The Rise Primesite
Primesite's failed The Rise scheme signalled the end for CPUK

How can the construction industry break its fall?

Dan Whelan

Design and build contracts are squeezing the life out of construction firms as they fight a losing battle to balance winning work and making a profit in what many have termed a race to the bottom. Diversification and involving contractors earlier in the process could stop the slide.

Chris McGoff, director of construction firm McGoff Group, said main contractors should be involved from the planning stage so they could have more say in the direction of a project. 

“It is so important for main contractors to lead the process from the top. If not, if you get something wrong, that could cost you 2% of your margin.” 

McGoff was critical of cost consultants who he said were sometimes “miles off” in terms of their estimations of what a project will cost as well as being overly reliant on “stale data”. 

On one occasion, his firm calculated that a job would cost £16m whereas the client-appointed cost consultant came back with a figure £2m lower. 

“One of the other parties that tendered for the job went bust. The market is very competitive and a lot of the time clients are being advised inappropriately by cost consultants who are setting unrealistic expectations on pricing,” he said. 

Diversify to survive

New Care

New Care provides work for McGoff Group’s construction arm, reducing need to tender for jobs

McGoff explained that his construction firm doesn’t tender for work that often anymore. Rather that it is fed by self-generated work such as building out schemes for New Care, McGoff’s care home development business. 

He said this diversification, and being able to generate work in-house, were key to avoiding the pitfalls of design and build but appreciated that not all companies were equipped to do this. 

“North West contractors that enter into that race to the bottom do it at their own peril,” McGoff said. 

The impending collapse of Cruden Construction, which has signed a notice to appoint KPMG as administrator, is an all too familiar story for the industry. 

Since December 2018, several high-profile names in North West construction have gone to the wall. These included Forrest, Worthington Construction, CPUK, Bardsley, Pochin’s, and Harry Fairclough. 

The reaction is typically sadness, tempered with a rueful acceptance of something inevitable. Shock is way down on the list of emotions these days.

Zoe Brooke, director of Widnes-based construction firm Whitfield Brown, and founder of the Save Construction Initiative, is angry. 

“It is absolutely devastating. We are at a critical point now.” 

Brooke has called for Government intervention in order to help the sector but admits that the process of design and build is largely to blame for the collapse of some of the North West’s most well-established contractors. 

Design and build is when a developer, often guided by a cost consultant, sets a fixed price for the construction of a project, transferring the financial risk to the contractor. 

Harry Fairclough Office

Harry Fairclough collapsed in February owing £7m to creditors

In order to win contracts, construction firms will bid low, narrowing profit margins, often to less than 5%.

As profit margins constrict, so too does the margin for error. Even the smallest mishap could plunge a firm into the red. 

CPUK collapsed owing £11m to creditors, largely due to a single problem job, Primesite Developments’ £40m The Rise scheme, which was subject to delays. 

Even while still operating, the narrow profit margins inflicted by design and build are reflected in firms’ financial results.  

Cruden reported an operating loss of £2.2m despite a £38m turnover in 2018. The previous year, Bardsley turned over £68m but made a profit of just over £1m. 

Pochin’s made a £6.2m loss after tax on a turnover of £50.5m, according to its most recent accounts for the year to March 2018. 

“People refer to it as a race to the bottom. I call it a self-harm cycle. We are all in a state of desperation to win work,” Brooke said. 

Having won a contract with a low bid, the contractor will then set about planning how to recoup money during the build, Brooke explained. 

By doing this, contractors are effectively backing themselves into a corner, risking the financial health of the company on the chance that it will be able to claw back money and make a profit. 

The process of pricing a job can take up to four weeks and cost around £50,000 and not winning a tender, that so many resources have gone towards, creates increasing pressure to win the next one, Brooke said. 

“We need a change in behaviour. People have got into the aggressive mindset that the lowest tender should always win,” she added.

Cheap obsession

Stuart Stead, head of property and construction at accountancy practice Cowgills, said there was an obsession among developers with “getting the work done cheaply”. 

He said this obsession meant that contractors have little room for manoeuvre and two- or three-week delays can have a drastic impact on a firm’s finances. 

“For a £10m job, the profit margin could be as low as 2%,” he said, adding that sometimes contractors will take on a job knowing it won’t make a profit “just for the turnover”. 

“We need a seismic shift in culture. The cheapest price mentality throws out the dynamic of a relationship between client and contractor. 

“There needs to be more collaboration between client and contractor to build up trust,” he said. 

Your Comments

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Is anybody forcing the contractors to enter into D&B contracts they can’t afford to fulfil? There is such a thing as saying “no”.

By Anon

Always about margins isn’t it. How about a more meaningful conversation about quality. People used to say they paid good money for stuff because they worked hard and earned it. Nowadays people seem more pleased with themselves with how little they paid for something. It’s dragging the whole world down, not just the construction industry.

By Jaded

Totally agree – focus should not be on a company’s turnover, but it’s turnover to net assets and ability to sustain shocks. However, the main problem is cost consultants interested only in the lowest build cost and their fees. Sadly there are still too many contractors chasing turnover at little or no margin, with cost consultants eager to appoint them to justify their existence.

By Fidel

100 % Agree with Chris McGoff and Zoe Brooke’s comments. I do not have any Contractor bias in my agreement with them. I spent over 40 years ‘Client side’ QS-ing in Public Sector, first 2/3rds of my time in ‘traditional’ client design / lowest price tender mode ( together with lots of disputes and claims ), and the last 1/3rd fully engaged in 2-stage collaborative procurements with early contractor involvement / target cost partnering contracts with pain/gain share mechanisms for client and contractor. Worked a dream ! Everybody bringing their knowledge and experience to the table for the benefit of the project BEFORE a contract is agreed. A project with ‘wrong’ budget would never get off the ground working this way. All projects must start with the right £ number to achieve desired outcome. No bigger current example of this than ‘Grenfell’. If the industry carries on ( driven by clients and their PMs and QSs ) who will only entertain this ‘ traditional madness ‘, then nothing will change. More Crudens, more Bardsleys, more Harry Faircloughs, more Styles and Wood, more Carillions, more Grenfells ……. CLIENTS and your Consultants ….. stop looking the other way when things go badly wrong …… start looking at yourselves, because if YOU change nothing, nothing will change ! Contractors are stuck in a negative ‘catch22’ situation where they are forced to react to ‘mad’ scenarios that Clients of the industry present them with ! Working together in some form of collaborative / alliancing way PRE -CONTRACT , with the ‘right’ budget on the table, is the only way to get this otherwise great industry, out of the absolute mess that it is forced to deal with on a daily basis. This is what the whole of the ‘Constructing Excellence’ agenda is all about for goodness sake ! Time to ‘smell the coffee’ if you haven’t done so already !

It’s a mugs game – when you are buying work at sub 5% margins, it doesn’t take much to go wrong to catch a cold. The issue has been exasperated in recent years by Housing Associations who over pay for sites and then expect the contractor to deliver at an unrealistic level to get them out of a hole. Simple answer – do not tender or provide a price. Before long the market will then realise that prices need to increase and that designs need to be agreed and costed at an earlier stage in the process. The only reason that more NW Contractors have not gone bust is that they are part of larger PLC’s and are being subsidised by other parts of the business.

By The realist

Good to see John Finlay’s comments- now there’s a man who has seen a lot of what the industry has to offer! Contractors dont enjoy bidding for work, making 1-2% after overheads are deducted, but sadly we do because there always seems someone who is prepared to- why do we do it to ourselves! But if there was a sensible conversation some would call it a cartel…. Even so called 2-stage projects with a 70% emphasis on quality are done with one eye firmly on the price- often a small increase in cost could be worth many points in quality so the weighting is all wrong. What other industry would risk so much for 1-2%? Its madness, Unfortunately clients are misinformed and the contractor battles uphill to try and educate them and dispel the myth that they’re trying to have their pants down and make a fortune….

By JB

To elaborate without blame – much of our industries problems arise from the initial procurement process.
The Save Construction is attempting to address this representing all disciplines. We already have support from CIOB and representatives from RIBA, Constructing Excellence.

There is still a huge mistrust when it comes to collaborating and there’s the misconception that clients won’t receive value for money. Early engagement with ALL parties would prevent the exhaustive pre-qualification, tender mostly with ITT/requirement of full methodology followed by value engineering, re design, re price scenario that has become all too common in attempt to reach a target cost.
In some instances this convoluted process can take months, meanwhile no one receives an income until the scheme is live.

The volume of projects being procured as D&B is time inefficient and increases contractor and to some aspect the clients risk. under competitive tendering it seems senseless and exhaustive. The open book/negotiated approach would bring huge benefits to the client drivers such as time, cost, money.

Self harm cycle – contractors, designers subs etc and having to adapt to the industries low/negative margins. If you are tirelessly pricing and not winning then you soon have to adapt to market conditions to ensure the stability of the business and the livelihood of the people you employ. It also defeats the objective of “quality” as this can soon be manoeuvred down the list of priorities if the sector is operating to low or negative margins.

We need government intervention. Support needs to come from the top to protect our sector and OUR people.

We have a skill shortage already. With the collapse of so many NW businesses, those surviving can only accommodate so many of those out of work which increases the chances they leave the sector entirely. This fragility is not a good advertisement prospective new comers – construction is losing its appeal and appetite is low.
Whitfield & Brown works alongside GMCA/careers and enterprise companies to create a sustainable industry, it’s fruitless if we have no one to mentor them.
Our people need protecting and the only way this can be done is with government intervention. We have guidelines on minimum wages/fair payment, we need the same introducing to fair and reasonable profit across the board for the industry as a whole.

By Zoe Brooke

Seriously, as a Sub-Contractor, who is safe to work for out there ? John Turner, John Sisk, Bowmer and Kirkland, Interserve, Eric Wright, Kier etc. What is being done to monitor their ability to simply pay their bills ? Why no stress test ? If they Employ a Director on a £100k+ package, then decide to make them redundant and ‘pay them off’ as they use them as an excuse for failing to make any money, do they really have the funds to employ someone new and continue this process every 6 months / 2 years. Do we need individual bank accounts for every project to at least supply some certainty ? If the supply chain are unable to gain credit insurance on the likes of Kier and Interserve….then why are clients giving them projects ?

By Dec Noncollusion

@Dec Noncollusion

Clients, and their agents, are always at the heart of industry problems.

By North by North-West

“Having won a contract with a low bid, the contractor will then set about planning how to recoup money during the build, Brooke explained. ”

As is always the case, this comes at the expense of the subcontractors

By Mike

No Contractor has to sign up to any D&B Contract. We have to be braver and realised that OHP is not a dirty word, we need it to survive. Buy cheap buy twice…I remember having a conversation with a cost consultant saying that “The lowest Tender Price was obviously wrong, and what’s the worst that could happen? They go bump and you can finish it!” These firms that have gone bump because they carried too much risk, chased turnover and grew into a uncontrollable debt ridden entities….the Construction industry is better without them. all they did was drive down market prices..

By Anon

I agree with John Finlay’s observations. Having worked for a contractor on frameworks set up by John, I saw how well 2-stage collaborative procurement can be. All parties benefit from the process. Project risks are better identified, shared and dealt with, costs allocated to mitigate problems are realistic and agreed and project teams work towards planning and implementing work on site rather than ‘bunkering up’ for contractual disputes. My observation goes a little further. There is a vast difference in mind set between mature procurers that are responsible for annual capital spend programmes vs the one-off procurers that will only ever have a major capital spend once or infrequently in their business lifetime. For mature procurers there is a more sophisticated approach to the build process, often they utilise frameworks where customer are able to set out their long term objectives, some directly related to the construction process and others outside it. The 2-stage process requires joint responsibility/trust/faith/confidence between the various parties and under long term framework arrangements there is time for the parties to demonstrate their reliability and commitment, and to learn and invest the lessons learnt. On the other hand, one-off procurers are really only interested in ‘how much’ and the fall back position is to resort to forms of contract and procurement strategy that offers the greatest protection to the individual parties, with inevitable conflict. Add to this the simple fact that pay-masters want ‘best value’ (read lowest price) and the result is an arrangement where the contractors price is simply a price to win the contract with the objective to reduce cost and add profit into the work. Both sides are equally to blame for the mess they get into. The simple truth is that both employer and contractor can and should walk away from each other if their respective business ethos are not aligned.

By Andrew Simkin

Anon makes a really good point. Unfortunately contractors can’t help themselves. they either need the cash to keep going ans worry about the consequences later, or they oblivious to the risk they are taking on. Clients and PQS’s should try more to understand the difference between the right contractor at the right price, and the contractor who has made a suicidal offer to make turnover.
D&B contracts are fine but more and more are moving away from standard forms and standard (understood) risk positions. Not only are all projects bespoke in nature, but so are the contracting arrangements. Doesn’t help anyone if good practice and established process is amended from one contract to another. What’s really wrong with standard forms unamended?

By Pope

Russell Curtis has some interesting commentary on this, including the use of ‘closest to average price’ to award the tender rather than lowest price. Also not bidding for a tender where the price component exceeds the quality component.

By 5LS

£50,000 to tender a project, not a chance. I’ll do them all for £49k. I think they put an extra zero on there in error.

The problem is ours as contractors. Developers margins > 25% Subs margins >25% MC margins < 5%.

By Verum

Totally agree.

By Paul Fear

We should be pointing the fingers at the Clients/Developers here, as they’re the ones who award the contracts to the MCs…..

By Anonandon

Stepping back from how contracts are determined for a moment, the underlying problem is that if contractors are bidding too cheaply, then there must be too many of them for the current size of the market. Crucially, the barriers to entry into the contacting industry do not seem to be very great, it isn’t capital intensive, and there are always the necessary people available to be hired. Its very hard to see how the outcome can ever be very different . Has there ever been a golden age?

If the current competitive system doesn’t deliver what developers need, why would they use it? Developers have to have a product that meets quality standards or they wont be able to sell/ let it . Why would any developer pay more than they need to. Its a competitive market.

The idea of a government regulated profit margin is just bizarre. How much more do these two stage processes cost. Who wouldn’t be able to justify all their costs.

It may not be much fun, but that is the industry you are in. As others have said, if you don’t like it try something else.

By Anon

Why do I get the sinking feeling of “Déjà Vu All Over Again”. – We went through this in the early naughties following the 1998 Egan “Rethinking Construction” Report. I was seconded by my employer to the DTI Ministerial Road Show that toured the country at the time. I was required to give the Major Construction Customers’ perspective – In essence if you cock up the process of delivering on time and on budget my company could not meet its production schedules and would lose out to the competition of current and more importantly future orders. I used to point that my company could do quite well at on our own and did not need help from the Construction Industry in deliver product late and other budget. “Plus ça change, plus c’est la même chose -n’est pas?”..

By Bob Robinson