Friday, 4 July 2014

How mad is the construction industry?

Balfour Beatty announced another profit warning to the stock exchange this week for £30million only 8 weeks after the last one.

Balfours are a great business with a fantastic heritage and some great people.I know better than most having worked with them over the past 20 years.What is happening to them is a symptom of the boom and bust of the construction industry. The challenges which Balfours are facing is why we want to "rethink your world" at Space Group.

We can't go on like this as an industry, swaying from boom to bust, gambling on who will win and who will lose. It is ridiculously expensive, stressful and means we lose any consistant improvement or skills development.

If we want to change we need to change something! 

The industry needs to fundamentally rethink its whole culture. It has nothing to do with BIM or technology but is all about culture, procurement and contracts.

I have written extensively about the different generations and their impact on change. The baby boomers have held the reigns for many years now and it is time for them to hand over to the young gen X and emerging gen Y.

If we take the Balfour Beatty story as an example to demonstrate what the construction industry goes through. In 1997 a new Labour Government was elected and on the back of a financial boom and growing tax receipts there was a public sector building boom.

By the late 90s clients had been convinced that a design and build contract reduced their risk and improved value. Builders became "contractors" The clue is in the name. It was all about the contract and the sub contracts and how these were played out rather than the process or product. Main contractors built pre construction teams who were excellent at bidding and winning work.Their delivery teams managed the subcontractors as they jettisoned their direct labour. At the same time their commercial teams grew. The risk moved to the main contractor from the client and design team which meant they held the power.

As public sector spending grew through the 2000s main contractors started to win the construction gamble. D and B is all about risk and with large budgets from government they were making huge profits. Sub contractors were squeezed so we had little skill development or investment in the industry but main contractors we becoming cash rich as they held onto cash as profits grew.

These cash piles were then invested into PFI and again they won big when clients wanted bidders to take interest rate risk. With falling interest rates PFI became hugely lucrative. This was a fantastic business model and through the 2000s shareholders of companies such as Balfour Beatty did very well.This was more of a financial model than a construction process. At Balfours Ian Tyler,accountant rather than a builder, was in charge and helped Balfours to grow revenue and profit,

However when the spending slows and the cash reduces the strategy falls apart as it is not a sustainable  model. An early example of this was Jarvis who were using cash receipts from rail work.

Construction companies have burned through their working capital over the last few years and have not been able to invest. To cover overhead projects have been bought with low margin. Again this is a  gamble and unfortunatley it is more likely you lose in a falling market. It is particularly tough on subcontractors who are squeezed at both sides. This is what has happened to the Balfour Beatty M and E business. They have gambled and lost. 

The mad thing is, that for Balfours to keep going they are selling their assets. These are the PFI assets they invested in during the boom. So by the end of this decade Balfours will have sold all if the assets which they amassed through the 2000 and will be back to where they started 20 years ago.Boom and Bust!

So who has won and who has lost.

The winners are the shareholders through he 2000s. The losers are the great staff of Balfours who unfortunatley have been through all of the pain of the past 5 years. The other loser is the construction industry. We have not moved forward, we have not improved and we have lost skills.

There is a different way. I think I will leave that for a future blog.

Rethink your world.

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