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The rise of the mid-sized contractor

Neil Hand, our CEO, explains why the industry should look to the mid-sized contractor to tackle its challenges

Carillion’s downfall needs to mark a huge reformation for the construction sector. I won’t bore you by adding to the wealth of op-eds written about how the fall-out of the business will affect the market over the years to come – although I admit this can’t be understated.

As well as the impact on the supply chain, we need to also be discussing the key question Carillion’s fall has raised around the industry’s margins: are they in any way sustainable?

There’s no doubt that the industry will be challenged like never before in the coming years – particularly in the case of a hard Brexit. While the IHS Markit/CIPS Purchasing Managers Index and ONS output data are crude aggregates that treat our diverse sector as if it were a homogenous entity, and as a result don’t always tell the best story of the sectors’ success, both are charting quarter-on-quarter decline.

There are many areas where underlying growth prospects remain strong. Social housing, which accounts for a significant proportion of Novus’ revenues, continues to invest in development schemes and maintenance cycles. There are also large capital expenditure projects covering new build and refreshing existing assets in hotels, leisure and grocery retail.

But as I say, there are going to be challenges. We’re already seeing materials prices rise – some by as much as 7.5 per cent. Skills, diversity, training, and recruitment will all be affected if we don’t take care of our businesses.
Of course, many of the largest players in the market feel the need to drive down prices in the race to secure mammoth frameworks to comfort shareholders. Not to state the obvious, but this acts to tighten the industry’s margins and creates certain expectations from clients.

Regardless of the market you play in, we all need to be turning this view around. We must get better at demonstrating how our pricing works to clients. We need to be honest in how this affects the long-term viability of the sector, not just their own projects. Even taking in economies of scale, the largest of businesses need to be financially secure and have budgets for training and attracting new blood in the industry – a key pressure point for the industry with Brexit seemingly destined to continue to impact labour.

In the current climate, this comes more naturally when you operate in the sector’s middle tier. You are less exposed to the supply chain risks of SMEs serving the struggling goliaths. But nimbler than the majors, allowing you to focus on areas where workloads are growing or stable.

There are also better opportunities to develop long-term relationships with clients too. Some of our clients have been stung by their own procurement processes when they favour the lowest price. After project failures or contract disputes they’ve retendered and chosen us. By having an up-front approach we’ve been able to develop longer relationships, which of course helps us minimise the amount of cash we need to allocate to new client acquisitions.

It’s for this reason that we’ll likely see mid-sized contractors tackle issues like diversity and attracting new blood quickest. But it’s a lesson that can be learnt by the wider sector. It should be adopting the same push-back on clients in the initial stages. Without this, the entire industry is at risk of continuing the same cycle and Carillion won’t be the last.
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