It defies logic really. We’ve had 12 years of sustained growth, PFI contracts are going begging and any client you talk to says there aren’t enough good contractors to go round.
Yet hardly a month goes by without news of a contractor taking a beating, of which Multiplex is the most recent example. Anyone arriving from Mars would conclude that there was something fundamentally wrong with the business. Look at Laing, whose former chairman we interview this week. Having sold out to O’Rourke for £1, it’s gone on to make £25m a year by investing in PFI projects rather than building them (see pages 48-50).
The reality is, even in the best of times – which is surely where we are now – contractors are one project away from disaster. The industry is undervalued by clients, and even though you’d expect Laing’s experiences to be etched in the brain of every contracts manager, it seems there are still too many who have their heads turned by sexy little numbers that end up costing them dear (see pages 42-46). That said, the underlying and contradictory trend is that Contracting plc has been doing, relatively, rather well. A decade ago, every contractor was the same: they were part of family-run groups working alongside a civils business and a housebuilding arm. When the downturn came, they bought work to keep up turnover. These days, more specialisation and the arrival of the PFI have pushed up the barriers to entry.
Even the City is relatively happy: contracting shares have outperformed those across the sector generally, including the support services sector. And even the moves back into housebuilding have been given their blessings by the City. The traditional wisdom is that housebuilders do not make good contractors. Kier has certainly defied this, and its steps to extend its housebuilding business are seen as sensible, as are Lend Lease’s purchase of Crosby Homes and Laing O’Rourke’s move into the sector (see page 21).
The disappointing thing for contractors is that this is probably as good as it gets. It’s questionable whether a move into support services will continue to provide the uplift in margins it does now. Regulatory pressure on firms to improve their environmental performance will inevitably erode their margins, and in the longer term, it is doubtful whether the flow of relatively low-risk government
work can continue at today’s level. There are already rumblings that funding for the city academies – one of the central planks of public spending – is being cut back. And if the office market does reappear in the next year – the signs for this are mixed – it could come with a sting in the tail. At a dinner a week or so ago, one very high-profile client predicted the demise of two-stage tendering.
This was intended as a way for client and contractor to collaborate on common goals and minimise dangers. However, he said it had become too difficult to pin a contractor down at the negotiating stage, and clients ended up taking on too much risk.
So are the odds for contractors about to get shorter? As one analyst put it: "Every time a contractor takes on a fixed-price contract, they are effectively gambling with the client that they can do it on time and to budget." In an unpredictable business such as contracting, one thing is for certain.
If contractors can’t make hay today, when will they ever?
Denise Chevin, editor