Feature The New Normal >
through the revenue account, not capital projects — clients looking to refurbish or maintain their current assets,” says Shaylor Construction framework director Martin Chambers PPCIOB. “So project values automatically became smaller. Now it’s £3m, a few years ago it was £7m.” Typically, construction companies are
leaner, tighter operations, with their cost base better matched to their income. Phil Westerman, head of construction at finance and business adviser Grant Thornton, points out that construction has historically struggled with low margins, but the struggle was harder than it should have been.
“Businesses that used to make 6-7% in the good years should really have been making 8-9%, but central costs got out of control. In the credit crunch, business stopped growing, and there was a smaller revenue pot to cover overheads,” says Westerman. “If they’ve re-based their overhead bases they should potentially make more money in the future — and not aim to grow too fast again.”
Realising efficiency savings Contractor GB Building Solutions “battened down the hatches”, reducing costs by measures such as switching regional offices from rental to owner- occupation, says chairman Martin Smout. “We’re a more efficient company — overheads have fallen from £12m to £7m,” he says. At Baxall Construction, managing director Malcolm Clarke says the company is now benefitting from the IT system it invested in during the boom years — but only yielded real efficiency savings when management refocused on quality management in the New Normal. Many contractors acknowledge that the crisis has prompted them to excise the financial flab that crept in when the bottom line just kept growing. “When you’re busy, it’s hard to concentrate on all the details that create total cost efficiency,” acknowledges Gary Sullivan of construction logistics and services provider Wilson James. “When you’re less busy, you streamline HR and payroll issues, and recruit staff to project manage internal issues like IT.” In terms of project delivery, many
contractors describe how they’ve upped their game in the New Normal, modifying designs for economy and pragmatism; using their expertise on supply chains and
16 | MARCH 2012 | CONSTRUCTION MANAGER
It’s normal to get discouraged.... For owner-managers in SMEs, the New
Normal often means longer hours for less reward — both financial and psychological. “Working life’s not as enjoyable as it was. When you go to events and speak to other people in the industry — the architects, engineers and surveyors — it can be quite demotivating just talking about it,” one SME director admits.
For employees, job insecurity remains high. According to the quarterly Employee Engagement survey from the Chartered Institute of Personnel and Development, 21% of employees across the economy felt their jobs were under threat in Q4 2011, slightly up on the 20% recorded in Q3 2011. Pay freezes are still overall the
logistics; project managing extraneous costs and carbon out of the project. “Margins are rising slightly and the bottom line will improve, but not because of any change in tender margins — the reason for the change is doing the stuff we were doing better and leaner,” says Martin Chambers of Shaylor Group. Other contractors have adapted to the
tougher conditions by offering clients a defect-free service or sustainability expertise. “We’re building a reputation for delivering to a higher standard. Delivering projects on time, to decent quality and almost snag free is part of the new reality,” says Mark Beard. “A lot of the things that were
aspirational a few years ago are now expected,” adds Peter Jacobs at Morgan Sindall. “Three years ago you could have had a nice glossy plan about your sustainability standards — now you need evidence of what you’ve achieved.” At GB Building Solutions, Martin Smout says the company is working harder at
norm, in Q4 2011, 75% of public sector workers said their salaries were still frozen, while in the private sector 43% of staff were affected. Ben Willmott, head of public policy at
the CIPD, warns that the combination of job insecurity and pay freezes could be harmful to employers. “There is the risk of higher levels of stress and absence, and reduced likelihood of innovation — you won’t get ideas coming up from the frontline or good intelligence about the marketplace,” he says. If a boost to pay packets isn’t possible, Willmott advises employers to offer other benefits, such as flexible working arrangements and childcare vouchers.
… but normal to look ahead with optimism After experiencing redundancies and recruitment freezes,
several of the companies CM spoke to for this article are now planning to recruit again in 2012. And there is evidence that jobs are filtering back on to the market, as companies re-hire some of the skills they were forced to cut. “We’ve noticed a pick up in the number of vacancies we’ve registered in most geographical areas, but we’re not back to the levels of 2006-08. Some regions are doing better than others – the south, South West, London and East Anglia are the areas where people are investing,” says Greg Lettington, director of Hays Construction and Property for the West Midlands.
Some companies are feeling confident enough to consider small pay rises and reintroduce bonus schemes. At Shaylor Group for instance, a one-year pay freeze is being followed by a rise for 2011/12.
And while we still hear news of rising unemployment, flatlining GDP growth and the impact of public sector cuts, the best strategy could be to mentally tune it out. “There’s no point in worrying ourselves about whether Network Rail is going to do a big infrastructure project, or that homeowners aren’t doing small domestic projects, because we’re not in that market,” says Malcolm Clarke of Baxall Construction. ”If you listen to all the news, you can become very negative. But you have to deal with what’s in front of you, and let other people worry about the rest.”
It’s normal to struggle to balance the books... Low-margin work presents plenty of
problems for contractors. Wrong moves that might have been lost in the overall picture can now have a serious impact on the final account or a contractor’s chances of winning the next contract.
In the New Normal refurbishment and maintenance-led economy, recovery of overheads is more pressing. Compared to new-build projects, the difference between a £1m job and a £2m job is more likely to be in labour than components and
materials. Even if contractors are foot-sure and efficient, it’s harder to cover overheads from a smaller £1m job. “It’s a struggle to win the work, then sometimes we find there’s just no profit,” says one contractor.
Contractors are also keeping an eye on clients’ ability to pay. Gary Sullivan,
managing director of Wilson James, which offers logistics services to contractors, has walked away from projects where there was doubt over financing. “With a large payroll, we’ve had to be very conscientious about cash flow,” says Sullivan. “We took a view we’d only work in areas where we knew we would be paid.”
Meanwhile, contractors know that taking lower-value work can be a risk if income ever fails to cover their obligations.
“Contractors can survive a while beyond the decisions they make to keep going. But sooner or later they’ll catch up with you,” says GB Building Solutions’ Martin Smout.