Is profit a dirty word in Construction? (What Latham missed and Egan did not have the answer for)

Constructing Excellence
Is profit a dirty word photo
Is profit a dirty word in Construction?

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 the other on bringing better processes and practices into the sector.

With varying degrees of success, most of the recommendations within these reports have been implemented. However, whilst the Egan report set a target for the improvement in profits it did not suggest how this was likely to be achieved. 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 now within Construction as a huge threat to productivity. 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 lots of other key topics surrounding Construction at the moment as well as skills shortages.  Take your pick from Health & Safety, Sustainability, Innovation, Environment, Social Value, Responsible Sourcing, Performance Gaps and so on.

These are all important topics in their own right and being highlighted and championed to various degrees by clients, contractors as well as people affected by Construction projects.

Without PROFITS, none of the above can be delivered.

How are we going to deliver better Social Value or Sustainability without a certain amount of investment?

Unless someone somewhere is making a profit, that investment cannot happen. Why do people invest money? Generally it is because they would like to see a return on that investment and to make more money.

Driving Innovation takes a certain amount of faith as well as a certain amount of trial and error. This is not conducive with a risk-adverse industry, ranging from the client to contractor to manufacturers.

So having decided that these topics are worth pursuing, where is the cost of these coming from?

It will not come from the profits of those involved in Construction. It cannot.

The Top 100 UK Construction Companies produced the following financial results.

(Source: The Construction Index http://www.theconstructionindex.co.uk/marketdata/top-100-construction-companies/2014)

Total Revenue                   £58,447,000,000 (Yes, that’s £58bn)

Total Net Profit                 £     871,600,000

Total Margin                       1.49%

Is this a blip? How did this compare with the previous year?

Total Revenue                   £58,027,300,000

Total Net Profit                 £     789,200,000

Total Margin                       1.36%

So, improving margins is a sign of things getting better then! Not exactly.

If you remove Keepmoat from the figures, as they vastly reduced losses in their business year on year, the underlying trend in the rest of the Top 100 is one of falling margins.

Latest Results                    Previous Results

Total Revenue                   £57,561,000,000                £57,351,300,000

Total Net Profit                 £     893,000,000 £  1,261,800,000

Total Margin                       1.55%                                    2.20%

Is this a year on year aberration? Unfortunately not. Since 2009, the figures show a history of declining margins which is quite ironic if you think how low they were to start off with. And this on the back of falling revenues for those in the Top 100 Construction Companies, where the total turnover has dropped by £10bn in that same period.

Over 54% of the top 100 Construction Companies reported falling profits year on year, with 42% reporting a decline in turnover. Another 16% reported growing their profits by less than 1% year on year, despite nearly a third of these reporting an increase in turnover.

How is the Construction Industry supposed to be funding the vast array of requirements on margins of 1.49% or 1.55%?

Especially given that Private Sector Construction Industry Clients would not want to work at these margin levels. A brief examination on the profit margins of various larger private sector Construction clients reveals profit margins ranged from 4.73% to 43.28%.

On top of these, Network Rail posted 8.31% net profits and even the University of Cambridge posted a 2.93% surplus!

We are trying to regulate and 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.

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?

Can better procurement lead to an increase in margins? And by better procurement, I do not mean just leaning on the supply chain.

Is it possible to work collaboratively to procure a project that meets the client’s wishes within budget, and still makes a relatively acceptable return on project investment?

It has to be.

Constructing Excellence (www.constructingexcellence.org.uk) has been considering this within its Procurement Forum and over the coming months will publish blogs on a range of topics that could impact profitable procurement.

This blog asks the question: Do we need to insist on the profitable construction of all building projects and for this to be demonstrated within the tender submissions?

For me, 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 we achieve this…………..?

Adrian Farley, Key Account Director for a market leading UK manufacturer and member of both the Procurement and Collaborative Working Forums with Constructing Excellence

This blog is the second in a series prepared by members of the Constructing Excellence Procurement Theme Group to provoke debate and seek to provide thought leadership on a crucial aspect which we see as a major barrier to improving the productivity of the sector. Comments are welcomed on the Constructing Excellence LinkedIn page or on Twitter using the  hashtag #CEprocurement.

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