Top 100 2009: 9 contractor bosses on the year ahead

To mark our publication of the annual Construction Top 100, Contract Journal asked eight construction bosses to pass judgment on the past year - and give their expectations for the year ahead.

Dave Sheridan, chief operating officer, Apollo Group

While the past year has been financially tough for many, construction industry companies appear to have taken a more responsible attitude to managing the downturn than in previous recessions, choosing to restructure their finances and work with their employees to best handle the circumstances instead of taking more drastic, reactive action.

As a property services provider working in the public sector, Apollo has been comparatively protected from the poor economic climate. We have maintained a stable financial base over the past year and we are now positioning the business for the future to address government spending decisions as they arise. A stronger focus on environmental issues and a clear drive to maintain and improve health and safety standards will be the other two major concerns in the Apollo boardroom over the coming year. In fact, we are already making further progress in these areas, as testified by our recent commitment to WRAP’s “Halving waste to landfill” statement and our achievement of the 18001 accreditation, which we expect to receive later this month.

Over the next year, I would expect businesses in our industry to look at stabilisation and consolidation. There is no quick fix to the recession. Instead, sensible and sustainable strategies need to be agreed that do not include suicidal tender prices or knee-jerk reactions to the next government spending decisions.

No matter which political party is in place after the next election, there will, as always, be challenges but also opportunities for companies in our industry. I just hope the government will continue to see the value in construction and will substantially support public spending in this area as a result.

Richard Gregory, Chief Executive, BAM Construct UK

The last year has seen a huge shift in the market. As ever, construction was one of the first sectors to go into recession and will be one of the last to come out. So the LSC funding debacle could not have come at a worse time for the industry which had invested huge resources in design, supply chair resourcing and bidding for colleges that had been approved in principle but were then put on hold or cancelled. It is important that Government learns the lessons from the mistakes made.

It is good to see BSF funding back on track after an earlier hiccup in the year. However, the huge energy and costs that have to go into these bids may be unsustainable in the longer-term. We also have to factor in the possibility of a change of government and what its attitude to major public spending projects might be.

There has been a rapid reversion by some clients to competitive bidding with some seeking a minimum of six design and build tenderers. Other clients, however, continue to take a more sensible, longer-term view and judge on ability to perform and quality.

So far, designers and subcontractors have been the hardest hit by the downturn and they have seen some dramatic reductions in staffing levels. Over the next 12 months, I think we will see the pain start to hit medium-sized contractors. The worry for the major contractors is 2011.

In terms of the issues in our corporate in-tray, I suspect our priorities at BAM are similar to many other contractors: winning work, not succumbing to suicide pricing, and looking after our staff while grappling with uncontrollable issues such as pension fund deficits.

Dennis Curran, chairman, Barhale Construction

There’s little doubt that the past year has been one of the toughest for decades for civil engineering contractors. At Barhale a few years ago we set out a philosophy that focuses on improving performance in our Three Pillars of Profit or cost-efficiency, Safety and Environment.

We have come to understand that all three of the Pillars are vital in our success, and that a failure to deliver excellent safety performance will impact not just in accidents that affect people but in a diminished reputation that could impact on us winning future work. The three really are completely interlinked and we believe we ignore any of them at our peril.

However, the challenge during the recent downturn has been to continue to improve performance in all three of these sectors, in an industry climate where cost-cutting and undercutting is so prevalent.

The market is such at present that some rival contractors are willing to tender at ridiculously low and unsustainable levels in order to win work. There is a real threat that, while they may well go out of business in the medium term as their profitability disappears in the pursuit of turnover, they will also create major short term problems for those contractors still pricing realistically, with margins sufficient to enable companies to maintain training and an emphasis on quality, safety and environment.

The aftermath of previous downturns has demonstrated what dangers face the civil engineering industry if it fails to maintain investment in quality and training even during the tough times – including the permanent loss of skilled and experienced people who are irreplaceable when the upturn comes around again. The challenge over the next 12 months will be in encouraging clients to become more effective in assessing the difference between cost and value to enable long term sustainability.

Organisations like the ODA and the water and rail industry lay down a range of non-financial KPIs for their contractors that embrace the correct employment, safety and personal development of the people working on their site as well as environmental and other key factors. I firmly believe that if it was mandatory for all client organisations to require their supply-chain to commit to similar standards the civil engineering sector in this country would be markedly improved for all concerned.

For companies like Barhale, the key issues going forward will be this fight to source, train and retain people to win and maintain workload while still maintaining focus on cost-efficiency, safety and the environment.

Andrew Wyllie, chief executive, Costain

The current economic downturn has had a significant impact on all businesses in the construction sector over the last year, and the general consensus is that we are perhaps still some way off from a return to a period of sustained growth. We are currently in an environment where customers invariably have less money to invest, where there is high volatility in material and commodity prices, and where there is pressure to further reduce costs.

At the same time, our society is facing some critical challenges which must be urgently addressed if the UK is to remain one of the world’s leading economies and our environment is to be protected.

In these more challenging times of reducing budgets, priority must be given to investment, whether driven by legislation, regulation or for reason of key national strategic importance, which is focused on meeting these challenges.

By way of example, significant investment is required in our sources of power generation, be that renewable, new nuclear or other, if we are to avoid the potential risk of the lights going out around 2017 given current growth projections for power usage. Similarly meeting Government targets which include 50% re-cycling of household waste by 2020, and a 50% reduction in CO2 emissions by 2050 are of profound importance to protecting the sustainability of our environment for future generations. Targeted investment in our rail infrastructure, including Crossrail and High Speed 2, will help ensure that we have a national network capable of supporting a leading 21st Century economy.

The construction industry therefore has a fundamental role to play in addressing some nationally important challenges over the next decade.

To ensure that Costain plays a leading role in that future, the board is focusing on a number of key areas. We are redoubling our efforts to ensure that the highest levels of health and safety are maintained, especially in a world where there may be a temptation to cut corners to save costs. We are driving innovation into the business and further developing our capability in operations and maintenance to provide effective solutions to our customers’ increasingly large and complex outsourcing requirements. Finally, by upgrading our career development processes we are investing in our people to ensure they have the additional skills and experience needed to be successful in this rapidly changing environment.   

Bob Rendell, chief executive, Leadbitter

How companies in the construction industry have fared has been mixed, depending on their size and exposure to market sectors, the strength of their client relationships, the quality of service they offer and their financial strength. Companies that have been exposed to the commercial and house building sectors have found it particularly difficult, as have companies that are highly geared.

Fortunately, the markets in which the Leadbitter Group operates have held up well, and given our cash positive position and excellent client satisfaction record, we have been able to improve our position over the last year where others have not.

For Leadbitter, 2009 will be an extremely good year. However, I believe 2010 will see an increased level of pressure brought to bear on public expenditure, with public sector projects increasingly delayed or cancelled.

Unemployment will continue to rise and I don’t foresee any particular uptake in demand in the commercial, industrial or retail sectors.

I believe both private and public sector housing numbers will increase from the present historical low level; however, the rate of increase in the private sector in particular will be dependent on the rate of any recovery that may take place during 2010.

The top boardroom issues for the coming year will be to secure a quality order book for 2011 whilst continuing to provide an excellent level of service to Clients; and along with this, client retention in what will still be an extremely aggressive and difficult market.  We will also need to continue to ensure we are operating with a robust and reliable supply chain and make sure that our employees continue to feel valued and remain motivated in what will be a difficult market.

Garvis Snook, chief executive, Rok

The last year has been tough, tougher than anticipated. The collapse of Lehman Brothers and the worldwide banking crisis that followed brought on the inevitable recession faster and made it deeper than anyone could have predicted.

Many parts of the industry are yet to feel the full effects. Some companies working on large scale contracts are still living off work won before the crash but will find it difficult to replace that work as it comes to an end and especially difficult to find it with sensible margins.

Because of the amount of money the UK Government had to pump into the economy, no matter which party is in power next year, it will have to slash capital expenditure which will affect all of us in the industry. The difficulty is guessing in which areas those cuts are going to be and how deep.

Tender prices are already at record lows and what I fear will happen next is that the house builders will start to get busy in the spring and that will push up prices of materials and labour very quickly. Contractors will be squeezed between poor returns and higher costs. More will fail as a result and also the banks will take advantage of rising asset values to close positions on marginal businesses. Eventually however we will get back to equilibrium between supply and demand and to worthwhile returns.

I do expect an increase in demand for repair and maintenance as companies and organisations refurbish rather than renew and as commercial landlords find themselves with old empty stock competing for fewer tenants against recently completed new buildings. 

Directors will be concerned about the volumes of work and balancing cost to reliable volumes. They will also be concerned at the potential for local management teams to acquire volume just to keep employed and the resulting rise in the number of contractual disputes. How many of us now remember Cardiff Millennium Stadium and the National Physical Laboratory or the Wimpey/Tarmac construction/housing swap of the mid nineties?

Attention amongst well organised businesses will also be focused on preparing for the upturn because the skill will be in having your operations in a position to take maximum advantage when the recovery comes.

Tony Hyde, managing director, Thomas Vale

2008/09 was a crap year for the industry as a whole, with developers and the private sector being at the forefront, and the public sector now following.

The construction sector has seen nothing but growth and investment for over a decade and is populated by many who have never seen bad times, let alone a recession of the magnitude being experienced.

But the good thing is that the good companies have anticipated change, cut costs and have cash and will come out stronger. For many, it will start as the existing one ends, with more debt ridden and cash starved companies going out of business. Jobs will be lost, trainees will just disappear as investment is cut and it could well take a decade to recover.

With the weakest of UK companies and lack of support from government, it is likely that overseas companies will see an opportunity and do a ‘Rover’ – moving tax payments and jobs abroad.

The three key boardroom issues for the coming year will be to look after and understanding clients needs, maintain cash flow and avoid bad debts and keep employees in place to take advantage of future opportunities.

My wish for the industry is that the government elect and civil servants realise the real cost of four million people on the dole and the potential of social unrest and riots on the street. They must invest in housing construction and capital projects – they spin off benefits to every other sector.

Alan Robertson, chief executive, VolkerWessels UK

The most noticeable aspect of the past 12 months was the speed with which the recession bit. The market went from ‘ticking along’ to being dead in the space of just a few months – with this dropping off of trade, particularly noticeable in building and the private sector.

For a few months, there was very real concern about just how long the recession would last and how deep the recession would be. Thankfully however, by late Spring there were economic indicators which gave hope that the recession was not going to turn into a longer-term slump, and that the economy might return to growth in the later end of 2009 or early 2010. Indeed, VolkerWessels started to pick up business again - especially in the arena of frameworks - in early summer, although the market was very competitive.

We are starting to see a reasonable pipe-line of opportunities again, particularly in the civil engineering and infrastructure arenas. But as I said, market competitiveness is a big issue - although input and supply chain costs are still falling. As most of the current economic activity is within the public sector, and public spending is acting as the ‘pump primer’ for the wider economy, the industry is nervous about how the result of a general election might impact upon public spending. The sector could still use some certainty, and Government spending plans are central in building the sector’s confidence.

Against a backdrop of a reasonable level of activity, one major point of discussion in the boardroom is the near constant review of our overheads and cost base. The market is very competitive at the moment, and where historically we would have looked at our cost base every half year or so, we are now looking at it continually.

A second issue is the retention and recruitment of quality staff able to make a difference to the organisation. The recession hasn’t made it as easy to recruit new staff as one might think - and I believe that people are opting to ‘play safe’ and stay where they are rather than risk pastures new.

The third issue for VolkerWessels is to make sure that we capitalise on the opportunities which came out of our recent rebranding and restructuring. The coming together of the VolkerWessels companies really does offer the whole group opportunities to improve what we do, to collaborate and share best practice – and to grow the business, even when times are tougher than they have been.

Rick Willmott, chief executive, Willmott Dixon

It will be difficult for anyone in the construction sector to look forward 12 months without the uneasy feelings of trepidation, doubt and cynicism.

So what drives these feelings?

There is trepidation that the next government will find that the country’s ‘books’ are in an even worse state than we have been led to believe. The consequential effect being that state sponsored capital projects will be deferred or, at best, enter a spending bottleneck

We also doubt that the ‘green shoots’ of recovery will take real effect next year and have a positive benefit for the construction sector, where we could see diminishing volumes and margins collide, in the fullness of time, with a surge in inflation within fixed price contracts 

Furthermore, there is cynicism as to whether some procurers (or advisers to procurers) of capital projects in both public and private sector still recall the incredibly negative outputs of lowest price tender procurement of the 80’s and early 90’s.  There were times when contractual claims seemed to be substantially higher up the agenda for some than health and safety, quality, partnering, customer service, sustainability… the list goes on. 

We’ve come so far since then, surely in the misguided pursuit of a cheap tender price, we are not going back to a time when there was little correlation between tender price and out turn cost.

However such feelings are balanced, as always, by the sector’s natural optimism and professional resolve to do more than just survive the recession. 

From Willmott Dixon Group’s perspective, we hope procurers will stick with a focus on quality not lowest price, and that our innovations in key areas like sustainability will continue to give clients exciting solutions for their projects.