If you want to know why so many fit-out firms going belly-up, you should remember this little jingle: turnover is vanity, profit is sanity – and cash is king

over The past eight months we have been hearing worrying reports about the state of the fit-out contracting market. Three well-established companies with multimillion-pound turnovers have disappeared. The industry must ask itself why this has happened, and take action to prevent it.

The fit-out contracting business has changed dramatically since its inception more than two decades ago. It began as an industry that enjoyed steady growth in an emerging market and turned into one that operates in a consolidating market in which supply has outstripped demand. And because more contractors are trying to enter the game, we are experiencing ultra-competitive pricing. Actually, that’s putting it mildly. The fact is that we are in a pricing war that has spiralled out of control and a number of the biggest fit-out contractors have become casualties.

Something must be done, but where do we start? First, we need to temper our desire for glory. Many companies seek to expand market share because it enhances their reputation. The amount of turnover a company generates pushes it up the league tables and into the limelight. However, by aggressively chasing turnover, the little issue of profit is often overlooked, as is the business’ long-term survival prospects.

Once we have accepted this diagnosis, we need to look at the way our businesses are managed. The buying and selling principles at the moment seem to be driven by “buying” turnover and market share – we are back to those league tables again – but this is a short-term solution and does not provide sufficient profit.

Admittedly, this process is perpetuated by clients who have taken advantage of our price war – despite consultants’ advice to the contrary – and adopted a lowest-price-wins mentality. They know that most fit-out contractors will go lower and lower to win the job. The industry must, therefore, change its culture. It must become more proud of the quality of its services. Conveying our track record and service delivery achievements to clients will allow them to understand what they are really paying for.

It is the responsibility of every main contractor to adjust prices so that they can sustain overheads and provide sufficient profitability. If the entire industry adopts this now, and it is supported by professional consultants, clients will have no choice but to accept the change.

Prior to tender, we need a rigorously enforced selection and prequalification process that includes an analysis of the fit-out contractors’ financial stability, assesses the quality of the organisation’s people and evaluates the effectiveness of its management systems. Then, and only then, should price be a consideration. The company selected should be the one that is best suited to meet the requirements of the client and the challenges of the project.

Already, trade contractors are beginning to adopt these principles, simply by being more selective about who they work for and at what rates. Payment terms are also being more closely scrutinised and adhered to. The result is that fit-out contractors with poor payment records are finding it increasingly difficult to employ and retain good quality trade contractors. This, in turn, is encouraging the industry as a whole to improve.

Now clients and professional advisers need to play their part and toughen up their criteria for identifying, shortlisting and selecting fit-out contractors. Part of this must include checking that their preliminaries, overheads and profits are realistic. It must, however, be recognised that this is only the first part of finding a peace process to end the price war.

In essence, all the actions that the industry needs to take to survive are based on more rigorous prequalification, a rounded selection process that considers quality, skills, experience, financial stability as well as price and, most important of all, better management of the contracting businesses on which the fit-out industry depends.

Peter O’Brien is director of fit-out and refurbishment contractor Interior Design Management