The fall guys: Richard Steer on the challenges ahead

I recently had the opportunity to discuss the state of the construction industry while perched in a boat, bobbing up and down just off the Cowes. At the Little Britain sailing regatta there was much discussion of how this industry event had almost become a bellwether for our sector. It is cross industry – architects sail against contractors, consultants compete with developers. No quarter is given, there is no room for mistakes. Everyone faces the same challenges. The same could also be said of all of us operating in the construction market.

We are now one year on from the clifftop tumble that we took courtesy of Lehman Brothers, Northern Rock and Robert Peston. The world has not ended as some feared and those of us still standing have dusted ourselves off and are on the beach looking back up at the heights from which we so suddenly descended.

It has been a shock, but if we are to make our way back up to the top, we must address the realities that have emerged over recent months and take a fresh look at the way we do business. For cost consultants and project managers, some clients have used the past 12 months to renegotiate fee levels and we have seen retailers in particular coming back to the table. This pushed fees down and caused many of us either to institute salary freezes, cuts or, in most cases, redundancies. This has affected margins, but has changed the way we work. We are now leaner, more focused and we have valued and further developed the bonds that we formed with clients who have not tried to exploit the perilous situation for short-term gain.

The income generated by secondee placements was significant for many of the larger practices and the true impact of its loss is only becoming apparent as the full-year figures are released

One massive change is the cut in secondment placements by clients like Network Rail or BAA. Why subcontract at a high daily rate if you can be spoiled for choice by work-desperate job applicants who will cost you a fraction of the salary you would have been paying a year ago for a full-time staff member? The income generated by secondee placements was significant for many of the larger practices and the true impact of this income loss is only becoming apparent as the full-year figures are released. The way back up is getting ever steeper.

But even as we plan our re-ascent, the ground under our feet is shifting. We will all be affected by the likely change of government in the next eight months or so. The Conservatives have already indicated that they plan to review public spending. This is the financial life raft to which many are clinging. Nobody really knows what cuts are planned but it is politically easier to axe building programmes than it is to cut jobs in education and the NHS. Those of us working in the Building Schools for the Future and what’s left of the Learning and Skills Council programmes would be wise to try and get projects signed off and started before next May. There may well be refurbishment work and regeneration spending but it will be closely monitored and not flush with money.

A new regime may also review the framework agreements of the past and local, national and private frameworks could well end up being ditched or recast. Already, key clients in the private sector such as BAA are questioning the usefulness of frameworks and we could well go back to the supremacy of the cheapest market price. This will be a return to the bad old days but for many it will be seen as the only way to win work.

I suspect firms like Carillion, Balfour Beatty and Bovis have already been invited to see the shadow Treasury team and discuss their PFI and PPP deals in a ‘frank’ and ‘open’ manner

In another area under review, I suspect firms like Carillion, Balfour Beatty and Bovis Lend Lease have already been invited to see the shadow Treasury team and discuss their PFI deals in a “frank” and “open” manner. If Tesco can be rumoured to have renegotiated deals with their preferred consultants earlier in the year then so can a future government.

Finally, will we see the return of newly enfranchised clients who are using their muscle to negotiate keen costs? We could soon be back to the “no” or “low” margin deal adopted to produce cash flow rather than profit.

Back in our boat on the Solent we reckoned that we had a remarkable 150 years of combined experience between us. We had all suffered in the eighties, succeeded in the nineties and agreed that the forecast for the noughties was unsettled, with outbreaks of rain and squalls in equal proportion. One thing was certain: we all continue to look up at that steep cliff.