News Archive

Prosperity

17/09/2011

NEW APPROACH NEEDED FOR LONG TERM PROSPERITY

As contractors like Balfour Beatty, Kier and Morgan Sindell show a healthy growth rate in a recessionary state of mind and the financial crisis stabilises, for the moment anyway, specialist sub-contractor Greg Verhoef discusses his ideas to meet the next round of cuts and calls for the industry to pull together for the long term prosperity of all.

In the 1950’s the United States Secretary of State, John Foster Dulles, said when discussing business, “The measure of success is not whether you have a tough problem to deal with, but whether it is the same problem you had last year”, the sentiment still holds good some six decades later.  I was therefore encouraged to read in Building (24.09) that the top 10 contractors are doing better than last year. Of course sub-contractors are well down the food chain when it comes to major new build projects and refurbishment contracts, but that doesn’t mean that we are not experiencing many of the cost cutting and payment pressures that the major contractors are no doubt experiencing too.

We are now all aware of the probable pains coming out of Osbourne’s CSR; and this, after two years of a world financial crisis. It is therefore, not surprising that we are operating in a tough environment. Tom Broughton made some interesting points in a recent editor’s comment piece. He acknowledged that the days of “Latham and Egan-style debates assessing the merits of partnering and integrated project teams” are gone and how much damage you suffer, really depends on “where you are in the chain”.

The core of small specialist sub-contractors sits at the bottom of this chain. We are suffering, but are still here because we focus on finding solutions. Diversifying into new products and markets has helped, but we are still facing short term problems that need to be, and in my opinion, can be addressed. The toughest current problem is that we operate in a client driven market and because the client, like everyone else, is suffering, they squeeze the main contractor to get the lowest price on jobs possible. And, in turn, the main contractor squeezes us.

We are expected to, and it is has now become the norm, for us to take a 10% reduction on all our projects. This immediately erodes our profit margin and puts us in danger of survival. I understand that everyone is primarily out to survive in these difficult times. However, I believe that if everyone continues down this road and pays no attention to others in the supply chain it will become more unsustainable and detrimental to every construction firm, not just the small subcontractors like us.

Because our margins are being squeezed, all the measures to reduce overheads and increase efficiency are in place – there is little or no room for compromise. We are being faced with rising material prices, right through from stone to fuel, but everyone still wants a discount. I worry that in desperation for profit, many small sub-contractors are going to begin looking for cost savings in the very places they shouldn’t. If health and safety, on site management and due diligence on materials become marginalised and subject to dramatic cost cutting programmes it will compromise projects and will therefore, impact on the client and the main contractors as well as us.

In many cases because the main contractors are being squeezed they are opting to go with small sub-contractors that offer the best price, but of course this does not guarantee the best work. Relationships cannot be built upon a supply chain where everyone is undercutting each other and choosing whoever will take on work for the lowest price.

Long term work experience and loyalty quickly erode as the focus becomes driven by cost alone. Clients and main contractors are beginning to have less understanding of which specialist sub-contractor’s actually deliver the best performance, because often they haven’t worked with the sub-contractor before and, as I mention above, the sub-contractors with the lowest price, securing the work, are probably skimping somewhere in the process and will deliver a poor standard application which, in the end, will reflect badly on the whole construction industry.

I insist on not skimping on health and safety, onsite management and due diligence. For example if we cut our key skilled people we will be cutting our main asset, our knowledge base, built-up over the last twenty years. I don’t want to cut our skill base because when the market comes back, as it will, we will no longer have the capability to deliver to the standard that sets us apart from other companies; and it goes with out saying that cutting health and safety and due diligence would be detrimental to the whole industry and is un-thinkable.

But we are getting to the point where something needs to change to ensure a brighter future - this brings me back to finding a solution. If the industry is not to face the same problems this time next year we need to work together to ensure that strong relationships are, once again, an integral part of the supply chain.

If I consider my own business, we believe in relationships. I want our clients to rely on us and to trust us to deliver whatever they require. However, we must be able to rely on them for a steady stream of work. It’s called building a relationship. Once we have one, we can begin to talk about discounts. But, it must be remembered, if and when the market comes back, that quality work comes at a fair price. We cannot go on like this forever.

What’s the alternative? Rachel Bridge writing in the Sunday Times Business section (10.10) quoted Kirk Fletcher, managing director of Experian’s business information team, who said: “What we don’t want is to use late payment as a stick to beat the large businesses and drive them to consolidate 100 small suppliers into three large contracts with bigger suppliers, where they don’t have the same challenges of dealing with small suppliers. It is vital that they continue to be willing and able to trade with small and medium sized firms.”

Clients and main contractors must be able to assess what they’ll get from specialist sub-contractors before they begin working with them, and then they can be sure of getting knowledge and performance in an established relationship with the sub-contractor geared to deliver a quality piece of work from the outset.