Russell Lynch: Slim pickings for players in a building industry on shaky foundations
Tuesday 19 February 2013
Outlook "If we're not careful, construction is going to end up like the food industry: the clients squeeze so much, god knows what will get into the supply chain." Welcome to Britain's building industry, 2013. When senior industry executives talk like this, you have to wonder how long it will be before the industry uncovers its equivalent of horse meat in the Findus lasagne.
Contracting was always a tough game at the best of times: wafer-thin margins in return for shouldering huge risks, and a host of punitive penalty clauses if you're a second late delivering the complicated colossus worked up by a precious architect whose "vision" doesn't involve many straight lines.
The industry also runs on cash: everybody is trying to hang on to it as long as possible, from the main contractor down to a lengthy list of subcontractors all trying to get their money off each other. A lot of the time it ends up in court, which is why the industry is the biggest source of case law in the country.
And those were the good years. It's 10 times worse these days. Building firms are scrabbling around for scarce work and tales of "suicide bidding" – taking on jobs at a loss to keep the cash tills rolling – abound.
The industry has shrunk by more than 18 per cent since the beginning of the recession in early 2008. "I don't know what we would have done without the Olympics and Crossrail," says another chief.
The woes of Severfield-Rowen, the UK's biggest structural steel firm, show how easy it is to have a bad contract blow up in your face. The company has 70 contracts, but one duffer, the Cheesegrater skyscraper in the City, will cost it £9.9m.
Severfield has undoubtedly made big mistakes, but the way these projects are procured are a recipe for disaster in any case. In today's cut-throat world it's all about lump-sum, fixed-price contracts. The bank lending the money to a developer lucky enough to get a pre-let for its office building wants absolute certainty on cost, so the developer passes on the risk to the main builder, who passes it all the way down the supply chain. There's no flex for rising steel or oil costs – a deal is a deal and you deliver no matter what.
The most infamous example of this potentially fatal procurement method is the Wembley stadium, which was a year late. Australian builder Multiplex signed up to build it for £757m, failed miserably, and eventually ended up being taken over.
The sad thing is that it didn't have to be like this. A decade ago industry reformers like former CBI president Sir John Egan tried to get clients and their builders working together rather than arm-wrestling. But as the economy turned south, the industry's worst instincts came to the fore. In the public sector, where things are still slightly more enlightened, a 7 per cent cut in spending since 2010 and not much visibility on projects beyond the current spending review period gives firms little incentive to change habits.
Back to the "horse meat". Buildings won't necessary fall over, but they won't be as good. "You have to go to the second and third division subcontractors, so the quality goes down," says one executive. After years of improvement, and despite the fact that the industry is smaller, workplace deaths are also on the rise again after a trough in 2009/10. As more corners are cut, the squeeze comes with a human cost.
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