As the credit crunch bites deep into the construction industry, Elaine Knutt asks people from all areas of the sector for thoughts on coming through the slump and out the other side.
Housing starts, employment, order books, share prices – the graphs are all on the slide. And as the effects of last month’s financial crisis ripple down the supply chain, the key indicators aren’t going to improve any time soon. The seized-up lending system will be felt in developers’ stalled programmes, in mothballed sites, in contractors’ cash flow, in the personal pain of redundancies, and even the ability of some contractors and suppliers to keep trading. It’s going to be a long winter.
So how can the industry raise its game to meet the credit crunch challenge? Construction Manager has sought advice from all corners of the industry: from trade associations and professional institutions; from academics and business advisers; from consultants and contractors. We’ve spoken to employers that are hiring rather than firing, and an employee who has faced the closed door of redundancy only to find another door open on the other side.
Their suggestions fall into three categories. First there are positive, practical measures that can be taken now. Second, the medium-term strategies that could help firms navigate the coming months. And finally, there is the need to look beyond the credit crunch, when the credit tap is turned back on and finance once again flows through the system.
As that will coincide with the release of pent-up demand for new housing and commercial space, the industry will need the skills and strategies in place to move forward.
‘There are two jobs to be done – managing in the downturn, and planning for what comes on the other side,’ summarises Ian Canham, chief executive of Lincolnshire housebuilder Broadgate Group. ‘In a downturn, you’ve got to remember that the people who come through have stronger businesses in the end.’
Tomorrow, next week and next month, the advice is to keep a tight control of costs, keep cash flowing through the business, focus on service and do not be tempted to suspend normal due diligence. ‘Concentrate on what you do well, and do it very well – that’s how a good reputation spreads,’ says Rogers Watts, director of building surveyor Trident Building Consultancy.
However, as existing projects become extended and their replacements fail to enter the pipeline, small contractors that traditionally use payments on one job to meet obligations on the previous one could be vulnerable. Accountant Smith & Williamson’s advice is to prepare cash-flow forecasts every week, and make doubly sure they are not leaving themselves open to contractual claims.
Some companies will conclude that cutting costs via redundancies is the best way to ensure healthy re-growth once the economic climate improves. But Sagegreen HR Outsourcing also advises firms to explore other options, including shorter working hours, reduced overtime, work sharing, early retirement, transfers and re-training. And redundancy affects external perceptions, too.
‘The companies that treat staff properly will protect, rather than tarnish, their reputations,’ says Julia Evans, chief executive of the National Federation of Builders.
Training and apprenticeships were victims of the early 1990s recession but there are signs that employers are thinking differently this time. Spalding-based Broadgate Group, which builds around 150 homes a year, has been forced to make redundancies. However, it ring-fenced its apprentices and most talented trainers. ‘Any business has short, medium and long-term assets, and our apprentices and trainees are our long-term assets,’ says chief executive Ian Canham. ‘A downturn is just that, so if you want the right assets on the other side, you don’t sell the family jewels.’
ConstructionSkills, estimating that around 1,000 apprentices are at risk of redundancy during or after completion of training, is working with the Home Builders Federation, and Department for Education and Skills, to set up a ‘clearing house’ to offer alternative placements to affected trainees so that skills capacity does not haemhorrage away.
But with around 8,000 staff already let go by housebuilders, it’s hardly surprising that Hays Recruitment director Greg Lettington has seen an increase in candidates and online applications. On the upside, he has not detected a drop-off in public sector vacancies, and some employers are still recruiting. ‘They’re thinking there are more good managers out there who are available – so we can attract a team and build for the future. That’ll be in the back of some people’s minds,’ he says.
Ex-housebuilding applicants should consider alternative areas of the industry and different parts of the world, Lettington says. Carillion, for instance, will be recruiting for its support services business, which covers property management, consultancy and long-term maintenance contracts.
‘We will probably take on people with a construction or housebuilding background, because quantity surveying or project management are transferable skills,’ says investor relations manager John Denning. Carillion’s other main growth area will be its Middle East construction business, to which it will be transferring UK staff and adding new hires.
Projects manager Richard Moore is proof there are still jobs to be had. He was one of 43 staff made redundant from 200-strong Stamford Homes at the end of July, and has now been taken on by Mansell Construction as a site manager on a housing contract at RAF Lakenheath, Bury St Edmunds. ‘Although it’s a setback in terms of responsibility and job title, the salary I’m on now is just a little bit more, and I’m very lucky to have found another job,’ he says.
For the duration of the credit crunch, companies that have the flexibility to address new markets and offer new services will have an advantage. ‘Studies of innovation across all sectors show that companies that have the capability to innovate in a downturn survive longer,’ says Professor David Gann, head of innovation and entrepreneurship at the Tanaka Business School, Imperial College. ‘Companies will continue to have opportunities to win good projects, but they will need to work in a smarter way and differentiate themselves.’
That could be a tough order for some housebuilders, whose business model was based on speculative land deals and standardised product. But even in housebuilding, there will be opportunities for companies to increase their exposure to the public sector (Kier has recently signalled it is scaling back on private housebuilding) or targeting niche businesses such as high-end homes (a successful strategy for Holloway White Allom) or student housing.
Consultants clearly have opportunities to reposition their offer. For instance, transactions in the institutional property market are now as rare as domestic house sales, but building owners will still have business plans.
‘Fund managers still care about their profits and bonuses, so if they can’t trade the stock, they’re looking to add value to it through refurbishment,’ says Roger Watts of Trident. Architects can also help owners ‘sweat’ their existing building assets through smart refurbishment projects that add value and increase rental yield.
Traditionally, recessions have forced industries to re-appraise inefficient business models; the Latham agenda of partnering and supply chain integration was in part a response to the recession of the early 1990s. Some companies are now viewing the downturn as an opportunity to drive through further improvements in productivity.
‘We’re talking to [contractors] Inspace and Higgins about partnering,’ says Rick Burgess, technical director at PRP Architects. ‘We already had an agreement with Inspace, but now we’re trying to make all the things you talk about at a strategic, high level actually happen at the coalface.’
Alternatively, small contractors that are seeing local developers sit on their hands may have an opportunity to target larger-scale projects. ‘An SME contractor that’s too small to take on some public sector work could partner with other businesses to offer critical mass. We’ve seen an emergence of more partnership working,’ says the NFB’s Julia Evans, mentioning that at least two such arrangements are nearing the end of negotiations.
And what will the landscape look like once the crisis eases? Housebuilding has been the sector most deeply affected by the credit crunch, and is likely to be the most radically altered. Essentially, if the private sector has proved unequal to the task of building the homes the nation needs – output next year could fall to just 60,000 – we can expect a switch to more centrally driven policies.
That’s certainly the line from English Partnerships, the government regeneration agency that will become one half of the new Homes and Communities Agency from next April. ‘Looking to the future, we’re trying to build a new kind of housing market with new players, and with local authorities playing a more dominant role,’ says Steve Carr, director of policy and economics.
The policy is centred on new public-private partnerships – local housing companies. Local authorities would put council-owned land suitable for housing development in a special purpose vehicle, bringing on board construction companies, developers or registered social landlords as equity partners. After the site has been developed, around half the homes would be sold, creating commercial returns for the private sector, while half would remain as ‘affordable’ homes in public sector ownership.
English Partnerships is currently working with 14 local authorities on pilot projects, the most advanced being Barking & Dagenham (see news story p6), Nottingham, Manchester and Newcastle.
‘It’s not a return to social housing, but it is a return to local authorities being players in the housing market,’ says Carr. ‘The downturn is an opportunity to reflect on what we were doing and the range of players we were working with, and having a more diverse housing market with more private firms as opposed to listed companies, and maybe more construction-based companies.’
Every business will have to take a long, hard look at what it’s doing and how it can meet the challenges of the future. But the good news is that the industry has the strength and flexibility to adapt. Twenty years ago, it was fragmented and cut-throat. Today, it knows how to look after staff, clients and supply chain partners. By pulling together, construction can lift its own prospects. cm
There are some very astute businesses already looking to the future, and collaboration is one thing we’ll be seeing more of. But companies will need the skills and equipment to look after customers
Julia Evans, chief executive, National Federation of Builders
Construction companies will need to be innovative in their business models, the ways in which they face the market and in the technologies and partners they work with
Professor David Gann, Tanaka BusinessSchool, Imperial College
Don’t panic, don’t rush out and get another job for the sake of getting a job or you’ll end up with something where you’re travelling three hours a day. Sit back and work towards something you want rather than taking a job in desperation
Richard Moore, project manager, Mansell
The most proactive thing companies can do is get all their paperwork in order. Banks don’t like surprises, so if you end up negotiating, you’re in a better position if all the paperwork is up to date
James Money, Smith & Williamson, accountants and financial advisers
I’ve been here twice before and the bottom line is that it’s bloody hard work. But if you graft and concentrate on doing what you do well, you’ll get out the other side
Roger Watts, director, Trident Building Consultancy
We’re always keen to recruit good people, especially for the Middle East. Analysts’ consensus forecast for Carillion for 2008 and 2009 is double-digit earnings growth
John Denning, investor relations, manager, Carillion
Illustration by Shonagh Rae