Contractors experiencing a renaissance

The supply chain has responded well to the changes that have arisen following privatisation, with new players having entered the sector and some having left. Terry Povall outlines just some of the challenges that contractors are likely to face in the 21st century.

Since privatisation of the water industry in the early 1990s the sector has experienced numerous radical changes including those in organisation ownerships, partnering approaches to delivery, longer-term arrangements and changes in the supply chain to name but a few.

Contractors have responded well to these changes and whilst there are some new players in the sector and some have moved out, the tier one supply chain has remained mostly in tact. So what challenges does the 21st century present to contractors going forward and what will the sector look like in ten years time?

Contractors in the UK are currently going through a renaissance with an extremely active workload and struggling with capacity to deliver. They are also experiencing an increasing demand for greater performance from their clients. In addition, clients are becoming thinner organisations with the expectations that contractors will have a much greater client business orientation than has been historically the case.

Contractors need to reinvent themselves as 21st century sophisticated organisations with new skills and capabilities as professional businesses focused on delivering value to customers over the long term, managing supply chains and increasing reliability of delivery through better and more consistent end to end processes.

There are two key change aspects that will influence this:

  • The changing nature of the type of work and how that comes to market
  • The market drivers that are changing clients’ expectations concerning the benefits of Product Innovation, Corporate Social Responsibility, Customer Relationship Management, Whole Life Costing, Performance Management and increased Productivity, all of which are being continually added to client needs

Taking first the changing nature of future work, an interesting simple statistic is that in the years following privatisation the average size of a construction project was £1.5M.

Although all companies had large programmes of small- to medium-size projects the average size of project was inflated by the large number of major wastewater schemes that were being built in all the major coastal towns and cities to comply with Urban Waste Water and Bathing Water EU Directives.

In time these bigger schemes became less of a feature and as we moved into AMP3 and AMP4 periods we have seen the average size of a construction project drop to circa £850,000, reflecting the lesser number of big schemes and the extra number of smaller schemes.

Overall, however, the sizes of programmes are increasing which means that there is a clear shift to larger numbers of smaller schemes. Does this mean that we will need more small- to medium-size contractors to deliver such projects, or will we require contractors who can re organise themselves to deliver programmes which are continually changing in content and scope?

In addition, the changes in bias from capital schemes to capital maintenance in the sector is becoming more publicised and contractors need to respond to this as well.

In-sourced solutions

Another future challenge for contractors, is that some water companies are stating that the industry no longer adds value in managing these programmes. The water companies say that the skills needed for this can be provided more efficiently by in-sourced rather than outsourced solutions, and with the added value that an in-sourced solution provides more sustainability.

A key challenge has to be how to encourage contractors to plan for the longer term by building stronger programme delivery capability that can be flexible in their application to programmes which will change in the future as regards content and size.

This sustainable delivery capability has to be extended into the supply chain now through investment by contractors even in the face of the possibility that they might not get future work outside of the current period. There is the added benefit that if a contractor sets out to build such a platform in a current AMP period this should enhance the value of their capability and put them in an excellent position for securing future work.

However with contractor margins at 1-2% there is little scope for investment in such learning and platform building and consequently the sector may continue to be reactive in its response to changing needs.

Taking the second key aspect of changing market drivers in client expectations, we have already referred to clients looking for construction companies to demonstrate that they are working with the supply chain. In addition, EC Harris has identified the following additional drivers that contractors need to respond to in the future – on time, on cost is no longer good enough.

The future contractor proposition needs to address market and customer specifics such as:

  • Environmental aspects that are going to start to have greater significance in any construction project
  • Sustainability and stakeholder buy in that are becoming more important as key differentiators in the bidding process
  • Built asset solutions will become more complicated as carbon footprints and whole life cost issues are brought to bear
  • Construction companies are looking to fund more projects through their financing arms and diversify into asset ownership
  • More work can be and will have to completed off site
  • Impact on the community will play an increasing part
  • There will be a need to have greater empathy with the end user
  • Its no longer just about providing an asset, there is a need to provide a solution that aligns with the user experience

In recognising these issues and the growing need to respond EC Harris’s experience highlights the following as barriers to these changes:

  • Learning is not taken from one project to another
  • Sharing knowledge is seldom achieved across organisations who have regional and sector structures
  • The supply chain is inherently inefficient and project focused
  • Tier 1 does not look beyond tier 2
  • Operational silo’s exist and leveraging of corporate power does not happen
  • Clients are looking for suppliers to be able to demonstrate value but struggle in identifying what good looks like in value terms
  • There is a growing lack of clear understanding of the relationship between Capex and Opex and impact on whole like costs in proposing built asset solutions
  • Innovation lacks transparency in benefits tracking
  • Clients still looking at lowest cost as opposed to driving value
  • Lack of real effort spent in the relationship building process
  • Lack of leadership by the Tier1 in the ‘end to end’ supply chain
  • 1-2% margin preventing investment in all this learning

These barriers have an impact on contractors’ business in that they result in construction costs becoming higher than they need to be and reduce margins. Lots of time is spent doing activities that are trying to meet clients expectations around areas such as corporate social responsibility and the environment.

But time is wasted due to lack of a common understanding of costs and the relative value to be delivered and as a result returns in real terms are minimal and seldom measurable.

Contractors are increasingly more aware that being non-environmentally friendly will result in lost opportunities. But what is the value to the client of a green solution and can this be articulated in cost and value terms so clients can make real decisions rather than playing a simple numbers game around lowest cost.

On this subject, one contractor challenged: “How can we offer green solutions when this puts up our price. Surely the decision about how green we can be has to be a joint process with the client rather than what we bid against.”

When we talk about design solutions being aligned with “buildability” it is already recognised that the ability to make major impacts into the construction cost is often too late in the end-to-end process.

Environmental impact and dealing with the supply chain are no different and whilst the advent of partnering has enabled contractors to be engaged earlier, the agenda upon which we do engage them needs widening if clients expectations in these new areas are to be met.

More and more contractors are becoming aware of these needs but only a few are responding on any significant scale. Some contractors are already:

  • Creating systems and processes driven by the need to deliver efficiencies
  • Creating off site manufacturing capability
  • Acquiring critical areas of specific supply chain
  • Developing their own frameworks with individual suppliers per commodity and guaranteeing volumes for three to five years
  • Spending more time and money developing its supply chain to ensure certainty of supply
  • Linking Opex requirements as part of Capex sourcing
  • Developing CSR systems
  • Developing customer relationship management processes

What the contractors say:

  • “The core functions for a contractor need to be changed significantly”
  • A 21st contractor needs to be different”
  • “Changes in customer requirements should provide the opportunity to drive for improved margins”

One final challenge concerns the intervention in the UK market of international contractors. The UK infrastructure market is being penetrated more and more by sophisticated European and international contractors.

These contractors have a global presence, and have extremely good political links and are well funded. And, due to the trading nature of their shareholding, they seem far closer to their clients than contractors in the UK.

However as these international contractors continue to expand their work in the UK EC Harris believes that they will need to move in the same way UK contractors need to right now but their speed of reaction and response will be quicker and leading.

Unlike other sectors, such as aviation and rail, the future water sector due to the changing content of the workload will not be significantly penetrated by these big, sophisticated and established European international contractors which will leave a potential development gap in contractors taking leading positions.

Those contractors who can recognise the changing needs and respond accordingly put themselves in an excellent position for securing future work.

Terry Povall is head of water at EC Harris. T: 0151 243 8490.

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