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.
If we are seeing major contractors unable to remain profitable, we know there is a crumpling ecosystem below them in the supply chain. Things need to change fast, and we need a more transparent and collaborative procurement system.
Fair pay
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?
In 2001, RLB was involved in the first project bank account (PBA) that was set up jointly by client and contractor, and linked to a Trust Deed, as a ‘fair payment’ mechanism.
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, the government has decided against mandating them yet PBAs can work.
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 transparency site-based quality assurance process that feed and confirm the release of milestone payments, blockchain-enabled payment processes and programme and schedule details linked using AI.
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.
This is an abridged version of an article authored by Sam Barnes, RLB National Head of Cost Management, that appeared in Construction News. For the full article, please read here.
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