to behave and transact in specific ways within set parameters. But is this really the right approach? The housing sector, for example, has high contracting margins, a very tight set of scalable construction processes and a truly innovative approach to business, driving efficiencies through off-site and modern methods of construction. And – yes – it also has a set of lucrative market conditions where demand massively outstrips supply.

For the pack, it is too easy to blame poor performance and the culture of late payments and to assume that all large-scale contractors are behaving badly

But it does all this without a stack of compliance legislation written into its contracts. What if contractors approached their selection of work just as robustly? Can you imagine a future where the days of mega contractors came to an end and we were simply left with sector specialists, experts in their chosen field, operating at scale but with processes so tight and supply chains managed so well via digital scrutiny that risk was almost eliminated? There would always be a place for a private firm such as Sir Robert McAlpine or Laing O’Rourke picking off the large one-off projects, rolling into town with their A team, guaranteeing smooth delivery to a client and a nice ride with a handshake. But for the pack, it is too easy to blame poor performance and the culture of late payments and to assume that all large-scale contractors are behaving badly.

Most contracting CEOs, such as ISG’s Paul Cossell, are good people running good companies and trying to do the right thing in the right way. Sure, 5% is an aspiration. And sure it’s a competitive market and tough conversations need to happen in any negotiation. But all the good that is found within the community of companies and people building amazing projects should not be lost to a lawyer’s pen. Subbies will always complain about contractors and contractors will always be seen to be screwing subbies. But fundamentally there is goodwill and pride at the heart of the sector. 

There are those who wish to use the Carillion debacle as a way to settle old scores and change the structure of the marketplace, bringing in big changes to procurement and payment practices. But on the whole, tough though contracting is, the bulk of the sector is making a damn good fist of it. There’s an underlying positive culture that we should be very wary of disrupting – it’s what makes the vast majority of projects get there in the end with a sense of style.

Before we leap into a cultural overhaul, let’s just urge our large-scale contracting leaders to do their homework a little better from the outset – and lead by example.