ROADS CONTRACTORS face a clampdown on margins after the Highways Agency this week revealed that profits would be capped at 2.5% on all future major projects.
Consultants working with an early contractor involvement (ECI) contractor will also be squeezed, with profits to be limited to 7.5% during the design phase.
The profit cap will be written into all future ECI contracts, the Highways Agency announced at a supplier conference in London last week.
Consultants said that the move by the Agency will force them to renegotiate their contracts with the contractors.
Traditionally consultants would seek to make considerably more than 7.5% profit because working with contractors can be high risk.
To balance this, consultants say that they will look at how they buy into the contract pain/ gain mechanism and will seek to further limit the percentage hit they would take when projects go over budget.
Consultants and contractors were told by the Agency that bonuses could be made by identifying savings on the projected target cost at the design stage, delivering ahead of the target cost in the construction stage, and bringing the whole project in under budget.
But it confirmed that the main ECI contractor would not be permitted to make more than 2.5% profit.
'We recognise the need for the supply chain to make a fair profit. We have spoken to the supply chain and looked at the results that suppliers are achieving. From this we came up with a figure of 2.5% and nobody has violently disagreed, ' said Highways Agency procurement director Steve Rowsell.
'We know the industry has a desire to increase returns and if contractors do a good job they can, ' he added.
At design stage the ECI contractor will earn 25% of any forecast savings, which are then incorporated into the construction target cost.
During construction the contractor will share up to 20% of savings on this adjusted target cost but will bear up to 50% if the project runs over budget.
The final bonus is a 25% share of any saving on the overall budget, to a maximum of 2.5% of the total budget.