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Feature The New Normal

It’s normal to deliver projects more efficiently... A flatlining economy, in which clients

AFTER RECESSION comes recovery — doesn’t it? Except that three and a half demoralising years since the credit crunch, there’s no sign of recovery. Instead, we’re in the New Normal, an unfamiliar territory where workloads and contract sizes have shrunk, but the skills needed to deliver them have risen; client expectations are up while the prices they’re paying are down. “People have come to terms with the fact that we’re in a new world, it’s not a short-term deal and things have changed,” says Peter Jacobs FCIOB, managing director for the London region at Morgan Sindall Construction. The New Normal is winning work at

margins so thin that one wrong move could pitch the project into a loss. Clients are achieving “more for less”, with out- turn costs wiping out the construction price inflation of the boom years and more. It’s working on smaller contract sizes — a Construction News/Glenigan survey found that the average contract size fell from £14m in 2008 to £8.7m in 2011. And it’s the sight of major national names on tender lists for six-figure contracts — and now being joined by work- hungry contractors from Ireland. The conundrum of the New Normal is

that the work pipeline has by no means dried up: it’s just narrowed and moving at a slower pace. “It’s a different type of economy — there’s still an ageing population, school places need to be delivered, the demand for social housing is still high. It’s about efficiency, effectiveness and unlocking value,” says Graham Kean, head of public at EC Harris. “The projects are about refurbishment, remodelling and adapting to reduce operating costs.” In other words, contracts that are lower in value, but more demanding in terms of skills, labour and resources.

Business as usual So how is the construction sector adapting? Clearly, different businesses are experiencing it in different ways. For the premier league players, insulated by major projects such as Crossrail and the remaining BSF and public sector framework deals, there is possibly a greater sense of business as usual. It’s also clear that New Normal in London and the south-east is more comfortable than it

routinely expect “more for less”, has achieved what two decades of

government initiatives and exhortations failed to do: broadly speaking to deliver projects at cut-throat prices and still make a margin, contractors are embracing lean thinking, squeezing out waste and reducing rework to a minimum.

From the perspective of 2012 and its new emphasis on efficiency, some of the out-turn costs racked up in 2008-10 begin to look distinctly off-colour. According to EC Harris, average per m2 out-turn costs in education projects fell from £2,700 in 2009/10 to £1,400 in 2011.

Martin Chambers PPCIOB, frameworks director at Shaylor Construction, reports that prices are back at 2005 levels, wiping

out the 10-15% cost inflation of 2005-08. “I’d say we are 15% more efficient, we use more off-site, we take more waste out, we’re better at getting it right first time,” he says.

At Morgan Sindall, Peter Jacobs says he’s aware of far less waste in the supply chain. “The best of the specialists [trade contractors] have upped their game a lot over the last few years, say by 20%. A lot of the old adversarial stuff has been driven out of the supply chain.” But some of the improvements in

efficiency can be found closer to home. “Everyone’s working a lot harder than they were. But [after redundancies] you’re left with the best people in the business, so you manage to get more work done,” says Phil Wilding at Wilding & Butler.

It’s normal to outsource... When the credit crunch first hit, many

contractors made cuts to their central admin and support functions, such as HR, finance and tendering support. Now that many have stabilised their businesses, they’re looking to outsource rather than rebuilding in-house teams. “Now, in picking up work, we’ve

outsourced some support roles,” says Malcolm Clarke MCIOB, managing director at Baxall Construction of Kent. “We now have an external consultant updating the website and assisting with marketing and bid-writing, releasing

is in the midlands and the north — analysis from PriceWaterhouseCoopers show a 5% decrease in construction firms going bust in London in 2011 compared to 2010, but a 9% increase elsewhere. But for the broad middle ground of the

construction industry, struggling to match their workload to the new realities, the New Normal has ushered in a very different way of doing business. “We started referring to the new reality about two years ago,” says Mark Beard FCIOB, managing director of Beard Construction. “What happened in 2003 to 2007 was abnormal and now we’ve got to trade successfully in today’s climate. The skill is in recognising that and acting quickly.” At Beard, that has meant switching focus to smaller and medium- sized projects to maintain the order book. Midlands contractor Shaylor Group is being broad-minded about what it takes on: project values range from £1,000 to £15m. “We made a strategic decision to concentrate on clients whose connection with the construction industry was

managers to do other things.” Contracts and risk management consultant CR Management offers companies training on winning work then making the best of the work they have won. Partner Jason Farnell says contractors have become more creative: “Following redundancies, companies have lost a bit of their history and cultural identity, the sense of ‘this is how we’ve always done it’. They’re more open, more creative. If you want to get the best out of people, you’ve got to let them think and produce solutions.”

It’s normal to have fewer disputes …. As the credit crunch started to bite, a spike in legal proceedings

was expected as contractors looked to shore up their finances by resorting to the courts. That spike never materialised: according to research from Glasgow Caledonia University, the number of construction adjudications broadly halved between 2001 and 2010. That’s not to say the courts aren’t busy, but a large part of the caseload relates to insolvencies and their aftermath. Simon Tolson of law firm Fenwick Elliott, chair of the

Technology and Construction Solicitors Association, says there has been a shift in the way construction solicitors operate. “Clients are using lawyers to advise throughout a project, not ringing them up because they’ve decided to go to court. The legal market has matured and met that demand.”

CR Management used to advise clients on “cold cases”: projects where the team had dispersed and the issues were fading from memory. Now, all its cases relate to projects still on site. “There’s more willingness to deal with issues earlier, to get the final account so we’re seeing far fewer disputes,” says partner Jason Farnell. “People want to negotiate, want to get to an agreed position and move on. It’s about resources and being realistic, and it contributes to a greater efficiency.”

And where contractors that have tendered uneconomically low might once have attempted to improve the final position through legal action, the norm now is to renegotiate. “Some people we’ve worked with have gone back to the drawing board, and customers have recognised this to some degree,” says Phil Westerman at Grant Thornton.


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