Many contractors might cast a jealous glance at a pre-tax profit around the £10m mark. Since Construction News last went to press at the end of July, John Sisk & Son, Morrisroe and Erith have all declared losses. Six other CN100 firms have reported falling margins: McAleer & Rushe, Winvic, RJ McLeod, TSL, O’Halloran & O’Brien, and M Group.
“Every single client we used to work with in London is national… for them, having different regional teams to engage with was a real pain”
Grant Findlay, Sir Robert McAlpine
However, for Sir Robert McAlpine – a business that turned over £1.07bn and took on its fair share of risk along the way – the £9.3m annual profit it announced in late July is a paltry return.
The 0.86 per cent margin revealed by its results for the year to 31 October 2022 was down from last year’s 0.98 per cent. Although sales jumped 16 per cent by £150m, profit rose just £150,000 (up 1.7 per cent) – meaning it clung on to just 0.1 pence in profit on each additional pound entering the coffers.
The family-owned company was the victim of a familiar squeeze, neatly summarised by its provisions. Sir Robert McAlpine put aside £11m – more than it earned in profit – for jobs on which it expects to lose money. In another sign of the times, it kept back a further £8.8m for remedial work on projects it has already completed.
The firm’s chief financial officer Leighton More preferred to blame a familiar cocktail of factors. “The recovery in activity levels post the global pandemic was tempered by subsequent supply-chain, labour-availability and inflationary pressures,” he said.
Trimming the fat
Sir Robert McAlpine is not just banking on stabilisation in material, labour and energy markets to recover its margins. Instead, it is trimming the fat and doubling down on profitable areas of business – in spring this year it overhauled its structure, so the business now revolves around “target sectors” instead of regions.
The firm’s executive managing director for buildings, Grant Findlay, told CN the restructure was not just about cutting overheads but being “better aligned with markets that are growing and where we have good, strong existing client relationships” and “capitalising on those relationships”.
“A lower cost base will allow us to navigate the ongoing challenging economic environment, as well as to maximise operating margins”
Leighton More, Sir Robert McAlpine
A centralised approach to construction helps keep clients happy, Findlay believes. While historically the group had “regional clients, a regional pipeline, a regional supply chain”, he noted that clients now tend to develop buildings in a range of locations.
“Every single client we used to work with in London is national: [clients have] got national real estate portfolios, some of them are international, so they’ve gone [geographically] wider. And for them, having different regional teams to engage with was a real pain. They were getting different approaches, even different contract forms being thrown on the table, different overhead profit and all that sort of stuff.”
By creating sector-based teams, the contractor said it hoped to demonstrate more empathy with its clients. “You’re talking to our people in our business that really understand your pressures […] what you’re trying to do with tenants or the governors you are trying to satisfy on your board – that sort of thing,” said Findlay.
The sector-based teams are also aimed at creating efficiencies through the consolidation of highly technical knowledge – for example on how to deliver the specialist building services required in modern hospitals or laboratories. “We can shortcut some of the things we had to do around checking on projects and making sure that we’re doing the right thing, because now they’re all being supported by a common team and supported in the same way – so we’ve broken down those silos,” says Findlay.
The most tangible gain to be reaped through the restructure was, inescapably, the reduction in staff costs – with more than 30 back-office jobs made redundant.
“Within each regional business we had technical support, so were able to look at that technical support as a whole and resize that to be more efficient,” said Findlay. “So it is in that middle layer [that jobs were lost]… it was where we had a duplication of effort”.
In a strategic report that accompanied Sir Robert McAlpine’s accounts, More said the “adaptation and streamlining” of the company would save £20m a year once fully complete in 12 to 18 months’ time.
“A lower cost base will allow us to navigate the ongoing challenging economic environment, as well as to maximise operating margins, as the global economy recovers from the inflation- and energy-price shock that has impacted the past 12 months,” he added.
For the best part of a decade, Sir Robert McAlpine has sought to reduce losses by taking on more projects in sectors where clients shoulder a greater proportion of risk – with just under half of the company’s work being conducted through (typically lump-sum) design-and-build (D&B) contracts.
But the firm has taken on more and more work in the infrastructure and healthcare sectors, where the typical contract forms are NEC with target costs, rather than lump-sum.
It has also increased its construction management work (for example on the new Museum of London, where Sir Robert McAlpine is not on the hook for the £100m cost increase announced by the client in May).
“Those are three big sectors within the business that, while not derisked completely, are different risk modules to the hard-priced D&B,” said Findlay.
Obviously, all contractors would like to see greater profitability in the sector – the 1.7 per cent average profit margin seen across the CN100 last year was lower than most sectors and companies. Sir Robert McAlpine would like clients – especially government – to appreciate that building at the lowest cost doesn’t create maximum value for them or their suppliers.
“Successful projects are the ones where the client and the contractor work as a team to solve problems and you can’t do that when the contractor is trying to make up the money he hasn’t made in the tender because it was done on the lowest cost,” said Findlay.
“The government has tried really hard to [use] different procurement models, but it still ends up with preference for lowest cost and it drives behaviour to lowest cost. We need to change […] and we haven’t seen a lot of evidence of that yet.”