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MARGINS - THE GORDIAN KNOT
00:00 02 Feb 1995
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Margin recovery - ie, how to make some money out of contracting,
though not by the traditional non-PC pre-Latham ways - is the
daunting conundrum of our time.
For a while, the great white hope for contractors was industry rationalisation: the Sir Clifford Chetwood school of salvation, which predicted just four or five major contractors rising phoenix-like from the recession and enjoying sensible margins thereafter.
The failure of construction to sort out its affairs by pursuing this apparently logical course means Sir Cliff's theory is now discredited. Nothing daunted, and still convinced that one day money can be made, two new construction schools have now emerged with fresh vigour to lead the industry forward to the promised land. Coincidentally, both schools set their stalls out in reports published this week, but there the similarity ends.
To compare them with English philosophers, one is of the Locke persuasion - it believes the industry can save itself without too much pain through rational improvement. The other is more inclined to Hobbes - only a nasty, brutal solution will suffice.
The first, outlined by Touche Ross (see pages 10-11), states: 'For the major contractor, having already squeezed costs in every department, margin recovery depends on finding ways of differentiating itself from the competition, putting some added-value into the industry, and convincing clients it is worth paying for the added-value.'
The second, proposed by NatWest, differs radically. It rebuts suggestions that the industry has squeezed its pips to squeaking point, and maintains that the wage bill must be reduced by a further 10-12% if 2% margins are to be consistently achieved. This equates to a staggering 20,000 people among the top 17 contractors (see front page and 8). Morale for those remaining would be bolstered by paying better salaries. (They note that those with the best margins at present tend to be the highest payers.)
Because it is obviously sensible, and not immediately painful, the Touche Ross report has found favour. An FCEC working party is already on the case, albeit slowly. The NatWest report, by contrast, has put the cat among the pigeons. Some, like Mowlem, say the analyst has got his headcounts wrong. Others feel the analysis is crude, and insist they require all their present complement in order to bid for future work. A few, though, acknowledge some uncomfortable labour-productivity truths and will be focusing even harder on the issue. They know how hard it will prove to invite a higher price from clients. The answer lies closer to home.
New technology is likely to prove a major part of the solution. Investment here has a long way to go if the fruits of Mr Gates' mind are to be fully harvested. Off-site fabrication, standardised designs and other 'right-first time' approaches will also assist. But ultimately, it comes down to fixed-cost employees. Professor Handy's adage about cutting numbers by half, doubling pay and trebling output is likely to prove the overriding principle of the future.
For a while, the great white hope for contractors was industry rationalisation: the Sir Clifford Chetwood school of salvation, which predicted just four or five major contractors rising phoenix-like from the recession and enjoying sensible margins thereafter.
The failure of construction to sort out its affairs by pursuing this apparently logical course means Sir Cliff's theory is now discredited. Nothing daunted, and still convinced that one day money can be made, two new construction schools have now emerged with fresh vigour to lead the industry forward to the promised land. Coincidentally, both schools set their stalls out in reports published this week, but there the similarity ends.
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To compare them with English philosophers, one is of the Locke persuasion - it believes the industry can save itself without too much pain through rational improvement. The other is more inclined to Hobbes - only a nasty, brutal solution will suffice.
The first, outlined by Touche Ross (see pages 10-11), states: 'For the major contractor, having already squeezed costs in every department, margin recovery depends on finding ways of differentiating itself from the competition, putting some added-value into the industry, and convincing clients it is worth paying for the added-value.'
The second, proposed by NatWest, differs radically. It rebuts suggestions that the industry has squeezed its pips to squeaking point, and maintains that the wage bill must be reduced by a further 10-12% if 2% margins are to be consistently achieved. This equates to a staggering 20,000 people among the top 17 contractors (see front page and 8). Morale for those remaining would be bolstered by paying better salaries. (They note that those with the best margins at present tend to be the highest payers.)
Because it is obviously sensible, and not immediately painful, the Touche Ross report has found favour. An FCEC working party is already on the case, albeit slowly. The NatWest report, by contrast, has put the cat among the pigeons. Some, like Mowlem, say the analyst has got his headcounts wrong. Others feel the analysis is crude, and insist they require all their present complement in order to bid for future work. A few, though, acknowledge some uncomfortable labour-productivity truths and will be focusing even harder on the issue. They know how hard it will prove to invite a higher price from clients. The answer lies closer to home.
New technology is likely to prove a major part of the solution. Investment here has a long way to go if the fruits of Mr Gates' mind are to be fully harvested. Off-site fabrication, standardised designs and other 'right-first time' approaches will also assist. But ultimately, it comes down to fixed-cost employees. Professor Handy's adage about cutting numbers by half, doubling pay and trebling output is likely to prove the overriding principle of the future.
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