Construction projects have multiple layers of sub-contractors

Companies are operating on thin or negative margins

Big groups should cast themselves as consultancies

Carmen Luca, 32, is one of 400 workers on the construction site of one of London’s newest skyscrapers, a 24-story building nicknamed the “Can of Ham”.

But Ms Luca, who directs traffic on the site, is one of only 40 people working for Mace, the construction company that won the £135m contract to build the project at 70 St Mary’s Axe three years ago.

The remaining 360 workers work for more than 40 subcontractors, or for sub-subcontractors, and some have been hired on a weekly, daily or even hourly basis.

This model of several layers of contractors and subcontractors, is the standard across Britain’s construction industry, especially on big projects.

But Mark Farmer, a consultant who led a government review into the construction industry two years ago, said the system is “broken” and even unsafe.

Nick Moore, Mace's project director at the Can of Ham site in London, admits that with 'workers having the choice of location it’s been difficult getting a team in place' © Charlie Bibby/FT

“Although the money washes through the prime contractors they are not actually employing the people who do the work,” said Mr Farmer.

“Nearly all the risk is passed down the supply chain to subcontractors which often have poor cash flow and low margins, leading to a potential willingness to cut corners, and a diminishing pool of skills.

“Add to this the contractual divisions in the supply chain and you risk the likelihood of no responsibility being taken for disasters like Grenfell Tower,” he said, referring to the west London tower block fire in which 72 people died.

In her interim report into the causes of the disaster, Dame Judith Hackitt called for an overhaul of roles and responsibilities in construction.

“The mindset of doing things as cheaply as possible and passing on responsibility for problems and shortcomings to others must stop,” she said.

Thin margins encourage contractors to pass on risk

Companies such as Mace focus almost exclusively on winning and managing projects, before outsourcing the rest of the work to the SMEs that make up 86 per cent of the UK’s construction workforce.

“We outsource more than any country in the world. There is no chain of responsibility,” said Rudi Klein, the chief executive of the Specialist Engineering Contractors Association.

“How many Grenfell towers or Edinburgh schools or Carillions do we need?” he asked, referring to safety failures that caused 17 primary schools built under the private finance initiative in Scotland to close and the collapse of the UK’s second-largest construction firm in January.

Companies such as Mace focus almost exclusively on winning and managing projects, before outsourcing the rest of the work to SMEs © Charlie Bibby/FT

Thin or non-existent margins encourage contractors to “focus on pushing risk and cost-cutting down on to subcontractors”, said Noble Francis, the head of the Construction Products Association lobby group.

The top 10 UK contractors made a combined loss of £53m and the average profit margin was minus 0.5 per cent in 2016-17, despite four consecutive years of industry growth. Labour and material costs have risen, particularly since Britain voted to leave the EU in 2016. A lack of investment has left productivity in the construction industry stagnant for 20 years.

As it emerged with Carillion, large contractors are willing to win contracts even at negative margins to maintain cash flow, and are willing to squeeze the supply chain by renegotiating sub-contracts or extending payment terms, Mr Francis said.

The Institute of Civil Engineers says this “highly transactional” model, with contracts involving lawyers and consultants at every stage, is one reason why construction costs are so high in Britain; it pointed to a study of two large unnamed building projects in London which found that around half the price paid by the developer was spent on commercial management, overheads and profit within the supply chain.

Training and skills in short supply

At the Can of Ham, subcontractors responsible for the ground works also bear the cost of pumping out the water if there is a lot of rain, said Nick Moore, Mace’s project director on the site. “Sometimes you get dealt a lucky card and sometimes you don’t,” he added.

He said that labour flexibility is key in a cyclical industry. “The trouble with construction is it goes in peaks and troughs,” he said. “What are you going to do with 3,000 to 4,000 workers sitting around?”

Meanwhile, training and apprenticeship numbers have fallen sharply and skills are in short supply, a problem that has been exacerbated by a drop in the number of EU workers coming to the UK since the Brexit vote.

In the final quarter of last year, more than two-thirds of contractors said they were struggling to recruit bricklayers, half said they had difficulty recruiting carpenters and joiners and 29 per cent reported shortages of plasterers and dry wall contractors.

Mr Moore admits that with “workers having the choice of location it’s been difficult getting a team in place”. Ms Luca, who emigrated from Romania a decade ago, has been one of the better recruits, staying for 18 months.

But he defends the existing model of contracting arguing that the amount of specialisation in modern construction means that the layers of subcontractors make sense. “People will try and get away with things but it’s our job to make sure they don’t,” he said.

Mr Farmer argued that large contractors should recast themselves as consultancies and be paid for their services rather than for the total project.

“At the moment large construction corporations have multibillion cash and revenue-led businesses despite up to 80 per cent of the value of projects being done by others,” he said.