In the second of our new series featuring costs and market data, we turn the spotlight on the contract cleaning sector and discovers that due to diversification, the sector is becoming increasingly difficult to define
The contract cleaning sector includes all aspects of the commercial and industrial cleaning market that is contracted out. It includes the interior cleaning of offices, factories, retail outlets, multi-unit residential locations, leisure facilities and other public and private sector non-domestic buildings. It also includes window cleaning at such sites, as well as industrial equipment cleaning, cleaning of transport vehicles and disinfecting and extermination services.

As with many business-to-business services, there has been a trend towards service diversification by contract cleaning providers, making the sector increasingly difficult to define. Most notably, many traditional contract cleaners are branching out into providing facilities management services, as well as equipment hire, linen hire and portering services. The MBD and Key Note reports, from which the figures referred to in this article are drawn, analyse only the value of cleaning activities.

The UK market for contract cleaning services is believed to have increased in value terms by as much as 26 per cent to £3,737 million in 1999 and has demonstrated year-on-year growth in line with the growth of the economy, particularly the service economy, which remains the largest target market of contract cleaners.

The market for contract cleaning has grown in line with the sustained trend to contract out non-core activities, which started in the mid 1980s. However, the rate has slowed in comparison to that of the early 1990s when the market enjoyed rapid growth, thanks to Compulsory Competitive Tendering in local government. Although the Labour government has abandoned CCT, it has replaced it with a policy of Best Value, which retains many of the features that encourage private sector involvement in non-core functions.

Despite year-on-year growth in revenue in the UK contract cleaning market, penetration in the sector remains lower than in many other European Union countries, at 42 per cent. According to the MBD report, this suggests a total potential market in 1999 of £8,898 million. MBD also notes that the UK industry tends to have a relatively low level of sales per employee, indicating that productivity improvements could lead to further substantial market growth.

According to Key Note, the contract cleaning market is highly competitive, served as it is by a large number of companies. Some operators are very small and survive by targeting particular markets. In addition to competing with each other, contract cleaners also compete with in-house cleaning operations both in the public and private sectors.

At the national level the sector appears very fragmented, consisting of a large number of small firms and a smaller number of large firms. At the local level, where service is delivered, this fragmentation is less apparent, since a town may have only a limited number of firms competing for a particular type of business.

Some of these competing operations are likely to be provided by the regional arm of one of the larger operators – e.g. Rentokil Initial, OCS Group, Mitie – which normally provide their services through a network of local branches.

Many operators in the marketplace, such as OCS Group, are long established, while others are relative newco- mers having expanded into the sector via acquisition. Operators from elsewhere in the EU are becoming increasingly established in the UK market, notably the French company Sodexho Alliance and Denmark-based International Service System (ISS).

The market, client sectors, contract lengths
Client sectors
The business services industry is the largest user of services, accounting for 32 per cent of total market value, with a projected value of £1,256 million in 2000. The UK economy's growing focus on such services means this sector is likely to offer some of the strongest growth.

The second largest market is public services and healthcare, a sector which increased in importance because of CCT and Best Value. Contracts tend to be large, involving multi-service provision, and are often negotiated over a relatively long period, commonly five years. Such contracts offer contractors a degree of security but the restrictions on price increases can have detrimental effects. Many contractors report that while commercial clients have been sensitive to the increased cost burden of contract cleaners and allowed price renegotiations, public sector clients have been less flexible. Some areas of this market are served by dedicated cleaning companies, most notably the medical sector.

Two growth markets are the banking and finance and transport sectors. Banking and finance, due to issues of confidentiality and security, is often restricted to well-established contractors. Transport showed the strongest growth for contract cleaning. But, the specialist nature of this sector has encouraged a degree of specialisation.

Length of contracts
Neither the MBD report nor that by Key Note contain information on contracts. However, according to the Cleaning & Support Services Association (CSSA), contracts generally vary in length from just a few months to five years, and occasionally, seven years. The traditional local office-cleaning contract is often based upon an exchange of letters and is perpetual unless either the contractor or client decides to make a change. An annual review allows for any revisions in the service provision and price.

The CSSA reports that in more regulated markets the average length of contracts, which has typically been three years, is being extended to five years with the introduction of larger value contracts in the public sector, for example. Ministry of Defence contracts are fixed price for five years. With the introduction of the Private Finance Initiative (PFI) and Public Private Partnership (PPP) type contracts, the length of contracts can be up to 30 years, sometimes with equity participation from the larger cleaning and support service contractors.

Cost
Pricing of contracts
There are no nationally accepted and recognised processes for calculating the price of a contract, reports the CSSA. Every firm appears to do their own thing. The introduction of computer-based systems means there are more generic systems becoming available to the industry, however these do provide flexibility for changes to be introduced by the individual company.

As a rule of thumb, contract pricing is based upon:

  • cost of labour
  • allowance for holidays
  • allowances for National Insurance Contributions
  • cost of supervision
  • cost of materials
  • cost of machinery and equipment
  • other costs
  • percentage for gross margin
Employment costs
The labour intensity of the industry makes employment trends and the cost of employment the most critical success factors for cleaning contractors.

In 1999, the number of jobs in the contract cleaning industry stood at 404,000. This is the same as in 1995, having recovered from 387,000 in 1997. Cleaning has traditionally been the preserve of part-time female workers and they account for 53.5 per cent of jobs in the sector, although this is down from 60.6 per cent in 1995. Full-time female jobs were increasing but overall female jobs have declined over five years from 73.5 per cent to 68.6 per cent.

Male jobs have seen an increase of 17.6 per cent over five years from 1995 to 1999. Most of this rise was accounted for by an increase in full-time jobs, up by 27.3 per cent, with part-time jobs increasing by a more modest 7.5 per cent over the period. All jobs increased by only some 0.6 per cent a year between 1995 and 1999, while the industry's turnover increased at a rate of 5.3 per cent a year, which, according to the CSSA, represents a significant improvement in labour productivity.

Direct employment costs increased from accounting for 55 per cent of annual sales in 1995 to a projected 66 per cent by 1999, according to MBD. The growth in proportional share of sales accounted for by employment costs has been gradual as companies phased in higher rates in anticipation of the National Minimum Wage, which once announced was lower than many expeccted. The adult NMW is £3.70 per hour (£3.20ph for 18 to 21 year-olds). This will increase to £4.10ph in October 2001 and to £4.20ph in October 2002.

Prior to the NMW, a CSSA survey of wages showed that 56 per cent of the workforce was paid less than £3.60 per hour. In fact, the introduction of the NMW indicated that prices needed to rise by an average of over 14 per cent to reflect the required increases in wage rates. With the anticipated costs of the introduction of the Working Time Regulations, this rose to 20 per cent. The market could not sustain such rises and many specifications and frequencies of service were reduced.

The industry, turnover, market share
Industry concentration
The contract cleaning industry is fragmented, with 78.2 per cent of businesses having a turnover of less than £250,000 a year. This is attributable to the fact that many firms address particular local needs by providing a range of activities that offer few economies of scale, and within a regulatory regime that imposes few barriers to entry. The growth of the market has also attracted new operators.

According to MBD, between 1996 and 2000, the number of contract cleaning companies increased by 20 per cent. However over recent years there is evidence of consolidation among the larger contract cleaning companies. They have achieved critical mass through merger and acquisition, which enables them to offer a wide range of business support services.

In 2000, only 465 of the 7,785 companies (6 per cent) registered in the industry, according to government VAT records, achieved annual sales of more than £1 million, with just 1 per cent reporting annual sales in excess of £5 million. Trade sources suggest that these 110 companies accounted for some 40 per cent of total industry sales.

MBD UK Contract Cleaning Market Development Report 2000

The MBD UK Contract Cleaning Market Development Report 2000 was published in the fourth quarter of 2000. MBD is offering a 10 per cent discount on the cost (£395) of the report to TheFB readers, tel: 0161 247 8600,
fax: 0161 247 8606,
email: enquiries@mbdltd.co.uk,
website: www.mbdltd.co.uk
The Key Note Contract Cleaning Market Report 2000 was published in July 2000, tel: 020 8481 8750,
fax: 020 8783 0049,
email:sales@keynote.co.uk
Website: www.keynote.co.uk
The Cleaning & Support Services Association, tel: 020 7481 0881,
fax: 020 7481 0882,
www.cleaningassoc.org