Consensus grows that contractors’ margin levels ‘not sustainable’ and more firms will go to wall unless current system changes
A former ISG employee has given a damning assessment of the industry’s “broken economic model” as the head of trade body Build UK said construction had to do things differently in the wake of the firm’s collapse last week.
The firm’s administration, confirmed on Friday after days of rumours it was set to go under, is the biggest since Carillion sank in 2018. Around 200 people have been kept on by administrator EY to help out with the administration after 2,200 people lost their jobs the same day.
Dozens of industry professionals have taken to LinkedIn to say the current contracting model is broken and needs a complete rethink.
One of those affected ISG employees, its former managing quantity surveyor Josh Griffiths, said: “What has to change [is] the broken economic model that encourages low margin and high risk work, and a perception that this is acceptable because someone will sign a contract saying so.
“This starts from clients, professional teams and legal advisors promoting a fair and equitable contracting profile: 2% [margin] is not sustainable; 1% contingency is not sustainable, zero weeks programme time risk allowance is not sustainable [and] heavily amended forms of contract are not sustainable.
“No other industry would launch a development for the same financial risk and reward.”
He said the industry should roll out minimum margins at differing project bands, suggesting a 5% margin was “not unreasonable”, and warned: “Our industry needs to adapt or it will fail again and again.”
And Mick Rogers, the director of business development for VolkerFitzpatrick’s building arm, said: “[ISG] s the inevitable result of the constant ‘race to the bottom’. Most clients and their cost advisors say they don’t do it. Yet every one of us sees it in action every day.
“A lot of clients don’t know any better but their cost advisors do. There is no excuse. Stop promoting the race to the bottom. Advise on enabling a fair profit, a fair risk share, and the right price not the lowest price. If you award to the lowest price, you’re promoting the race to the bottom and contributing to the next contractor failure.
“And contractors, stop kidding yourselves you can make a profit when you’ve squeezed the pips out of everything at tender stage.”
Speaking 10 days before ISG sank, Cathal O’Rourke, the boss of the country’s biggest provate contractor, said current industry margins were “not sustainable” after Laing O’Rourke posted a pre-tax profit of just £18m on turnover of £4.3bn. He the return “acts as a significant handbrake on the sector’s ability to invest in the transformative technologies that will create step-change”.
Build UK has also said the industry must do things differently in the future to prevent more collapses like ISG’s in the future.
Suzannah Nichol, the chair of the trade group, which represents contractors, said: “For too long, inappropriate transfer of risk and unsustainable profit margins have been accepted as the way to do business, despite the recommendations for more collaborative and sustainable ways of working featured in every report since [the] Latham [report called Constructing the Team and published in 1994].
“We have to change the way the industry operates in order to prevent more companies ending up in this position, which is distressing for everyone involved.”
She said it has asked specialist contractors to see if they can take on some of the apprentices that have lost their jobs as a result of ISG’s collapse.
>> Also read: Major contractor set to file for administration, chief executive confirms
She added: “We want to hear from any specialist contractors employing apprentices that may be at risk of losing their job as a result of ISG’s demise and, also, from any ISG apprentice, graduate or trainee that has been affected.”
“It’s important, at this stage, to come together as an industry and do everything that we possibly can to support all those affected.
“There will be a significant impact on those just starting out on their career in construction, and this is where we are looking to make an immediate impact and are encouraging any businesses to get in touch that may be in a position to help one or more of ISG’s apprentices, graduates or trainees secure another role in the industry.”
Meanwhile, the Construction Leadership Council said: “We would advise everyone in the industry to ensure that they are managing any impact on their businesses within the terms of existing contracts, ensure that where possible payments are made promptly to suppliers.
“For the apprentices and graduates who are directly employed by ISG, Build UK and the CITB have established a working group to ensure that placements can be found for as many people as possible.”
>> Also read: Timeline: How ISG went from ‘wholly inaccurate’ claims about its financial health to ‘ISG has filed for administration’
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