Polypipe’s Adrian Farley, a member of the Constructing Excellence Procurement Forum, asks some provocative questions about profit margins.
A longer version of this blog was first posted on the Constructing Excellence website here.
Adrian Farley
Both the Latham and Egan reports identified areas where the construction industry could make improvements in the way that it worked. Both of these had one eye on the clients’ satisfaction as a driver behind their implementation, and on bringing better processes and practices into the sector.
But the Egan report also set a target for the improvement in profits (raising them by 10% year on year). It did not suggest how this was likely to be achieved – and a look at the trading figures in the last five years would demonstrate that this is one target that has been missed by some way.
Construction needs to be a profitable activity. We look at major skill shortages as a huge threat to productivity. But have we not got the skilled labour because we stopped investing in the last couple of decades? We stopped investing because we were not making enough profit.
There are other key topics surrounding construction at the moment as well as skills shortages. Take your pick from health and safety, sustainability, innovation, environment, social value, responsible sourcing, performance gaps and so on. How are we going to deliver better social value or sustainability without a certain amount of investment?
But unless someone somewhere is making a profit, that investment cannot happen.
The top 100 construction companies produced the following financial results in 2014:
Total Revenue £58,447,000,000 (Yes, that’s £58bn)
Total Net Profit £871,600,000
Average Margin 1.49%
Since 2009, the figures show a history of declining margins, which is quite ironic if you think how low they were to start with. And this on the back of falling revenues for those in the top 100, where the total turnover has dropped by £10bn in that same period.
How is the construction industry supposed to be funding the vast array of requirements on margins of 1.49%?
Meanwhile, a brief examination on the profit margins of various larger private sector construction clients reveals profit margins ranged from 4.73% to 43.28%.
We are trying to reform the construction industry, and various reports have been commissioned to this effect (Latham et al). In all of these reports, we have yet to include a measure that insists on the profitability of the project.
“Is it possible to work collaboratively to procure a project that meets the client’s wishes within budget, and still make a relatively acceptable return on project investment? It has to be.”
Surely, in isolation, a project bid and won at less than cost is an insolvent project? You would not want to trade with an insolvent company, so why do we accept this within the construction industry on a project-by-project basis?
Is it possible to work collaboratively to procure a project that meets the client’s wishes within budget, and still make a relatively acceptable return on project investment? It has to be.
Constructing Excellence has been considering this question within its Procurement Forum. For me, the question is, “do we need to insist on the profitable construction of all building projects and for this to be demonstrated within the tender submissions?”
I think it is imperative that we allow for a reasonable profit figure to be achieved. Not just so construction companies continue to exist, but that they can also then develop the necessary skill base that enables us to build with both innovation and with the right collaborative mindset. If we achieve this, we may find that meeting our Construction 2025 targets will become easier.
What margin is acceptable will be the next question. For me I think it is more than reasonable to expect companies to make a minimum of 5% net profit in the immediate future and for that target to be raised to 10% over a period of time.
Forcing companies involved in construction to make 10% should not just lead to them paying themselves bigger bonuses and driving better cars. If you make a decent return, then for my part I believe you have a social duty to train and develop your people so that the industry has the skills to move forward with confidence.
We have to act now or we will not be able to build beyond a certain activity level as we will not have the resources or knowledge available.
The next question is: can we do this and the one after is: how do we achieve this?
Adrian Farley, key account director for Polypipe, is a member of both the Procurement and Collaborative Working Forums with Constructing Excellence
