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Risky Business: Giving More to Get Work

Monday, September 26, 2011

More items for Program/Project Management

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Contractors, want to land that next contract? How about sweetening the bid with a little something extra for the developer?

No, not a bribe. This is a formal commitment to partially finance a client’s project, and it’s one of the latest strategic gambles for some UK construction companies angling for a new edge in gaining work.

Squeezed by growing competition at home and abroad, many contractors are taking on new risks—in projects, clients and financing—to survive as they confront historically narrow margins.

Although contractors remain optimistic, many face “the difficult scenario of either increasing their workload or shrinking their business,” said Iain Parker, of Davis Langdon.

Thus reports global construction consultancy Davis Langdon, which recently conducted in-depth surveys of more than 70 contracting organizations about the state of the contracting supply chain.

Rethinking Strategies

The company’s conclusion: The post-recession, zero-margin era has spawned a brave new bidding and sales world that includes first-ever offers to help finance projects, abandonment of long-time relationships, shunning of one-time clients and medium-size projects, and acceptance of delayed payment schedules.

 “The UK economic environment over the last few years has thrust significant change upon the construction industry,” Davis Langdon reports in “Review of Contracting Supply Chain.” With construction activity declining, “the country’s leading contracting organizations have had to re-think their strategies and priorities as competition for new work increases.”

Many construction companies are, for the first time, only breaking even on projects, the report says.

Mega-Project Scramble

Although contractors express optimism for growth through 2014, “it is also clear that the construction industry remains in a fragile position,” said report co-author Iain Parker, Davis Langdon’s Head of Offices.

Nuclear Decommissioning Authority

Contractors are increasingly joining forces to secure larger projects, such as those in the UK’s £70 billion nuclear decommissioning programs.

“With the majority of contractors maintaining their current capacity, the difficult scenario of either increasing their workload or shrinking their business lies ahead if they are unable to meet their turnover expectations.”

Among the casualties in the current environment are medium-size projects, which have lost their allure amid the value of smaller projects and the payoff of larger ones.

Developers of mega-projects are especially in the catbird seat, the report says.

More contractors than ever—even those new to the field—are targeting developers with large corporate portfolios, the report said. Developers, in turn, are taking advantage by increasing the number of bidders they seek, “which is having the effect of making the industry think that there is more work than there actually is.”

Projects valued at less than £50 million ($77.7 million USD) and more than £100 million ($155.5 million USD) are in high demand. Not so for projects in the middling range, where contractors that traditionally serve this sector are increasingly banding together in joint ventures to go after larger or more complicated jobs, Davis Langdon found.

Balance, Relationships and Public Contracts

Among other findings:

  • Public-sector work now makes up 27 percent of the average contractor’s revenue, a 35 percent increase since before the global financial crisis, because of the sharp decline in private-sector projects.
  • Contractors are becoming choosier in the clients they pursue, focusing more on developing long-term relationships and less on “one-off” customers.
  • Contractors are also becoming more vigilant about the financial status of their subcontractors, and most have installed a formal reporting regime and/or prequalification process for their supply chain.
  • Many contractors are more concerned with creating a “balance” in their workflow, to guard against volatility in individual sectors, than in sheer growth.
  • Contractors and subcontractors feel increasingly squeezed by foreign competition, with many “noting that they have been operating at ‘zero margins’ for the first time in their history or being generally ‘less risk adverse.’”
  • The pressure threatens even relationships with longtime, trusted clients, who are suddenly shopping around for services.
  • Almost 80 percent of contractors strongly prefer the two-stage design and build procurement route, although the predominant route is currently single-stage design and build.

Innovation

Contractors are meeting the new era with innovation, including prefabrication, sustainability/carbon reduction and new technologies like Building Information Modeling. Some have carved out “specialist roles” while others are using intranet to encourage in-house innovation sharing, the report said.

Many contractors are offering or providing “equity” on projects to help “get projects going” while private-sector funding is tight. Some are also offering to accept delayed payments while funding is being finalized.

Subcontractors

Despite hard times, most subcontractors anticipate a return to pre-2008 income levels by 2013 and generally feel that bidding volume and value are increasing. Meanwhile, a number report operating at “low margins which can only be sustained for a short period of time” and are accepting “smaller than usual” projects, Davis Langdon said.

Relationships with contractors remain a critical issue for subcontractors. Contractors are making alliances with key subcontractors to secure competitive pricing, while subcontractors are working to expand existing or form new relationships with developers to secure repeat business.

Davis Langdon is an international construction consultancy, serving clients investing in infrastructure, property and construction. Davis Langdon is a business of AECOM Technology Corp., a provider of technical and management support services for government and commercial clients.

   

Tagged categories: Bidding; Construction; Project Management; Subcontractors

Comment from Catherine Brooks, (9/27/2011, 11:10 AM)

Since Public Sector contracts are the more steady projects in this economy, are contractors looking for renovation and restoration of older buildings? Job creation is a national priority. Green America states that Recycling materials (including windows) creates 6 times as many jobs as putting materials in landfills. Restoring existing buildings is the most ecological vs building new ones. Investment companies and banks are demolishing and landfilling foreclosed homes to keep the property values of the neighborhoods from being brought down. Why not salvage building materials, train people to restore not destroy, and keep contractors growing their businesses?


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