Mandating a minimum profit margin could solve construction’s profitability woes

Life as a contractor is precarious. Scraping a profit is hard, and low margins can undermine the industry’s potential to survive – let alone thrive – and to contribute value locally and nationally. ISG’s collapse last month was just the latest reminder of this. 

This is a deep and complex issue that it won’t be solved overnight. But improving profit margins would be a good place to start.

As Building deputy editor Dave Rogers explained in a recent article, consistently low profit margins – at best 2-3% for some of the country’s larger contractors – hit long-term cashflow, curtail investment and drive up the rate of insolvencies across the supply chain.

Increasing margins to 5% would create a virtuous circle, shifting the focus from driving down costs through unsustainable profit margins, and onto delivering greater value through transparent procurement processes

A clear way to mitigate this sorry state of affairs is to mandate higher profit margins. This is something that Scape advocates for in its Charter for Change, which calls for swift, decisive action from policymakers through a variety of legislative and policy changes, to accelerate the recovery of the public estate.

Working closely with the public and private sectors, we believe that increasing margins to 5% would create a virtuous circle, shifting the focus from driving down costs through unsustainable profit margins, and onto delivering greater value through transparent procurement processes.

So, what are the key benefits of fixing profit margins?

To answer this question, we first need to consider how current approaches are impacting business growth across the industry.

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Looking to the supply chain, unsustainable profit margins can increase the use of retentions and, in some cases, drive poor behaviour such as late payment. These effects are then cascaded all the way down the supply chain, with main contractors seen to be holding back contract fees from subcontractors who are already struggling on low margins.

These practices can place considerable strain on our SMEs, hindering long-term growth for UK companies as well as undermining trust and collaboration across project teams.

The Department for Business and Trade’s confirmation that it will bring legislation to force large companies to publish payment data in their annual reports, and that it will consult on additional measures to address late payment and long payment terms, is a welcome recognition of the severity of the situation. But what we urgently need is a focus on solutions.

Setting higher profit margins from the outset is crucial for enhancing contractors’ cash flow, enabling more effective allocation of funds throughout the project timeline. This financial stability would allow clients to establish clearer terms with the supply chain, including realistic milestone-based payments and penalties for late fees.

These measures would, in turn, help to address trust issues across the supply chain and support long-term collaboration and growth.

Receiving fairer pay, and on time, enables contractors to operate more sustainably, contribute to local economic growth, and invest in new technology, equipment and resources

Scape’s National Construction Framework has a 94.2% KPI on fair payment within 30 days. On all our frameworks, Scape’s Fair Payment Standard supports supply chain resilience, fostering a stable and cooperative environment. This is a clear example of how prompt payment regulations can be put in place to the advantage of all parties.

More sustainable profit margins also encourage greater transparency in procurement, allowing clients to benefit from increased certainty that they are achieving the best value and the best outcomes. Clients would also have all the information they need to make more informed decisions about which projects to progress, rather than simply going with those with the lowest price.

In addition to improving trust and prioritising outcome-led projects, setting realistic profit margins also allows teams to set higher standards on projects. Receiving fairer pay, and on time, enables contractors to operate more sustainably, contribute to local economic growth, and invest in new technology, equipment and resources. At a stroke, this benefits both local communities and the national economy.

Contractors deserve more than a fighting chance to prosper in the long term. By collectively improving industry standards, and by sharing and adopting best practice and solutions to help businesses make informed decisions, we can ensure that we have the means to drive growth sustainably in the short and long term.

We all want to see a profitable, dynamic construction industry, one which delivers the assets and built environment our society needs. Fixing profit margins is an essential first step to becoming a more collaborative, purpose-driven industry, which generates greater value – and value that cannot be measured in just pounds and pence.