Industry must price right to survive
The construction industry is characterised by risk, uncertainty and complexity according to a new report form The Institute of Chartered Accountants for England and Wales (ICAEW).
The ICAEW Audit Insights: Construction (Bidding for lasting value, delivering for success) report was published in April 2019. It points out that the construction sector is an important part of the UK economy, contributing more than £110 billions – 6% of GDP. But it highlights lowest-cost bidding as the source of a number of long-term problems in the industry.
The ICAEW states: “Construction is also a fragile sector that suffers from low margins and high risk where even the largest firms can find themselves just a few contracts away from slipping into the red.” The collapse of Carillion and ‘failures at Grenfell’ are cited as examples of the risks affecting the industry.
While external factors such as lower bank lending rates are noted, the Institute report calls on construction firms to reconsider the practice of lowest-cost bidding to win jobs. “If construction businesses want to generate sustainable profits, they need to get the price right at the tendering stage,” states the publication.
One reason for low bidding that the report raises is that companies are offering to work for less on complex projects in the hope that they will improve margins because the project will be changed. The ICAEW refers to this as a ‘risky strategy, as unforeseen changes can turn small profits into losses.”
This is far from being the first report to highlight the risks of low pricing. The Farmer report (Modernise or Die) published in 2016, stated in its introduction: “Put simply, much of the industry does not make enough money, or, where money is being made, feel enough confidence it will stay possible into the future.”
The low profit margins and high risk pricing are not only impacting on individual companies. These issues make it difficult for businesses to invest in training, which has now become an urgent issue for the whole sector as it struggles to find skilled trades, leading to project delays. As the Farmer Report states: “The consequence is underinvestment in training and development, in innovation, in raising productivity.”
The ICAEW report welcomes the government’s £600 billion infrastructure investment announced along with the Construction Sector Deal. But the ICAEW also calls for specific timings to guarantee that projects will be tendered. It also says that government should be a better client in terms of “showing more ambition and urgency in facilitating a reliable pipeline of major infrastructure projects.”
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