Friday, February 12, 2016

Time to just say ‘no’ to cost cutters

Paul McLaughlin, BESA Chief Executive

Three Tier One contractors have just walked away from major projects.

Bouygues, Kier and Morgan Sindall have all said ‘thanks, but no thanks’ to significant projects for blue chip clients having decided there was no way they could get the sums to add up to a profit.

Kier had 50 people on site at the Ram Quarter regeneration scheme in Wandsworth with enabling works well underway on the £170m project to redevelop the old Young’s brewery site into luxury flats before deciding enough was enough.

Apparently, it was under pressure from the Chinese developer to ditch its preferred supply chain and source more supplies directly from China in a bid to get costs down further.

Morgan Sindall has just dropped a big scheme for Cambridge University and Bouygues has walked off site at Great Ormond Street Hospital – both following a collapse in price negotiations.

So what’s going on? And what are the implications for specialist sub-contractors for the rest of this year and into 2017?

Unrealistic
The trend for unrealistic pricing by cost consultants blights our industry and has been a major reason why contractors have found it hard to turn burgeoning order books into truly profitable work. While the sector recovered from the depths of the recession, prices only inched upwards marginally – and with main contractors struggling to make their cut, sub-contractors inevitably came under increasing pressure to drop prices even further.

It is good to see Tier Ones drawing a line in the sand and waking up to the fact that buying turnover at any price is not a blueprint for future prosperity. If the top of the supply chain can’t see a profit in a project, then there is clearly no reason for specialist sub-contractors to subject themselves to the inevitable price pressures that would follow – and the potential harm to their businesses.

As the construction market calms (and cools) down – particularly in London – it is clear that spooked developers are forcing prices down with little thought about how that will affect the quality of the final product and the impact it will have on their supply chains.

At the start of the year, construction industry forecaster Richard Threlfall, head of Infrastructure, Building and Construction at the accountancy firm KPMG, said sub-contractors would “continue to hold the balance of power” for at least another year.

“For the supply chain, the outlook is really good,” said Mr Threlfall. “Companies [with a] real specialism will be in hot demand, particularly those operating with highly skilled labour, which will remain in short supply. Sub-contractors will continue to hold the balance of power…and Tier Ones will remain under pressure from clients [who are] increasingly sceptical about their added value.”

The BESA members add immense value to projects thanks to their specialist skills and expertise. The current uncertainty in the market and the stance taken by these three major firms should give them confidence not to sell their expertise at any price – but rather at the right price.

Sometimes it pays to just say ‘no’.

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