When times are desperate, there’s a temptation to grab anything that might boost our turnover. The game now should be to prepare for the upturn and increase margins
So we start the new year with a series of forecasts on the economy and there is good news and there is bad news. With an election looming we see a miraculous return to the black for UK PLC with figures for the last three months showing 0.1% growth in GDP. Unemployment is down and mortgage approvals are up. However, before we rush out and hang bunting from the lampposts, let’s look at our own industry. With our traditional lag behind the conventional economy, it will be some time before we see really good news percolating through to the bottom line, I fear.
It is true that we are busy again. I am seeing more requests to tender and our submissions department are quoting for real live projects.
The bad news is that although the volume has increased from negligible to small, the projects are not that profitable. A recent survey from the RICS put it in characteristic cheery fashion: “Prospects for the next 12 months see more surveyors expecting workloads to rise than fall for the first time since Q1 2008. Nevertheless, it is anticipated that profit margins will be reduced further over the coming year and that more jobs will be lost, albeit at a more modest pace.”
in the past 12 months our industry has moved from being able to pick and choose high-value, high-margin work, to having to scrabble for business that has little or no profit
Meanwhile, ironically, we are seeing contractors starting to have to be more choosy about the work they take on. Most of us have had to downsize in the past 12 months and our industry has moved from being able to pick and choose high-value, high-margin work, to having to scrabble for business that has little or no profit. By way of illustration we were recently asked to project manage a £10m office block in Coventry for a prestigious client in the charities sector. Of 10 contractors approached, at least three refused to tender.
I suspect they did not have the resources to undertake the project, having cut back staffing. They told us that the margin was acceptable but they had already grabbed other work and were concerned at becoming overstretched.
So once again we see our industry returning to the cycles that seem to haunt those of us over 40 who have worked through the downturns of the eighties and early nineties. But there is good news. Now is a good time to buy. The wiser speculative developers have pulled off the dust covers on projects that were mothballed during 2OO9. For instance, we see Land Securities restarting £240m of commercial projects in central London. According to historical trends, we will see developments like these completed just in time for a full recovery of property prices in the UK over the next three to four years.
The wiser speculative developers have pulled off the dust covers on projects that were mothballed during 2OO9
Having recently undertaken an inflation report along with other QS and project management practices for a major developer, we find that there is a wide range of views on what faces us in the future but two key facts emerge on which all of us agree. Prices will continue to drop for most of this year, level out in 2O11 and start to rise thereafter. Central London will recover fastest. For this year, an average drop in prices of 3.9% is predicted for central London and around 4.4% for the regional cities.
We are seeing both private sector and public sector clients keen to jump on this bargain basement bandwagon. Over the past few months there has been a frenzy of framework fixing. There has been much re-tendering and re-pricing before a potential change of government calls time on public spending altogether.
I just wonder whether we are all falling under the misapprehension of being “busy fools” rather than actually tendering for projects that will deliver a genuine return. Remember the adage: “Turnover is vanity; profit is sanity.” Last year we were all finishing off projects with a pipeline ahead of us that looked as empty as an Icelandic bank vault. There is now a trickle of work starting to emerge but with the margin on eight new projects being about the equivalent of what we achieved on just one job before. In the end this will come back to haunt us.
However, there could well be an upside in all this for the more adventurous. Although the architectural profession is suffering more that most at present, there has never been a better time to finish A Levels and opt for an architecture degree. With a five to seven year qualification period and predicted spare places available on courses as fees rise, by the time students qualify we should be well on the road to recovery. The rest of us could well be back to scouring Eastern Europe for qualified construction professionals having cut back our own training budgets and lost a generation to the downturn if we are not careful.
Richard Steer is senior partner at Gleeds