Contractors as specialist consultants and why is profit a dirty word?
This is the final article in our series on early contractor engagement. In the previous two articles we’ve discussed what early contractor engagement is and how you implement it. Today we’re looking at why contractors should also be treated like specialist consultants and why profit is deemed a dirty word in the industry for contractors.
No nasty surprises
Often a contractor’s role is underestimated. It’s our opinion that contractors should be considered specialist consultants during the planning and procurement process. We bring a practical perspective to preconstruction conversations and question aspects that may only present themselves after budgets have been submitted or during the construction process, which may lead to set backs in the construction timeline and programme.
In addition to this, the level of collaboration that early engagement allows for can improve project outcomes – specifically it can improve the accuracy and sufficiency of construction period planning. Consultants, clients, MEP contractors and architects will have a number of meetings to review construction plans and then contractors are brought in later to price the project and often encounter surprises.
The Construction Playbook and Gold Standard Framework Review, which Speller Metcalfe has contributed to, ties to this concept and provides evidence in support of early contractor engagement.
Profit? What’s profit?
At the start of 2023, the Construction News predicted that over 6000 construction companies could go into administration in the year. As of November, over 4,000 construction companies became insolvent [Construction enquirer] – a 36% increase on pre-pandemic levels. Construction News revealed that construction companies accounted for 16.8% of all insolvencies in 2023. This has a far-reaching impact.
Profit is not a dirty word. The Construction Playbook calls for moved to ensure that contractors can bid schemes with a fair margin baked in. Instead it’s often a race to the bottom line. In terms of profit margins, those of a contractors will be significantly lower than any other sector of the industry. In construction, successful profit margins would lie between 1% to 3%, with few contractors achieving this level of profitability.
When you consider the profit margins of consultants, these figures are staggering. The industry’s last 100 contracts in 2018 had an average profit of 2.6% – and this is a pre-covid figure [CBI 2020].
If you take a step back from construction, the UK average profitability across all industries is 17.9%. So why is it such a dirty word for contractors to talk about profit? Especially when we can often be brought into a project to consult on budget, programme and design at a later date.
Food for thought
This is only further portrayed by the number of contractors we have lost since 2020. Why is it becoming the norm to see a news article about a company that has been around for decades going under? The Construction Playbook talks about risks being carried by those best able to bear and control them. The construction industry cannot survive if risk continues to be piled unwaveringly on contractors. To ensure a sustainable future for UK construction firms, construction contracts must be profitable and offer a fair return. This starts at preconstruction stage.
That brings a close to our articles on early contractor engagement. We hope these have provided some insight into why we promote soft market testing, and why it’s beneficial to bring contractors in at an early stage in the same way that consultants are. We’d love to hear your thoughts on what has been discussed in the comments below.