Regular readers of this column will acknowledge that whilst I have made several references to the Brexit process over the last two years, they have usually been linked to another issue and the comments have been drawn to support or contradict a particular line of thought.
With this month’s column I intend to break from that practice and talk directly about the impending withdrawal from the EU (be it a Deal or No Deal Brexit) and some of the potential practical implications for Contractors operating within the Construction sector.
We have all been aware of the failings that led to the undoing of Carillion in recent times, and that the business model they pursued of high revenue, low margin long term contracts was deeply flawed. In fact, the business model resulted in Carillion’s ultimate demise, and the increased cost of unfinished contract to the client as alternative Contracting organisations refused to pick up mid contract based upon the original terms agreed to, resulted in a ‘lose: lose’ scenario.
Carillion were the most extreme and high profile casualty of this approach to market, but they were by no means the only business to employ this strategy, and in fact, although the most extreme version, Carillion’s business model is one that is still widespread within the sector which, as a result, sees Construction as a less desirable sector for investment than was the case pre - Carillion.
The implications for the supply chain are ongoing uncertainty and a remorseless pressure on margins, which are no more sustainable at any link in the supply chain, be they Contractor, Distributor or Manufacturer.
However, because of the sheer scale of operations for Main Contractors and Manufacturing when set against the fragmented nature within the trade specific contracting sector, we as ‘Sub’ contractors inevitably become the pinch point where margins come under the most strain. Manufacturers will pass on any increased costs directly to their customer base, and in all likelihood use the opportunity to enhance their returns, whilst Main Contractors will use the tender process to drive competing contractors – ever more desperate to secure work – into unwise and unsustainable levels of competition, factors we have seen many times before.
So, we have a sector that is in danger of engaging in a ‘race to the bottom’ which places the security and sustainability of every business operating in the sector under pressure. That suggests that the market is not working properly ultimately because the client is not being asked to pay the appropriate price.
I am not suggesting that we do not or should not operate in a competitive marketplace – we most certainly do, and many organisations are able to grow and prosper within it, but when major establishments take business that undermines their very existence then something needs to change.
What does this have to do with Brexit?
It relates to the inevitable uncertainty that will arise, whether we experience an orderly or disorderly withdrawal. The uncertainty makes planning more difficult, yes but not impossible.
But the reality is that it is difficult to secure projections on continuity of supply and price stability from many suppliers. This in turn makes it difficult for Distribution to commit with confidence.
So, what is the logical outcome of such a scenario? You’ve guessed it – the contractor, who has no transparency on the supply issues highlighted (availability and price continuity) has to engage in long and medium-term contracts which demand both and penalise any inability to comply.
Failure to engage in negotiating contracts leads to a reduction in pipeline and future workflows, willingness to engage inevitably increases risk.
There are numerous potential implications in this scenario, some contractors may fail. Those with the deepest pockets can potentially strengthen their position due to stronger balance sheets. It may lead to a surge of consolidation within the sector. Another alternative is that businesses and skills within the trade contractors will retreat into safer trading sectors with less onerous trading conditions.
The truth is that nobody can foresee what the outcome will be, and that all of the scenarios identified will occur to a greater or lesser degree, but one thing that will take place will be uncertainty, and change.
Whilst sectors continually evolve and change out of necessity and this is no bad thing – the plea to manufacturers and suppliers is greater transparency of management plans, likely implications and greater engagement on the likely implications as we go through what will inevitably be a year of challenges and changes.
The political class have demonstrated an almost limitless capacity to mismanage the Brexit process through a mixture of partisanship, secrecy and self-interest - we in the Construction sector should take a different path.