Strong-Arming or Shaking Hands? David Stapleton discusses

12 February 2016

hand holding

“Construction Enquirer” has published a thought-provoking, prescient and provocative piece¹. As they put it “for too long client cost advisors have got away with strong-arming contractors into accepting unrealistic target prices…”.

At the outset I should say that I am able to see both sides of the argument. My father worked in purchasing at a contractor called RM Douglas, now part of Interserve. Before that, both my grandfather and great grandfather ran a small construction business in North London. My chosen path was down “the other side” and I qualified as a Chartered Surveyor. I have worked in the development arena for most of my working life.

Strong-Arming or “Hobson’s Choice”?

There is no doubt that many contractors have enjoyed something of a purple patch after being severely battered during the last downturn. They have seen their margins return to a reasonable extent after years of struggle and we are all to be grateful for that.

There is also no doubt that we have experienced a level of unprecedented and steep cost-price inflation in our industry. Clients cost advisors blame this on greed. Contractors blame specialists and sub-contractors but it seems clear that the fundamental driver has been a skills shortage, across the whole of the profession, created by the last economic downturn. As a school leaver or university graduate, who would choose an industry that is potentially so volatile?

In today’s economic climate, one of the greatest challenges for clients is finding a contractor with adequate standing, capacity and similar cost aspirations. The client, their advisor and the contractor clearly have differing views on the latter at present. But is it fair place the blame with the cost consultants? I don’t think so.

Remember The Industry That We Are All In

Property and construction are notoriously illiquid and either lead or lag behind the general economy. They are both industries that have changed beyond recognition in the last few generations.

Historically, there was no such thing as a “Main Contractor”. You were a contractor. RM Douglas turned a small business into a significant one through investing in plant. They bought a then innovative mechanical digger and were consequently able to price jobs lower than competitors who were still pricing jobs on the basis of “hand dig”. Frequently today, contractors don’t own plant or employ significant labour – hence the birth of the “sub-contractor”.

Property has been transformed too, largely because of changes to the banking system. Investment banking introduced the idea of leveraging and speculative development, which has fuelled both industries, but has also brought attendant problems.

From the moment a client spots a redundant building and has an idea, to when that idea comes to fruition can be many, many years and involves having to deal with staggering numbers of stakeholders, environmental issues, planning, inquiries, procurement and tendering, government intervention and tax changes, economic cycles and so on. In the meantime, the cost consultant has to rely upon largely historical information and previous experience whilst trying to stay within parameters set down by clients, banks and funding partners.

An Alternative Way?

When I read the piece in the Enquirer, I was put in mind of an article from late last year in “Building”². This dealt predominantly with the plight of specialists and sub-contractors and how they were facing challenges recovering from the last downturn. It highlighted continuing low margins and a struggle to rebuild the balance sheet. As interesting though, was the idea of early engagement. Or, let’s put it another way and call it “Collaboration”. The article gave examples of specialists engaging earlier with clients, not I hasten to add at the expense of the relationship with the “Main Contractor”. Rather it was viewed as a way for the client to achieve alternative design solutions at an early stage rather than adding yet more lag into the procurement stage. It would also allow all to have a clearer expectation on cost at an earlier stage.

Collaboration or Confrontation

For an industry built upon relationships, it is unfortunate that there still persists the “them and us” attitude. Whilst controlling boom and bust might be out of the hands of everyone except Gordon Brown³ it will serve none of us well to see the pipeline dry up or lenders calling in loans. It is perhaps therefore time for “them and us” to adopt a more collaborative and transparent approach. Early engagement can only help develop trust and nurture relationships and avoid either party feeling strong-armed. Wouldn’t that be better?

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