Construction firms put immediate financial goals over long-term success

In the wake of Carillion’s collapse, Constructing Excellence published a report which reveals that almost half (43%) of construction firms prioritise immediate financial goals over organisational resilience.

The report reveals the key obstacles to embrace organisational resilience, identified among the 100 senior business managers and executives within UK construction organisations surveyed:

• Immediate financial goals are more urgent – 43%
• Inadequate budget – 27%
• Lack of skills or knowledge related to ensuring resilience/business continuity – 27%
• Insufficient senior management focus on resilience – 19%
• Opaque operations or practices, making the effects of organisational actions towards increased resilience unclear – 14%
• 29% stated they didn’t see any obstacles.

Don Ward, CEO of the report’s publishers, Constructing Excellence, said, “The collapse of Carillion has kick started a wide-ranging debate about the causes, including how underlying business models need to change. The report asks whether the industry is built on a house of cards, which it surely is, and the call to action for companies to assess their ability to respond to incremental changes and sudden external disruptions and to act on these findings is therefore extremely timely.”

The report, written by Project Five Consulting, has identified the construction industry as a key enabling sector for the wider UK economy. A resilient sector should be good for UK plc. However, it has a higher rate of failure than the average across all industry sectors. This fragility is underpinned by structural issues that characterise the weaknesses in the industry. These are borne out by the recent collapse into liquidation of the country’s second largest construction company, Carillion.

There are also economic, political and market uncertainties facing the sector alongside the disruptive forces of technology and increased regulation. Based on the findings, the report has identified a range of priority actions to help the industry understand and embrace approaches to organisational resilience. These include strategic actions to address the structural issues and weaknesses identified: low levels of profitability; a fragmented supply chain; adversarial client/contractor/sub-contractor relationships; skills weaknesses; low digital maturity; low productivity.

The construction industry’s lack of resilience has been evidenced. The most recent figures from the Insolvency Service (which has taken over the collection of data from the Office for National Statistics) on the total new company insolvencies in England and Wales for the year ending Q3 2016, show that there were more insolvencies in construction than in any other sector.

The total was nearly 2,500. When the data are aggregated by the ONS, they show that construction accounts for 16.5% of all insolvencies, but only 7% of economic output (by GDP) and 7.5% of total company numbers.

Alarmingly, the sector’s future looks even less resilient. Accountancy firm Moore Stephens, in a 2017 study which showed that 26% of construction companies currently exhibit warning signs that indicate they are at risk of failure. The analysis from Moore Stephens’ ‘Moore Data’ service of construction companies identified key factors for this as follows:

• Construction sector is under pressure due to tightening margins as the fall in Sterling since the EU referendum has pushed up import costs, with smaller contractors’ profitability among the hardest hit;
• Smaller companies can also find it harder to access bank lending for projects, putting cash flow under strain;
• Construction companies could face further problems in the future if access to skilled labour becomes more limited following Brexit, pushing up wage bills.

The reasons for the sector’s lack of resilience have been documented by several studies. Research by Jagafa and Wood (2012), from the University of Salford, supported by previous research by Jonathan (2002) and Langdon (2012), reported that cash flow shortages, falling profits, failure to pay suppliers, delayed and /or reduced valuation certificates, progress of works slowing, insufficient resources deployed on the project, falling asset values, excessive borrowing, or even boardroom tensions are signs of company financial difficulty but are often overlooked by management.

The organisational resilience of the UK construction industry: Are we built on a house of cards? survey provided a snapshot of some of the key risks against which organisations need to build resilience. Some of the common issues identified in wider research were also reflected in the responses received, such as macroeconomic uncertainty. However, the respondents also identified issues including disruptive competitors, reputational risks and threats to information security, including:

• Disruptive competitors in the market – 42%
• Macroeconomic uncertainty/events – 32%
• Political instability/civil unrest – 28%
• Reputational risk (e.g. on-site accidents, non-compliance) – 27%
• Threats to information security – 23%
• Corruption/bribery – 19%
• Environmental changes/natural disasters – 17%
• Increased incidence of terrorist attacks and other crime – 11%

In the face of these identified macroeconomic, political and industry-specific challenges, the case grows stronger for the sector to address its approach to organisational resilience to de-risk itself. In developing its framework for organisational resilience, BSI, who supported the report, has identified three core functional domains:

• Operational resilience – focused on internal continuous improvement activities with a customer focus in mind.
• Supply chain resilience – to quantify and minimise supply chain risks across all business operations.
• Information resilience – managing information throughout its lifecycle securely and effectively.

The benefits of developing an organisational resilience framework, as expressed by those surveyed, include:

• Long term viability – 56%
• Protecting reputation – 42%
• Improved financial performance – 32%
• Improved competitiveness by minimising disruptions – 29%
• Operational efficiencies – 29%

Tim Whitehill, Managing Director of the report’s authors, Project Five Consulting, concluded, “A resilient industry is good for clients, for the workforce, for communities and for the economy. Organisational resilience is a real opportunity to enable the industry to weather the storm, grasp opportunities as they arise and put itself onto a firm footing for the future.”