Sam Barnes is a partner and national head of cost management at consultancy RLB UK
Last year wasn’t the best of years to be a contractor. The last seven months of 2023 saw major contractors such as Henry Construction, Buckingham and Michael J Lonsdale go into administration, and in November, Laing O’Rourke posted a £288m pre-tax loss.
“Cashflow is often a major cause of failure in the construction industry. If we can equitably manage it, we can protect everyone in a project’s ecosystem”
The latest reports from the Insolvency Service show a year-on-year increase of 8.3 per cent of construction firms becoming insolvent – a shocking 33.2 per cent increase on the 2019 figure.
If we are seeing major contractors unable to remain profitable, we know there is a crumpling ecosystem below them in the supply chain.
Presently, we have a situation where financial institutions are asking for at least 15-20 per cent margins from developers before investing, and tier one contractors are turning their backs on longer-term contracts with one-sided risk allocations. Things need to change fast, and we need a more transparent and collaborative procurement system.
So how can we move forward as an industry to ensure that contractors make money, clients pay fair prices and subcontractors are protected further down the supply chain?
We know there are already alternatives to help mitigate the situation we find our industry in now. In 2001, the first project bank account (PBA) was set up jointly by client and contractor, and linked to a Trust Deed, as a ‘fair payment’ mechanism. To ensure the contractor and supply chain received prompt payment of monies rightfully due through certified interim payments, it looked to provide insolvency protection for the whole supply chain.
However, although current government best practice and guidance, as outlined in its Construction Playbook, is that PBAs should be used on public sector construction contracts, we know that they have not been adopted at any noticeable level, let alone universally.
Although the government has decided against mandating them (most recently rejecting a Labour amendment to the Procurement Bill to mandate their use), PBAs can work. Maybe now is the time for the industry to lead the way on collaboration and put the long-term view ahead of short-term gain.
What about alternative procurement routes?
If the past 12 months of insolvencies has told us anything, it is that we need to spread the risk that currently is sitting firmly on the shoulders of the contractor. Is construction management, or management contracting, a more transparent and less risky route for trade contractors? It is not a silver bullet but would help clients to get closer to their supply chain, bringing clarity around where the margins lie. However, the challenges here are clear: many clients do not have the capacity for these alternative routes, there is a perceived lack of expertise within contracting firms, and funders frequently see non-fixed-price routes as too risky.
Fluctuation within the market of course comes into the equation. With JCT set to launch a new Target Cost Contract in 2024, sitting alongside the NEC Target Cost Contract, perhaps both will gather momentum. There is no doubt that creating and maintaining such initiatives might be harder in the short term, but what’s key is the need to invest in the long term in supply chain relationships.
And what has the role of digital and data got to play, and how can technology help us with the procurement and delivery puzzle? We need to consider elements such as:
- Transparent site-based quality assurance processes that feed/confirm the release of milestone payments.
- Blockchain-enabled payment processes to simplify the administration of PBAs.
- Programme and schedule details linked to generative artificial intelligence to quickly resolve disputes during the construction stages of projects.
And we must ask questions such as:
- Could the principles of ‘golden thread’ lead to fairer assessments of risks to be held by clients and consultants, and rebalance the risk profile across a project?
- Could live profitability, risk and viability be modelled across the supply chain so that contractors and clients could review, adjust and reset mid-project?
Ultimately, we know that cashflow is often a major cause of failure in the construction industry. If we can equitably manage it, we can protect everyone in the ecosystem of a project. And if we set up processes that work now and are consistent with these principles, not just when we are in crisis mode, but when times are good, too, we will have a more robust way of working that enables us to really build for the future.