COMMENT The news of ISG going into administration has sent shockwaves across the industry. While comparisons are being drawn with previous high-profile collapses, most notably Carillion, it will take time to unpick exactly how far the similarities go, but it is likely to have a considerable impact on the whole supply chain.
The reality is that every business is run differently. However, ISG’s failure spotlights some of the major challenges facing our sector more broadly and lessons we must carefully consider around how clients procure and work with supply chains.
It is a challenging environment for contractors, with growing pressure on already limited margins. On an individual project basis, across the UK, contractors are typically making between 3% and 6% profit. What we see in companies’ financial results though is that, on average, some very large businesses are making significantly less.
These limited margins, along with tight credit conditions and labour shortages, are clearly contributing to the rising level of insolvencies across the industry. In the year to May 2024, 4,297 construction firms went out of business.
While inflation has eased and there are signs of more confident spending in real estate on the horizon, this does not automatically translate into stability, indeed there is continued significant risk for clients who don’t take action. Viability will remain under pressure, and contractors are increasingly cautious and selective about the new work they take on.
In the immediate future, clients must proactively mitigate the capacity and insolvency risks to ongoing projects as well as consider from the very start of future projects how they will work more closely with main contractors and suppliers to support a stable supply chain and keep projects on track.
Rethinking relationships
This is by no means the first time the industry has had this debate, yet typical approaches to contracting can often still focus on delivering the lowest cost. The result is increased vulnerability throughout the whole supply chain and additional risk for projects. The fact is that all businesses need to operate sustainably, and clients need to ensure they are considering the overall value – cost and risk – of project delivery.
This isn’t simply about the contract sum. More importantly, it’s about how we view the client-supply chain relationships throughout procurement and delivery.
In the current market, clients need to take greater control. They must consider more sophisticated commercial models which position contractors and the key trades as partners, not just suppliers. Promoting incentivisation and collaboration and equitably apportioning risk and reward for both the client and the supply chain is absolutely critical to project delivery against the current economic and industry backdrop. This is not only a “problem for the supply chain” but should instead be the lens through which clients approach the achievement of the project business case.
Clients must therefore take greater ownership of the wider supply chain – intelligent clients are working with us to analyse, understand and engage closely with both general contractors as well as the key specialist contractors early on to enable better visibility of risk and achieve better value. Some are going one step further and looking to engage the trades more formally.
Staying in the trenches
The focus should shift to how we bring suppliers on board and set up the right supply chain strategy and commercial models to ensure success. For most projects, clients should be prioritising active management of the supply chain to mitigate evolving risks to costs and timelines. This is particularly important when looking at portfolio-wide investments, such as government programmes, or complex major projects which span a number of years.
ISG is not necessarily the canary in the coal mine, but the UK no longer enjoys a bench of very strong tier-one firms. Therefore, oversight of the entire supply chain and the risks which each link brings is a significant risk and clients will need to stay hands-on – sticking close to suppliers, keeping a watchful eye on emerging or potential risks and working proactively to iron out any challenges in the chain.
As we look ahead to the chancellor’s Budget on 30 October and prepare for what we hope will be a period of more consistent investment and confidence in the sector, we all need to work together to ensure the stability and performance of our industry – and the businesses within it. That requires us to rethink our relationships from the top down. It means dropping the “us and them” mindset towards contractors.
This is not simply a case of stopping individual businesses from going under. Our contractors are the foundation on which some of the new government’s biggest plans for the country must be delivered – from data centres to support the development of AI and the growth of our industrial and advanced manufacturing sites to enable the green energy transition to the refurbishment and expansion of our national healthcare estate.
Mitigating the rate and impact of insolvencies by working with a more united front matters not just for projects today but for the success of our industry and our society over the years and decades to come.
Chris Sargent is managing director, UK real estate, at Turner & Townsend
