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If contractors thought their margins were tight before, they’re about to get worse. As the Brexit deadline looms and the governments are no closer to a deal, companies are being warned that they should prepare for the worst.

But what does this “worst” look like and what will be the direct impacts on profits?
Supply chains will involve a lot more red tape, and navigating the way through that will be time consuming and expensive. Up until now the EU free trade agreement has meant that buying materials from EU countries has been as easy as buying them locally. There are no shipping regulations, checks or additional paperwork. When this free trade benefit falls away, all that is going to change.

Contractors should prepare to have to follow at least 10 different steps to get materials into the country including customs and security checks. They will most likely need to contract a customs broker and invest in import software to help manage the process – additional expenses that will shave margins more. Not forgetting that there’s a strong likelihood of import duties being reintroduced. The delays in getting materials through the process will cause disruptions with project timelines – again with a possible knock-on effect on the business bottom line.

Is this a risk that can be mitigated?
Contractors may be able to start to put policies in place for future projects that are set to start post Brexit to ensure that their margins aren’t entirely erased. But what about projects that are currently underway? With the pressures that the industry has been under as a whole, it’s unlikely that funds have been set aside to mitigate Brexit losses. Most contractors, especially tier one’s are simply not in a position to do that.

It’s clear that the industry is in for a bumpy ride in the coming months and it seems the best hope they have is to pressure government to negotiate a new deal in which not all the trade benefits are scrapped. This will at least give contractors some breathing space until things can turnaround. But even that will require government support.
There’ll need to be increased investment in construction and infrastructure and at better margins than currently exist. This means that government can’t only award projects on a lowest cost basis and start to recognize the value of paying more to get project delivery.

As Carillion has shown, posting large profits isn’t necessarily the best measure of success. Just months after doing just that, they closed their doors, the impact of which is still being felt in the industry. So if profits or even revenues aren’t the best measure of success, what is? What will give clients and subcontractors a sense of a company’s financial stability? What will ensure it can meet its project deadlines and financial obligations into the future?

Top 10 don’t set a great example
One might expect the biggest industry players to demonstrate what success looks like. But with pre-tax profit margins averaging just 0.9% and three of the top ten posting considerable losses, it’ doesn’t inspire much confidence in the industry. The losses posted were actually larger than previous years and to top it off those who did post a profit shouldn’t be bragging about it because even those figures are lower than previous years.

Despite industry hopes, the downward trend is continuing. Five years ago profit margins were 2.9% and already then that was considered low. In the past when a recession hit the strategy of big players was to increase their turnover and reduce margins and in time profitability would be restored – usually within 2-3 years. But several years down the line this hasn’t happened proving that was perhaps not the best strategy.

Niche is paying dividends
Maybe the big players should be looking at those companies who despite the current economic climate are doing well and start to rethink their strategies. Smaller contractors in the £300 - £500m turnover bracket are finding success particularly in niche areas of specialisation.

Rather than chasing high profile projects and turnover, smaller contractors are being more selective of what they take on – specifically with regards to maintaining target profit margins. A few have reportedly walked away from tenders, choosing instead to focus on projects they are more confident will secure their future.
For companies in this group the average pre-tax profits are around 5%. Niche specialists are doing even better with margins around 7%. They are reportedly achieving this through managing their workforce and risk more effectively.

It will take a great deal of effort to mimic this success, and it is encouraging to see tier one contractors now focusing on achieving stronger balance sheets. But will this be enough?
The traditional view in the industry seems to be that when ecological factors need to be taken into account it’s likely to hinder planning, delay progress and drive up costs. But is this view perhaps too single minded? Could ecological factors be an opportunity rather than a hindrance and be a factor that drives the construction industry to start thinking more creatively for ways to be compliant without incurring additional costs and delays?

Technology helping create opportunities for greater efficiency
Ecological factors become a bigger issue when endangered or sensitive species or their habitats are at risk of being threatened by possible developments. For example: Certain species of bats are protected under European law and up until now defining their habitats and doing a species count has been difficult and expensive. However, by applying infrared technology and cameras, researchers can now pinpoint roosting areas and ensure that developments don’t encroach on the roost exits or the bats foraging areas. Environmental DNA testing is also being use to identity these and other species and their habitats. This method is significantly cheaper than traditional survey methods and often more accurate.

Licensing as an environmental protection strategy
A relatively new concept in environmental protection is district licensing. This mitigates the need for environmental studies or surveys to be conducted or submitted prior to gaining approval. Instead the development pays a fee which is then invested in creating alternative natural habitats for specific species away from urban development where they can be better protected. While this is an attractive proposition for contractors it should be noted that to date it has only been implemented as pilot projects and only relating to habitats of specific species in certain areas.

The environment as an asset rather than hindrance
Today people are far more environmentally aware, additionally they often seek out natural spaces and are prepared to pay a premium for them. This means that housing estates and even corporate offices that feature wildlife areas could be in greater demand and fetch a premium. Developers who capitalize on this trend may more easily obtain council approval if the development includes specific plans to protect natural habitats.

What is evident is that addressing environmental issues in relation to construction and development will require more innovative thinking and those willing to go down that road are most likely to reap the benefits.

London is soon to follow in the footsteps of several other major cities. TfL has announced its plan to provide commuters with WiFi connectivity on the London Underground from 2019..

It’s great news for commuters but making the business case work for contractors is going to be a little harder. Various attempts have been made over the years to connect commuters but this success only currently extends to 79 over-ground and 260 underground station platforms. Getting Wifi operational in the tunnels and on moving trains to date has not been achieved. For whoever decides to take it on, it is going to be a complicated process.

Underground challenges
Many of London’s underground tunnels are deep and narrow which makes access for installation and maintenance difficult. Additionally due to increased commuter demand, many of the lines are operating 24/7 which leaves little down time. In an ideal world, TfL is looking for a system that can be quickly installed and requires little maintenance. Whether that’s even possible is another question.

While WiFi can operate fair distances in an open environment, signals cannot bend around or get through heavy concrete structures such as those characteristic of the London Underground. Because of this the network will require connecting a great number of signal devices along the routes.

Many of the tunnels are very narrow and there is concern that the system will increase the heat generated in the tunnels to a level that no longer complies with safety standards. The devices will also need to be able to withstand exposure to steel dust generated from the train braking systems. Electronic equipment is notoriously sensitive to fine dust and the brake dust is also conductive and could possibly interfere with signals.

Contractor opportunities
The bidding for the project has been opened. While opportunities exist, serious thought will need to be given on ways to monetize Underground customer connectivity in order to make the project financially viable.

Some of the ideas being put forward include sharing the network with emergency services which will help reduce implementation costs but then adds the complication of requiring different operating frequencies.

Transport for London has communicated that they hope to appoint contractors and start rolling out the network by 2019. This is a tight timeframe for a very complex project that is likely to come at a major price tag. Contractors will have their work cut out for them.
When considered, the construction industry is firmly entrenched in very traditional models of leadership. Ones that often take a very hierarchical and supervisory approach to managing teams. Communication is often a one way street with instructions being issued that need to be followed rather than discussion being encouraged.

However, it’s becoming abundantly clear, given the shakeup’s that the industry has experienced this year, that perhaps traditional models of leadership are no longer the most effective. As new technologies become more mainstream and new generations of workers enter the workforce, a new transformational style of leadership will be required if companies want to keep ahead of the game.

What does transformational leadership look like?
One of the characteristics differentiating transformational leaders is their willingness to collaborate with colleagues and industry partners. There’s a recognition that more can be achieved in this type of environment than going it alone. Discussion is encouraged, particularly relating to new ideas or strategies, and teams are encouraged to approach work with an innovative mindset.

To support innovation, transformational leaders view failures as temporary setbacks that provide key learning experiences for the wider team, rather than costly exercises. They entrench the company values and vision and work to empower their team, coaching and guiding them, but ultimately giving them the freedom to work independently. This supports a culture of continuous learning and helps further develop the expertise within an organization.

Transformational leaders are those that embrace technology and look for innovative ways in which it can help make the workplace smarter, safer and more efficient. They pass the benefits of this on to the client which is often a contributing factor to winning contracts.

Why aren’t there more transformational leaders?
While this may sound like a good way of operating, and there is evidence to support that it works, too many managers are still playing it safe, too scared to release the reigns and make space for innovation for fear that it’ll negatively impact their own careers. After all, there are always people coming up the ranks eyeing senior positions.

But if leaders start developing broader view of what the industry and their organization needs to remain relevant and competitive, they’ll recognise that the approach to leadership needs to change. The question is: Will you be the leader to spearhead innovation that moves the construction industry forward?
The recent National Infrastructure Commission report highlighted several issues in the industry. Amongst other things that productivity in terms of the development of infrastructure is below the national average in almost every major city in the UK. To address this the NIC’s recommendation was to implement 5 year budget cycles covering smart technology implementation, routine maintenance and well as minor infrastructure enhancements.

While both Highways England and Network have already adopted 5 year cycles, their budgets are secured 2 years in advance which provides ample time for planning and implementation. In terms of recruitment this makes a significant difference. If the budgets only commence when the 5 year cycle starts there is a significant lag in recruitment because contractors won’t hire until the strategic planning phases are completed and this can take up to 2 years.

Could 5 year cycles disadvantage recruitment?
Much has been debated about the boom and bust cycles in construction and this has a direct impact on recruitment. While a 5 year cycle may make strategic sense in terms of finances, it needs to be considered in terms of the skills available and needed to meet the requirements of infrastructure projects.

While the delay in recruitment may be understandable because planning does need to happen first, and requirements often change, it makes getting the right skills at the right time challenging. When the go ahead happens after a year or two of planning then things often need to move fast and it sometimes only leaves only a small window of time to find the right expertise.

Change vs continuity
When moving into the final phase of the 5 year cycle uncertainty once again prevails. Will contracts be renewed? Will strategies change? And what impact will this have on the skills needed? While the pressure may be on for contractors to meet deadlines within the 5 year framework they will be reluctant to hire on new people when there’s uncertainty as to whether they’ll retain contracts for the next 5 year cycle.

A change in strategy can also impact the skills required. This is particularly relevant when a client implements new technology. For example: a digital signaling system or remote wireless monitoring will not only require the technical skills to install but also for managers strategizing and overseeing the implementation to have sufficient digital knowledge to do so effectively.
Despite a recent increase in investment and awarding of tenders, infrastructure output in general is still not at the level that it could or should be according to industry experts. The Essential Infrastructure Report by Scape identified that in the 20 year period between 1997 and 2017 construction output on UK infrastructure and public construction projects had only increased by £64bn which is considerably disproportionate to the increase in investment over the same period.

As infrastructure output is typically measured in relation to local populations this can skew the results as some regions populations grow faster than others. However, it is interesting to note that despite the average output being low, there are some regions that are performing impressively. Compared to London, Scotland has increased their output by 54%. And the North-East region is not far behind with 40% more output than London. So it appears a higher output is not impossible, it’s just the exception rather than the norm.

Industry hindrances
While productivity is in part to blame, there are other industry factors that make increasing output difficult. A much talked about subject recently is that of retentions and late payments. This hits the smaller contractors and sub-contractors hardest. How does one increase output if you don’t have the money to pay wages for the work that’s already been done?

Red tape still ties up many infrastructure project decisions and this is often due to differing political views. Getting different role players and decision makers to work together, supporting a devolution agenda will be beneficial for the industry and contribute to streamlining projects and output. The NIC in particular aims to help reduce the impact of politicizing decisions with regards to developing infrastructure. In addition it hopes to see more social value attributed to contracts, particularly when they exceed £10 million in value.

Output solutions
If the industry is to overcome its reputation for poor productivity and output, all industry role players need to make a commitment to collaborating better with one another. Recognizing that smaller projects can hold just as much value in the communities they serve as the larger infrastructure projects such as HS2 that cross over multiple regions. Combined these factors can help assure a continual pipeline of work in infrastructure and further secure long-term relationships in the supply chain, thereby giving the stimulus needed to improve output.

If you would like to discuss this article or have any future recruitment requirements to discuss then please give me a call on 020 7183 0255 or email:
While the news carries reports of continued failure of Governments on both sides to reach agreement terms for Brexit, the deadline continues to creep closer. In just over 7 months, with or without an agreement in place, Britain will no longer be part of the EU. And exactly what this will look like in business terms remains an unanswered question.
The impact of this is evident in particular within the construction industry. As a sector that that is reliant on trade deals to secure its supply chain of resources and skills, it has the industry in limbo. A recent CITB report found that almost two thirds of construction firms do not have strategic plans formulated to deal with Brexit, largely because there are too many unknowns.

Does the UK have enough skills without the EU?
The problem is that the UK construction industry employs approximately 2.25 million workers, of which 14.8% are migrant labourers and tradesmen. The majority of UK construction firms report that migrant workers are more productive and have a better work ethic so these are not skills that the industry can afford to lose. While many migrant workers interviewed indicated they intended to remain in the UK until retirement, unless this is supported by clear legislation this may not be possible.

Currently industry reports highlight that the skills shortage in the construction industry will be a major stumbling block unless stimulated by targeted training programs to upskill workers. Additionally, concerted efforts will need to be made to woo more senior skilled entrants into the industry to maintain the expertise needed.

Will new trade tariffs trip up the industry?
While the government would like to minimise the impacts of Brexit, if the negotiations are anything to go by, this is unlikely. Which means that companies taking a sit back and wait approach are likely to find themselves in hot water down the line.

While there is currently no detail on what post Brexit trade deals and tariffs will look like, this much is clear, costs are likely to increase and there will be impacts on the supply chain which will impact both bidding on new projects and the ability to deliver on existing contracts.

Contractors that have contingencies in place will be leaps ahead of their counterparts, mostly because they will have options available to them rather than being on the back foot

For the past few years may local councils have found themselves under pressure to the point where budget cuts and other austerity measures have been implemented to try reduce budget deficits. While financially this may seem to be the most prudent course of action, it is not without implications.

The demand for infrastructure and related public services doesn’t simply go away or reduce because there’s no funding available. In fact the opposite is true. Road traffic estimates from 2017 show that the total number of vehicle miles travelled was already exceeding 323.7 billion - up 1.3% from the previous year. Traffic on minor roads has increased by 1.4% and ‘A’ roads by 1.1%. While this may not seem like a lot, when compared to motorways statistics it reflects that local roads carry 66% of all traffic.

Are motorways more important than local roads?
The majority of funding (52%) being made available for road infrastructure upgrades and maintenance is being channeled into developing smart motorways. While this is important, local roads are equally so. The problem is that funding for local roads falls under local councils, who currently don’t have the money for routine maintenance, never mind the much needed upgrades. Many local councils have taken the approach of only carrying out emergency repairs. However, this retroactive approach is likely to compound the problem.

The Department for Transport statistics reflect that decades of underinvestment have resulted in a 9.3 billion backlog on pothole repairs. With no hope of finding the funding needed to make up for that deficit, the situation for road users is likely to worsen in the foreseeable future.

Who will pay the price for deteriorating roads?
The latest Local Authority Road Maintenance report highlights that the rate of road deterioration is increasing. No doubt due to the increased traffic volumes which are set to grow exponentially. Given the current 9.3 billion maintenance budget deficit, it is estimated it will take at least 14 years to get the local road networks up to an acceptable standard. Furthermore, the report states that at least 20% of local roads will need to be resurfaced within the next 5 years.

It is clear that austerity measures are not a solution with regards to infrastructure development. Local councils need to rethink their strategies and actively work to source funding that can be channeled into essential infrastructure development.

The issue of retentions and late payments has been in the spotlight more recently following the Carrillion collapse. But the reality is that this practice has been ongoing for years and it’s having a major impact on SME’s who make up an important sector of the construction industry. The tough current economic times are making things even harder and this is putting greater pressure on small businesses who are struggling to maintain a positive cash flow. The impact of late payments is often the last straw breaking the camel’s back.

Alarming statistics
A recent report by the Prompt Payment Directory reflects that the number of SME business owners affected has increased from 27% in 2017 to 48% in 2018, with many of them admitting to suffering from extreme anxiety and stress due to cash flow issues. At least 67% have gone without a personal salary in order to keep the business afloat. More than a third are struggling to make mortgage payments and a quarter have had to sell their personal properties and downgrade their lifestyle or rent a home.

This is alarming, especially considering it’s a situation that could be avoided if prompt payments were instituted. When following up on payments from clients, the majority of SME’s are told that the clients are awaiting payments, or an even more feeble excuse: “The accounts person is away.”

Government reform needed
There are calls from the industry on government to institute reform to address retentions and have them completely scrapped by 2025. The Aldous Bill which is currently being read in parliament is set to institute retentions reform, but some are of the belief that its impact will not be enough to help the small contractors that are at the end of the supply chain and most affected by late payments.

Late payments as a practice needs to be abolished if the industry is to enjoy positive growth. Collaborative and mutually beneficial working relationships are the way forward.

But will the industry respond? Since January industry sector groups have been collectively lobbying for retentions reform and recently several tier one main contractors announced they would be scrapping retentions. This is certainly a step in the right direction. Now what’s needed is for government to do their part to ensure protection is put in place for everyone, including the small contractors in the industry.

If you would like to discuss this article or have any future recruitment requirements to discuss then please give me a call on 020 7183 0255 or email: