What went wrong at Pochin’s?
After confirmation that administrators had been called in at Middlewich-based contractor and developer Pochin’s, Place North West investigates what could have gone wrong for the long-established regional business.
Administrator Grant Thornton, appointed on Monday, cited “legacy issues from earlier contracts” as a major component to the collapse. The construction arm posted a £6m loss on a £50.5m turnover in the year to February 2018.
Pochin’s built offices, warehouses and residential schemes. Market speculation points to the contractor’s exposure to residential as a contributing factor in its demise.
In particular, issues are understood to centre around work for DeTrafford at the City Gardens apartment block in Manchester.
City Gardens started on site in 2017, and is believed to be running behind schedule and over budget. Sources suggest that during construction, unforeseen elements were found in the ground, while Pochin’s is also understood to be in a dispute with the client, DeTrafford, and architect, Ollier Smurthwaite, regarding issues with the design. Pochin’s was also contractor on the neighbouring Sky Gardens.
A statement from DeTrafford said: “DeTrafford wishes to reassure its customers and suppliers that despite this unfortunate news, our robust contingency plan is now in place.
“We intend to complete construction of Sky Gardens and City Gardens, the two projects Pochin were employed on through our in-house construction business, DeTrafford Construction Limited in order to minimise the impact for our customers. As such we have issued the appropriate termination notices to Pochin and are preparing the team to complete the remaining works, largely relating to fit-out works only.”
DeTrafford and Ollier Smurthwaite have yet to comment regarding the legal dispute.
While a further statement is yet to be released from Grant Thornton over the future of Pochin’s eight companies and 120 staff, the administrator warned earlier this week there was “a high likelihood of redundancies”.
Below we analyse market factors which could have contributed to Pochin’s collapse:
Competitive contracts
Construction contracts are largely awarded on a design-and-build basis, with tenders likely to be given to whoever offers the lowest price. This has led to a race to the bottom on pricing, leaving little wiggle room for contractors operating on profit margins of around 1% to 2% should the cost of delivering the scheme increase over the construction period. Some contractors go so far as to ‘buy work’, deliberately quoting at a price which will make a loss on the promise of future profit-making work with the same client.
Rising construction costs
Manchester’s city centre residential sector is a particularly tough market to work in on a fixed-price basis. Construction costs have increased by 15% in the last two years alone, rising from around £150/sq ft to £180/sq ft.
This has been driven by a number of factors. The city has become a victim of its own success; 78 sites under construction, including tall and dense development by prolific developers such as Renaker. Sub-contractors and materials are in short supply.
According to one architect, “there’s a shortage of brickies, and if someone offers them 50p more per brick to go to a different site, then they’re off”. One Manchester city centre developer said sub-contractors walking off site mid-contract for a better offer had become common. The result; contractors are having to pay more to keep staff, eroding an already delicate profit margin.
Meanwhile, Brexit has impacted on import prices. Most materials come from Europe, and with the pound worth 20% less, imports have become more expensive and supply competitive.
City centre residential market
City centre residential is “a unique skill”, one prominent city architect told Place North West, with significant experience necessary to be successful in the market. Pochin’s only entered the city centre market relatively recently, winning its first project with DeTrafford in 2015.
The cost of delays is high. If a building finishes late, impacting sales or lettings, a penalty on the contractor could equate to the level of lost income felt by the developer. For city centre schemes demanding increasingly high rents of around £1,000 per flat or even higher, a contractor could face a penalty of hundreds of thousands of pounds per month until it is finished.
David could have saved them..
By richard
A well written article, pretty much sums up the situation, tight margins, outdated competitive tendering processes, unrealistic risk pressures from clients & consultants, an evolving construction market and a short term approach to solving skills shortages. Naturally the focus is on the direct employees when a collapse like this occurs, however, often those impacted the most are the supply chain and the ripple effect of this spreads much wider. Sub-contractors struggle to deliver their other work due to the cash pressures this creates and the whole industry becomes affected in some way. The knee jerk insertion of unrealistic clauses into future contracts to devolve risk is just one example of where the problem will become worse in the future.
Thankfully with a reasonably buoyant market, most of the Pochins staff will quickly find alternative positions. The effects of the demise of established firms like Pochins, Forrest, Shaylors, Carillion, Havelock etc etc, will last long into the future.
21 years and the Egan Report is all but forgotten
By Richard Kenworthy
The construction market will never change from SME to tier ones the competitive market is a nightmare, yes we need competition but at what costs cutting corners on quality, safety, and ultimately the reputation of the contractor/industry. Buying work is still common it looks like this is where Pochins have been sucked in, developers are there to make money at any cost and will take no prisoners.
No excuse for Pochin over 100 years experience did they get to greedy? Tier one 1% 2% is the norm, I know a PR company who wont move unless they acquire no less than 60% profit, nice if you cant get it.
As one of your readers mentioned, “hey so what Director will surface with nice six figure sum and move on some where else.
All the leader and wise people still coming out with the same old regurgitated garbage about the industry how we can procure by the cloud what!! Builders are builders never change, make a butty, make more, for less, get greedy, BUST! (CBA SME Contractor)
By CBA
great analysis, I fear for any developer going out to the contracting market at the moment.
By pity
This will not be the last contractor to go under. The market has been slowly shrinking for ages. Last year GDP was 1.1% – the same a 2011. There was a time when that was considered recession level, now such low levels will be the norm until the Brexit thing sorts itself out, and lets be honest, that will take at least a decade….There are a lot of contractors who have tried to buy they way through the downturn in the short term…with no sight of a light at the end of the tunnel, there are sure to be many more to follow throughout the whole supply chain over the next couple of years….
By Elvis
Pity….Why do you fear for the developers? Surely they have influenced the market by tendering on price over quality…They are just as much to blame as everyone else
By Elvis
The founding fathers of Pochins will be spinning in their graves over this debacle!
When the business went private four years ago the board had a strategic decision to make which they got badly wrong. Instead of de risking the group into a development/investment business with a medium sized low risk contracting business they ‘chased the dream’ of delivering large private sector fixed price projects and failed!
Poor understanding of risk and the controls to mitigate them have resulted in administration, job losses, supply chain debt and 200 v worried pensioners.
Watch this space as the process moves forward – some of the senior team will probably float back to the top of the pool in a ‘newco’ no doubt with some tasty property assets having left a trail of woe behind.
By Dissapointed
The biggest risk to the contractors are the terms and conditions being passed on by the developers, their lawyers and professionals which impose all of the risks on the contractor for no reward. Development risk and in particular the risk of unknown ground conditions, albeit the developer has issued a ground investigation report, which is not worth the paper it is written on and which the contractor cannot rely upon, is passed onto the contractor even though he doesn’t own the ground and is not getting a development risk return. Until contractors resist onerous terms and conditions or get a reward and share of the developer’s profits in relation to the risks, the contractors will always suffer. The other factor is that those contractors that have gone bump are able to bounce back in another newly formed company with no financial record and bid on or be awarded significant contracts driving down prices of those who remain. Subcontractors and materials suppliers should be more wary of supplying these “phoenix companies”, but it doesn’t seem to be the case.
By d&b
Interesting article but quotes are riddled with inaccuracies. Pochin has been developing in City Centres for decades. Check their student experience. DeTrafford are a new company with an inexperienced team. They have tried to become a design led developer and like many others are probably well intentioned but lack the know how to procure and deliver decent schemes. To the best of my knowledge they have only delivered one scheme in Manchester City Centre of about 80 or so Homes. They have a long way to go to prove themselves and I think the market needs to reflect on this.
By Informed
Sorry to hear this news of a company that had a long and well deserved high reputation in the industry. It was instrumental in ensuring standards in health and safety and fair working practice. What has happened is a metaphor for a modern age unfortunately. Good wishes to all staff.
By S Tozer
I have apartments in both projects and was warned Detrafford are very unreasonable delivering projects on time.
Wished I listened now paying the price hope no one makes the same mistake as me.
By Abul choudhury