Construction has a long history of blockbuster reports that set out how the industry could be improved. Many worthy recommendations have been made, but there has always remained an elephant in the room: little progress can be made until we fix the fundamental problem of contractors’ margins, and the hefty levels of risk they routinely carry.
Lendlease has worked with the CBI on a new report that addresses this issue head-on and describes the very fine margins contractors face. It spells out how in 2018 the largest 100 contractors in the industry made an average margin of 2.6 per cent. Most importantly, Fine Margins, delivering financial sustainability in UK construction, contains recommendations that, were they implemented, would bring changes the industry has sought for a long time.
I strongly suggest that you read the report in full, but here are some of the key recommendations around addressing how risk is allocated between clients and contractors:
- contractors should be prepared to challenge or walk away from contracts when bidding
- the use of single-stage procurements should be discouraged in major construction projects above a specific value. The CBI recommends £10m as a threshold and they will consult with industry on this proposal
- where clients and contractors cannot agree on a risk sharing position during early engagement, they should adopt a gain/pain share approach to incentivise the appropriate allocation of risk between parties.
We in construction know, instinctively, how much more the industry could achieve if these kind of changes were introduced, but the report puts a headline figure on it, which I expect will resonate with the wider public and policymakers. The boost to productivity resulting from implementing these recommendations would increase UK construction industry output by £30bn a year.
Greater output leads to more jobs and a more environmentally sustainable sector thanks to an increased ability to invest in innovation. Of course, let’s not forget, it would also deliver a significant boost to the UK economy – to which construction currently contributes 6 per cent.
By implementing the clear steps set out in this important new report, we can rebalance the risk in construction and ensure the industry secures a sustainable and productive future.
Simon Gorski is managing director, construction, Europe at Lendlease