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Construction firms ‘reducing margins’ to win contracts risk industry's future

Rail workers

Construction firms are cutting margins to win contracts and damaging the industry as a whole,says report by the Institute of Chartered Accountants in England and Wales (ICAEW). 

ICAEW’s report accuses UK construction firms of too often reducing their margins to win contracts on the assumption that they will be able to recover their costs through subsequent changes to the scope of their respective projects.

“Where contractors lose tenders they sometimes assume that their price was too high and will then aim to be cheaper the next time they bid,” the report states.

The report warns firms that they will not be sustainable in the long-term if they cut margins without examining how they can cut delivery costs.  This would involve examining their operating models, resources and capacity for innovation.

It adds: “Clients in both the public and private sectors that focus primarily on lowest bids, without properly investigating the overall quality and viability of the bid, heighten the risk of additional costs, quality shortfalls and delivery delays to the project.

“They are also effectively forcing construction businesses to bid at unsustainably low prices just to be competitive, often at the expense of quality.”

The report says that the UK construction industry contributes more than £110bn per annum to the economy and employs more than 2.4M people. But it adds that the industry is a “fragile sector”.

The report 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.

“This pressure is further compounded by the longest decline in bank lending for construction companies since 2011 – because of fears of a downturn in the economy and the impact of Brexit – at a time when firms need to manage their debt.”

The report goes on to accuse the sector of lacking transparency, particularly concerning cost and performance.

It states: “Executive management and boards need to ensure the tone from the top encourages and supports employees early reporting when problems occur.

“Without early reporting, projects are less likely to remain on track and management may be unaware of a problem until it becomes significant. Management reward structures should also align remuneration more suitably to longer-term measures of a company’s achievements.”

In addition, the ICAEW report argues that the demise of Carillion and failures by construction firms in relation to the Grenfell tragedy both represent examples of “the hugely significant risks affecting the sector”.

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