Despite an optimistic outlook in KMPG’s recent survey, it’s head of building says the sector must reassess risk management practices and people strategy
Although KPMG’s survey indicates that globally the construction industry appears to be in good shape, there is no doubt that the environment remains difficult for the sector, particularly in the UK.
Construction companies have to ask themselves whether 2010 will be the year in which they feel the pain already experienced by so many other sectors of the economy. Many construction companies appear to be living off the profits of contracts secured before the credit crunch. Whether such performance can be maintained depends upon a number of factors, not least a general economic recovery.
One key question is whether the projects that were put on ice in the years of under-capacity will re-emerge. Many of these were in the energy sector, and their future funding may be reliant upon continued high prices for oil, gas and other raw materials.
Of perhaps greater concern is the impact of the much-publicised public sector stimulus packages. In Europe and the UK there is real concern that government initiatives may be slowed down by bureaucracy or that money may not filter through quickly enough.
The challenging environment means that UK companies must stay alert and if necessary adapt quickly to market conditions that are changing fast. In our view, geographic and service expansion clearly should be on the agenda for every company in the sector. And locally, there are two particular areas for improvement.
One is the sector’s risk management. Practices have been under the spotlight for some time and it is estimated that worldwide under-managed project risk alone is costing the industry $3-4 billion annually in profits.
Our survey findings suggest that there has been considerable progress in the last couple of years. The sustained investment in risk management appears to be having a positive influence on behavior, with a greater focus on due diligence; greater evaluation of risk at bid phase and throughout a project; assessment of potential loss-making projects; enhanced oversight of subcontractors; and improved cash flow management.
However, such achievements should also be replicated at an organisational level, which involves looking at some of the broader risks facing the business. These could include emerging industry risks such as available financing for projects, expected levels of government stimuli, availability and cost of energy and raw materials. Scenario planning can play a valuable role in evaluating the impact of such macro-economic factors.
In our view UK companies have a lot of catching up to do when it comes to risk management. Many firms are still not making great leaps forward when it comes to risk management but instead continue to make small incremental changes year after year.
Another important consideration is aligning risk management practices with corporate strategy. For example: does the incentive structure encourage unnecessary risk taking (as happened in the financial services industry)?
Establishing an effective risk culture is also important in encouraging all employees to be risk aware and to take responsibility for their decisions. This should hopefully reduce the prospect of individuals close a potentially risky deal, and generally assist in balancing growth with prudent behavior.
The industry can feel justifiably pleased with its progress in tightening up project risk management. Those companies that can sustain this momentum across all their activities should not just reap commercial benefits, but also help to satisfy regulators’ expectations of good governance and enterprise risk management.
Managing and retaining talent is another area that construction companies should focus on. The recession may have temporarily eased the skills shortage, but the industry should not forget the clear message from the corresponding 2008 survey: the need to attract high quality people into a career in construction.
Despite the recession, there has certainly been a reluctance to let too many employees leave, with relatively few job cuts. Understandably, the majority of losses have involved indirect labour, with companies careful to retain project managers in particular.
However, only a small proportion of respondents seem willing to invest in links with schools and universities, which is a concern given that construction has to compete with other sectors for the best young talent. Professions such as accountancy, law and consultancy have placed a big emphasis on establishing a strong reputation on campus, painting a picture of exciting careers with a variety of options.
Another challenge facing some companies is to broaden the skill base in their appropriate geography, as they seek to gain a share of anticipated new infrastructure contracts. The challenge is not only to have the right people with the appropriate skills but to have them at the right place and the right time. Some of the executives we spoke to suggested that they may have to acquire companies with such expertise, although these may be relatively small scale purchases.
The ultimate test of the sector’s HR strategies will come when demand starts to rise again. Only then will engineering and construction companies discover whether their investment in good people has given them sufficient capacity.
Fiona McDermott is KPMG's UK head for building and construction