Size matters

Look into the future and what do you see? Is it a fairer construction industry where everyone gets paid a proper amount, and on time, too? Hopefully there are still some optimists out there. But, for those of you who aren’t looking through rose tinted spectacles, where does the specialist contractor go from here? How does it claim a fairer slice of the construction pie?

Many contractors aren’t leaving the future to chance. They are forcing the issue with radical action. Action in the form of mergers, buyouts and acquisitions. In recent months there has been a spate of buying, selling and joining together – deals which see specialists joining forces or becoming a division within a larger concern, often a construction company.

As reported in EMC (September 2000), Mowlem subsidiary, Aqumen has bought the Bower Group for £7.5 million. A statement from the Aqumen newsletter reads: “The purchase of the Bower Group will enable us to deliver facilities management and m&e services as an integrated package to our combined clients.”

Another multidisciplinary company, Direction International, has acquired F W Cook Building Services. Group managing director Phil Moore summed up the move, saying: “The purchase of F W Cook enables us to compete right across the board.”

This shift to become part of a larger concern is not something that has come about by chance. It is concrete evidence that those long awaited and then often ignored missives from messrs Latham and Egan are actually having an impact on the industry.

Both men called for a more streamlined construction industry with quicker, simpler means of communication, cooperation and remuneration. They said that it would lead to a more efficient industry and a more profitable future – something that everyone wants, especially the client. In fact little would have changed if the client hadn’t called for it. The Egan report took on board the views of some of the industry’s largest players and translated their ideals into workable solutions for the construction sector.

It is a consolidation of business in general, providing the one-stop offering that the client requires

Steve Wilton

Steve Wilton, md of Aqumen’s new division, Dudley Bower Services, sees the acquisition as a logical step: “It is a consolidation of business in general, providing the one-stop offering that the client requires.” He goes further, though, saying: “The spate of mergers and buyouts stems from the need to improve margin by increased revenue into higher margin markets and continually reducing overhead costs.”

These reasons make sound business sense for the client. And, for the specialist, combining forces with a general contractor brings access to larger and different markets, the financial resources to tackle bigger contracts and hopefully more opportunity for infrastructure development like IT and personnel enhancement.

But is there a downside? Moore recognises the possible stumbling blocks when a specialist is enveloped into a larger corporation. “The flexibility to provide tailored services to clients may be reduced as could the ability to respond quickly to an order.” Wilton points to “…the loss of business identity, unless carefully managed,” and the fact that this destiny is in the hands of a greater authority.

Consolidation does not always take the form of a specialist being bought out by a multi-disciplinary construction firm. As with the creation of the MEA Corporation (EMC July/August 2000), specialist contractors can combine forces to provide a one-stop-shop for all the client’s building services needs. MEA Corporation consists of Rotrax Engineering Services, C J Bartley and Total Environmental & Maintenance Services (TEMS).

This road has been taken by Gratte Brothers, too, with its buyout of mechanical contractor A G Manly. Gratte Bothers md, Ian Gratte, believes that the merging of specialist contractors is the way forward. He says: “Diversification in the skills base reduces the risk of over-dependence on a single discipline…In the case where the client requires a single source for building services, the merger will give the company a competitive advantage over a single discipline company.”

The flexibility to provide tailored services to clients may be reduced as could the ability to respond quickly to an order

Phil Moore

Simon Bartley, sales director with MEA Corporation concurs: “Since specialist contractors tend to be smaller and privately owned they are most at threat from the vagaries of the construction industry, especially in light of the general trend for clients to produce much reduced suppliers lists.” Bartley believes that the current spate of mergers and acquisitions is borne out of a fear of another recession. “The lack of improved margins despite a considerable upturn in work has instigated the mergers. Fear that, come a recession, there will be a further downturn in margins, margins that aren’t there now.” And so, economies of scale point to a merger. Less overheads, centralised functions, better credit and more availability and flexibility of labour and plant enables survival when single skill specialists are falling by the wayside.

So, where does this leave the contractor specialising in one discipline? Who is going to fight their corner? Wilton says: “Good opportunities for medium sized contractors will remain in the short term. However, there is a risk that if they remain independent and medium sized, they will fall somewhere between a ‘niche’ and a ‘volume’ supplier. This is a dangerous zone to be in.

“A further disadvantage of remaining single skilled and independent is that you will move down the ‘value chain’, which could result in reduced returns.” This statement rings especially true when PFI and partnering based contracts are considered. Bartley believes times will be difficult for the single skilled contractor. When asked if they would be able to compete on premium projects like PFI he says: “Only if they are either a niche specialist or a very large contractor.”

Gratte, however, is not so pessimistic. He believes that there will continue to be a role for the medium sized electrical or mechanical contractor, as some organisations seem reticent to deal with suppliers who are larger than they are. He too, points to specialist niche sectors as an avenue for trade.

But what of fair and prompt payment? Well, consortiums of services specialists working under one banner will have more clout in the construction shark pool. The project manager and client will have to sit up and listen. But what about those specialists that are part of a construction firm’s portfolio? Gratte says: “There certainly appears to be a potential conflict of interest…has a specialist ever taken its construction parent to arbitration?” Bartley agrees, thinking that the specialists’ rights may be subsumed if it becomes part of a large construction-led organisation. He feels that the preferable road to travel is that of the large multidisciplinary building services corporation.

At the end of the day, who is to know which is the right route to take? Large multi-skilled construction companies may one day be the only purveyors of building services. Or, there could be joint rule, with specialist corporations grasping a share of the power.