Top Specialists 2013

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It’s been a long time coming, but specialist contractors’ fortunes are definitely looking up. The latest state-of-the-trade report from umbrella body the National Specialist Contractors’ Council (NSCC) - of which more later - may contain some depressing findings, but it also includes clear indicators that business is improving.

For instance, the report, published earlier this month, states that 49% of NSCC members reported an increase in orders in the previous quarter, up from 27% six months earlier. Conversely, just 25% reported a decrease in orders, compared with 38% earlier in the year. The figures for enquiries are similarly optimistic and the balance between those seeing increases and decreases in orders is now the healthiest that the NSCC has seen since the end of 2004.

What’s more, Building’s ranking of the most active specialists by discipline, produced in partnership with Barbour ABI, shows that firms are winning more work in most disciplines than at the same time last year (see tables overleaf).

“I think that we are now returning what we might call normality,” says Brendan Kerr, chief executive at engineering specialist Keltbray. “Our financial year came to an end at the end of October and we’ve secured probably 50% of our workload for the year ahead. That compares with 30-35% in the last couple of years.”

NSCC chief executive Suzannah Nichol adds: “People are still saying that it’s tough, margins are tight, but they’re busy and they can see a glimmer of hope. We’re not there yet, but people do feel a bit more positive.”
However, a rising market presents dangers as well as opportunities, especially after such a long downturn. So just what challenges do specialist contractors face? And how should they and the wider industry respond to the recent changes in market conditions?

An expensive recovery

One of the most testing issues facing specialists is the well-documented rising cost of materials. Manufacturers have been as surprised as anyone by the growth seen in the last two quarters and have found it difficult to keep pace with demand, and this has inevitably led to price inflation. Clearly that’s an issue for clients commissioning new work, but for specialists working on fixed-price contracts it is particularly dangerous.

I think that the attitude of a lot of clients is that people should be grateful for getting the work. Material costs are causing a real problem

The problem is twofold. First, if companies are working on a contract that was entered into earlier in the year, when the recovery looked rather more anaemic, they still need to deliver at the price promised and consequently risk making a potentially substantial loss on the job. And second, new work will effectively require firms to take a punt on when prices will start to level off: assume that prices will stabilise and you risk bidding too low and getting locked into a loss-making contract; assume that they will continue to go up and you risk bidding at an uncompetitive rate and failing to win the work.

“Increasing material costs are obviously going to add to risk,” says Rudi Klein, chief executive of the Specialist Engineering Contractors’ Group. “I don’t think that there is a great deal of sympathy for the problem. I think that the attitude of a lot of clients is that people should be grateful for getting the work. Material costs are causing a real problem.”

Similarly, the cost of labour is starting to rise, which may be a very good thing for the workers concerned - wages have been flat for at least four years - but it does add to a company’s costs. “We’re starting to see wage inflation coming into the picture,” says David Frise, chief executive of the Association of Interior Specialists. “Inevitably you have to bring new people in to cope with the workload and that’s when you find that prices are rising. If you’re still working on a job that you got earlier in the year then that’s a problem.”

New market, same old problems

Even as the market is returning, specialist contractors are still finding it more and more difficult to get paid on time, with all the associated cash flow problems that entails. The NSCC survey found that just 6% of respondents were being paid within 30 days. Meanwhile, 72% said they received payment within 30 to 60 days, down from 82% in the previous quarter, while 19% said they were paid between 60 and 90 days, up from 17% in the previous three months. “Late payment has never been worse,” says Nichol. “There has been a switch. Everybody is embarrassed now about paying late - they know that it’s wrong - but that doesn’t stop them doing it. Main contractors’ business models are predicated on them paying late and they don’t know how to change.”

I think that there is a general recognition that the market is on the up and that costs are following

According to Klein, this isn’t just a cash flow problem. Rather it is stifling growth by preventing specialists from taking on more staff, something that is clearly vital when workloads are rising. “One firm with a turnover of around £35m told me that they are owed £1m and said that if they could get what they are owed they could employ more people,” he says. “And if they had more people they would be able to bid for more work. If you were to project that across the whole industry, you’re looking at £2-3bn that’s outstanding. The problem with payment is a cancer in the industry.”

Dangerous times

And so an unholy trinity emerges. With growth returning, specialists are bidding for and winning more work. However, rising costs mean that fulfilling contracts is more expensive and long payment periods mean that the gap between money going out the door and coming back is extending. All of which combines to increase cash flow problems and consequently the risk of insolvency.

“The greatest risk of insolvency is right now,” says Klein. “When all of a sudden firms are grasping opportunities that are presenting themselves, there is a danger that they overstretch. And they’re not in any position to ride out that process because after five years there is no fat there at all.”

However, there are some signs that, as the industry emerges from the downturn, some clients and main contractors are reassessing their attitudes towards specialist contractors, and are starting to recognise that for specialists to continue as going concerns they do need to turn a profit. “There seems to have been a realignment of thought,” says Frise. “You’re seeing a much better vibe coming on payment. I’m not saying that it’s got better, but they’re talking a better talk. The view is that they need to cherish their specialists a bit more than they have done.”

This changing attitude may well come from bitter experience. Sean Wickens, business development director at NG Bailey, says: “Maybe they’ve had a M&E contractor on site one day and then they’re not there the
next. With a lot of our customers there is an understanding that we need to make a margin out of what we’re doing.” Keltbray’s Kerr adds: “I think that there is a general recognition that the market is on the up and that costs are following.”

But while there are inherent dangers in a rising tide, it is still a welcome sight. And as development levels pick up, specialists that have weathered the recession and emerged on the other side should find themselves in a stronger position. Indeed, they may well be able to start getting pickier about the clients and main contractors they are willing to work with. “I think that we’ll see a flip to a seller’s market,” says the NSCC’s Nichol. “I thinkt that we’re on the cusp of that. What I hope is that the opportunity is taken and that we get a smarter construction industry as a result.”