Sir Robert McAlpine’s diversification strategy towards civils and public sector work shows that, in the current market, contractors can be choosey about where they operate

Simon Rawlinson

Sir Robert McAlpine’s announcement of a diversification strategy featuring civils and public sector work highlights the viability challenges of a business model focused on large-scale, complex, commercial projects.

The potential loss of part of McAlpine’s construction capacity and capability will be a blow to private sector clients seeking to deliver large and complex projects. The contractor’s management and technical skills and the capability of its supply chain have enabled it to specialise in the delivery of the most complex schemes, such as the Bloomberg HQ under construction in the City, or Kings Place, which combines office space and an underground concert hall. The wider question that a diversification strategy poses is whether these specialist skills can be more profitably targeted at the delivery of civils projects and whether this development signals a new phase in the war for talent in UK construction.

Following a shift to lump-sum, design-and-build procurement from around 2000 onwards, developers and contractors have developed a symbiotic relationship. Leading contractors offer the management skills and deep pockets needed to de-risk the delivery of complex projects designed by high-profile architects. On the other hand, commercial clients provide the brand-enhancing iconic project opportunities, the personal relationships and, when times are good, a large and profitable pipeline. Based on this alignment of business interest, it is not surprising so many complex projects in London and elsewhere have been handled by a small number of leading contractors.

However, this mutually beneficial relationship faces a crisis. Wild swings in the balance of commercial power between client and contractor, determining who is price-setter and who is price-taker have infected relationships at all levels of the supply chain, leaving a legacy of low contractor profitability and risk-aversion on the one hand – and high levels of pricing uncertainty for the client on the other.

So where do the civils and public sector clients fit into this picture? Do they represent some useful diversification for a supplier focused too much on one sector or does a rebalancing of the McAlpine portfolio highlight some wider truths about the sustainability of key industry sectors?

It makes perfect sense for a construction business to reorientate itself towards the most secure sources of growth and opportunity

Civils is widely expected to be the fastest growing sector on the back of growing spend on the UK’s energy and transport infrastructure. These sectors have big clients with long-term, assured spending plans. Pursuing the infrastructure sector won’t abolish the spending cycle, but will help to mitigate some of the biggest sources of risk to the order book. In addition, the civils sector has invested in more collaborative ways of working – whether through alliances, early contractor engagement or in the integrator model that has been adopted by both Heathrow and London Underground. A sector-wide interest in a range of options for aligning supply chain interests and rewarding out-performance suggests that civils clients are more open to process innovation than other parts of the industry.

With spend on infrastructure forecast to grow at a double-digit pace between now and 2020, it makes perfect sense for a construction business to reorientate itself towards the most secure sources of growth and opportunity. The fact that clients in these sectors can trade off an assured pipeline of work, and a more balanced approach to risk transfer will increase their attraction.

Faced with this risk to the size and make-up of the major projects supply chain in the commercial sector, are there any steps that a client should be taking to reinforce their position as client of choice?

Firstly, clients could review the value of risk transfer strategy on projects. Are the costs duplicated? Is the client really isolated from all change? Given that the client pays up front for risk through a premium cost, could benefits be secured by a different allocation? The second could be to add further value to client: contractor relationships – perhaps through an assured volume of work or lower transaction costs. The third, and the most difficult to scope out, is how to mitigate the effects of the commercial cycle; in order to sustain their supply chain, do commercial clients need to diversify their delivery models too?

Clients in the commercial sector have a huge influence on the industry, by creating opportunity, driving innovation and by setting standards. The way in which the sector procures its work is highly influential too – but at present is not delivering results.

The updated McAlpine strategy shows that, in the current market, contractors can pick and choose where they operate. In the current fight for resources, commercial clients have fewer options. Given that both clients and contractors have a shared interest in maintaining a sustainable industry, now is probably the time to review a self-limiting business model, rather than waiting until the cycle reasserts itself.

Simon Rawlinson is head of strategic research and insight at Arcadis