Are you fragile or agile? That is the question for contractors…

While there were pockets of industry celebration last year, we sadly observed too many contracting organisations cease trading. According to the Office for National Statistics, insolvencies were up by 17% in the 12 months to June 2023.

This list included some big names with decades of history, such as Henry Construction, Buckingham Group and MJ Lonsdale. This month, Stewart Milne Group, based in Scotland, entered administration with the loss of more than 200 jobs.

The question of who else may be fragile remains a regular topic of conversation and project due diligence, as clients wrestle with yet another challenge to add to the already lengthy list of issues that include engagement and clear policy from planners, construction costs, interest rates, legislative change and dealing responsibly with the essential topic of carbon.

There can be many contributory factors to a contractor’s state of fragility, but one of the tactics in trying to manage this risk would be their ability to be agile. In other words, how equipped are contractors for spreading diversity of sector workload, diversity of geography, client base, procurement route and general project risk versus reward criteria?

The ability to be agile offers a form of defence against becoming fragile

We are all familiar with the term “having eggs in more than one basket” and, as the economy (and, therefore, the market) continues to move in cycles, the ability to be agile offers a form of defence against becoming fragile.

While agility can be an effective defensive tactic, there are many other factors at play, such as taking on projects at sub-economic levels, being under-capitalised, entering onerous contractual arrangements, being treated fairly and correctly by those who administer contracts and the essential topic of being paid in a timely manner to create positive cashflow levels. 

Many of these points flow from the industry’s trading conditions, and the Independent Review of the Construction Products Testing Regime, published in April last year, did succinctly summarise an accurate view of the challenging trading conditions of the construction industry. Some of the key observations made, which are likely to strike a chord, include:

• a pattern of demand that is both diverse and volatile (as the investment tap is turned on and off in response to economic cycles).
• an industry that is consequently reactive waiting for the next enquiry before equipping itself to respond.
• fragmentation, both in terms of the number of businesses and the way the industry organises itself with fractures between design, construction and occupation.
• a high dependance on subcontracting.
• a highly mobile workforce with a high proportion of them self-employed, meaning that investment in training is compromised.
• relative protection from the high levels of foreign competition that have transformed other industries.
• low levels of innovation, including slow take-up of industrialisation and digitalisation.
• high levels of competition at low margins, often in the expectation that a margin can be created or increased by “playing” the terms of the contract later by driving down supplier prices or substituting products.
• the consequent prevalence of opportunistic tendering within the supply chain, rather than the assembly of a settled team that can strive for continuous improvement.
• and, finally, the absence of a feedback loop by which learning can be collected and disseminated.

The tragedy is that these trading conditions have existed for many decades and are not easy to fix! However, the truth is that, rather than ask ourselves which contracting organisations may or may not be fragile this year, the better question to ask is how do we change the industry’s trading conditions to mitigate organisations becoming fragile in the first place?

If we don’t address these points soon, it is difficult to see how the industry in the long term can ever become demonstrably more healthy, with a stable and sustainable future and a greater proportion of satisfied customers.

Iain Parker is a director and head of London cost management at Turner & Townsend Alinea