Are subbies’ margins being damaged by a new procurement squeeze?
Faced with another big squeeze from clients and main contractors, many subcontractors are teetering on the edge. In order to survive they’re going to have to move away from the age-old contractor-bashing arguments played out in the legal pages. Instead they will need to focus on demonstrating that they are efficient and accountable. Here’s why. One senior Whitehall source summed up the situation nicely: “Carillion’s list of 25,000 companies is not a supply chain, it’s a phone book.” And, as such, it is difficult to blame any tier one contractor for culling a bloated, inefficient supply chain down to 5,000 companies with a view to saving £140m by 2013. However, where criticism may be justified is over the manner in which such important decisions are implemented and the other margin-grabbing ideas behind them - think Serco demanding rebates from its suppliers.
Carillion’s plan was to draw up a preferred supplier list based on what it deems to be a pure science of online selection, complete with comprehensive criteria under a transparent, but unpopular, process known as electronic bidding. However, many subcontractors would rightly put such difficult-to-measure considerations as reputation, quality and deliverability at the top of the list for building trust and driving collaboration. Specialists champion Suzannah Nichol addresses the problem - her point is that subbies’ margins, and any spirit of engagement, are being damaged with every new procurement initiative because it simply translates into price cuts.
There’s a sense that for every step forward, with examples of integrated teams and client leadership, there are three steps back as hard-nosed commercial decision-making takes hold. Nichol’s warning shot comes amid the spin that has been emanating from Whitehall over the past six months about the virtues of standardised public sector procurement and frameworks and their ability to drive efficiencies. The drama unfolding at the Department for Education and Michael Gove’s encounter in the High Court last week is telling in two ways: it shows us that ministers’ cost-cutting measures can be successfully challenged but that they clearly don’t like being backed into corners and are determined to continue their squeeze on margins.
So while subcontractors are right to argue for a fair deal on payment and shared ownership of projects, they need to understand that a new era of procurement is ahead of us. In this world the values of commercial giants such as Tesco, which demand measurements and efficiencies to be demonstrated at every turn, will dominate - whether we like it or not.