Mark Farmer is CEO and a Founding Director of Cast, the specialist construction consultancy. He has over 30 years’ experience in construction and real estate and is a recognised international commentator on a variety of industry and policy related issues. Mark authored the Farmer Review, an influential 2016 independent government review of the UK’s construction labour model entitled ‘Modernise or Die’. From 2019 until 2023 he was appointed as the government’s Champion for Modern Methods of Construction in Housebuilding.
Six years on from the collapse of Carillion, the failure of ISG has reignited the debate about the construction industry and its broken model. In Modernise or Die, published two years before the Carillion liquidation, I warned of an “inexorable decline” in the industry’s fortunes unless things changed. Here and now, in 2024, it feels like the industry is continuing on its insidious course towards even choppier waters.
The brutal reality is that the industry at large is unable to reform unilaterally at scale in response to this or likely further major corporate failures. It is just too fragmented to perform a collective about-turn on how it does business, and there are still no significant external initiators to break out of a vicious circle of doing the same thing day after day.
Both commissioning clients and the government (as a client and policymaker), remain the most likely external influencers, but both have their own challenges to face at the moment. For private sector clients, it is investment viability and, for government, it is value for money and competing political priorities.
Ultimately however, they are relying on a sector that has increasingly variable capability and stability. There is a core of successful and resilient businesses of all shapes and sizes that have found a way to evolve and prosper – or at least to survive in a difficult market.
However, alongside that core is a very large, more fragile and transient cohort of businesses increasingly exposed to growing trading risks and future structural changes in the market. Differentiating the types of businesses who you are dealing with in the future, up and down the supply chain, will be key to risk management.
Any expectation of a Damascene conversion to a collaborative, integrated, high-performance way of working at an industry level is, I am afraid, wishful thinking. Despite there being many exemplars showing in isolation how it can and should be done, these are the exception not the rule. And they are reliant on a rare combined impact of intelligent clienting, enlightened advisors and a progressive supply chain, usually supported by different procurement and funding protocols. Most importantly, they demonstrate real business and project leadership in modifying behaviours and ways of working.
The industry’s trading model of adversarial and layered transactions to maximise risk transfer has been set and established over decades in response to inevitable boom and bust cycles. Even a much overdue return to process and competency-driven regulatory oversight in the wake of the Grenfell fire is too little and too late to force a wholesale rethink on business models. The industry, I fear, will always find a way to game the system and demonstrate superficial conformity, especially as capacity and capability constraints mean we are already struggling with the bandwidth to regulate and police matters robustly.
Nothing short of combined legislative interventions across prompt payment, project bank accounts, responsible procurement, self-employment v PAYE incentives, workforce licensing, more stringent building regulations and a consumer rights revolution will force the necessary change at an industry-wide level. The modern political era of the light hand of the state means that this is likely to remain a pipe dream.
We should therefore not expect the government to be the answer to our industry’s woes. Despite many calls (including from me) for government to play its part in demand planning, strategic policy making and better clienting, the industry has been marched up a hill of modernisation and then left at the mercy of yet another economic cycle. The disastrous 2022 Truss mini-Budget led to an accelerated and synchronised downturn across both private and public sector output, with many who had invested in change left high and dry.
There was no governmental counter-cyclical demand smoothing and no strategic long-term support for industry improvement. In the wake of this, future decisions on investment and modernisation are likely to be viewed more cautiously by many and will be driven by business imperatives and personal leadership.
In response to the ISG situation, some are now calling for minimum margins or putting up prices to fund wider margins in construction – but that is not going to wash. Construction already has up to 50% waste baked into it, and price sensitivity is high across private and public sectors.
The problem is that project organisational fragmentation prevents us from attacking that waste and redistributing the benefit to the appropriate parties, including the end client.
Take the private housebuilder model, for instance. Any benefit of reducing build costs ends up residualising as either a higher land offer or a wider development margin for any given market-driven sales value, with no benefit to the purchaser or the construction supply chain.
Similarly, in general construction work, the tiered contractor model means that any legitimate cost reductions obtained through true design or process optimisation are over-ridden by commercial opaqueness and opportunism.
The inability of the industry to think in bottom-up resource efficiency terms rather than in top-down market price terms now acts as a real drag on incentivising waste reduction. It seems easier to rely on contractual risk transfer and often inappropriate commercial practices which perpetuate all of the waste but still pressure the down-end selling price.
This conundrum is, then, amplified by the contemporary tier one contracting business model. There are simply too many contracting businesses who chart success by ROCE (return on capital employed) and revenue rather than EBITDA (earnings before interest, taxes, depreciation and amortisation). They are content with a Ponzi-style monthly cash cycle, using trade credit to create a false sense of liquidity as opposed to true bottom-line return.
In looking to the future, we cannot underestimate the impact of workforce contraction on trading risks. As we head towards sub-two million sector employment for the first time since 1997, any return to growth now poses greater risks, with question marks over reduced experience-based competency accompanied by structural wage inflation as highly skilled, time-served operatives retire in high numbers. Set this against a backdrop of higher building performance requirements and an overdue return to more regulated quality, and you can see that the industry is just not set up for scalable growth.
We increasingly need to reflect on one thing referenced above – leadership. Some businesses are clearly capable of being successful and making money in the sector, whether they be consultants, contractors or specialists. I think we need to have much more focus on sharing the traits required to run a successful business rather than keep focusing on the industry’s dysfunctionality. We won’t change it, so we need to navigate it.
Ultimately too many failures are a function of poor business leadership and a lack of commercial acumen. It is time to reflect on the quality of our decision making in what we do, who we work for, who we employ and what terms we accept.
We need to rethink how we ensure end quality, and how we create – within our control – competitive but sustainable profit models that are based on more than just adding up the bills after they have landed.
For some, this is already happening. For others, this may mean that working in construction is not a viable business proposition anymore. Or that there is a need to shrink a business or change direction to improve quality of revenue and true profitability.
It is better to do this on your own terms, rather becoming just another industry insolvency statistic of either your own making or down to the failures of others.