Economic forecasts for the year ahead suggest that 2025 will likely be another difficult year for the construction sector, with analyst BCIS warning that a reduction in the cost of borrowing is doing little to increase investment in built assets. Add to that increases in both input costs and tender prices due to the National Insurance uplift, and construction firms are bracing themselves for a bumpy ride.

For ICAEW member Pete Duff, the outlook comes as no surprise. With an impressive track record across the construction sector including seven years at Laing O’Rourke as finance director for its Europe hub, Duff was recruited as CFO at Osborne, a construction business with a near 60-year heritage, in September 2022.

The company was in need of transition following a difficult few years not helped by the pandemic which, Duff says, exacerbated existing problems. Duff, along with Chief Executive Dave Smith, was brought in to work with the Osborne family and existing management to try to turn the business around.

High-profile failures

Although Duff believed the firm was salvageable when he joined, and despite a robust business plan to drive the construction business forward, attempts to raise money were hampered by nervousness towards the sector fuelled by a series of high-profile failures.

They included the June 2023 collapse of Henry Construction, a £400m residential building specialist; the collapse of Buckingham in September that year made headlines as the contractor behind rebuilds of football stadiums at Fulham and Liverpool. Then in November 2023, the UK’s biggest private contractor Laing O’Rourke posted a £228m pre-tax loss – the biggest in its history.

“As far as lenders and credit rating agencies are concerned, the construction market is always regarded as high risk, and that certainly doesn’t do it any favours,” Duff says. “We had former clients wanting to give us jobs. They wanted us because they liked working with us and liked our principles and outputs, but the risk metrics were saying no. 

“You need to win work to generate cash and trade yourself out of the situation you’re in. But people don’t want to give you a job because, historically, your numbers look rubbish. The whole thing is a massive vicious circle,” Duff adds.

Backward-looking financial information

Credit scores are influenced by credit rating agencies’ risk perception of the entire sector. “Anyone looking to invest in you – banks, bond issuers, the supply chain - are looking at these credit ratings, and they're looking at your financial information, and all of it is backward looking.”

Osborne closed down in April 2024. Its last audited set of accounts showed the firm had an income of £337m, made a net profit of £4.8m and before the sale of its infrastructure business employed 950 people. By the time it went into administration, it had a turnover of around £150m and employed 100 staff.

A report issued by administrator RSM said: “Towards the latter part of 2023, the construction business had succeeded in completing its legacy projects, reducing its overheads and was now trading profitably on its current work. It was continuing to win new projects and it had been selected as preferred bidder on a number of public sector projects.”

Banks’ reluctance to lend

Reflecting on the experience, Duff says a reluctance among commercial banks to lend to construction, particularly smaller companies in the sector, means the industry needs to find itself a better funding model. He says the National Wealth Fund (NWF), launched by the government in July last year to boost investment in national infrastructure projects, could help but better visibility of the projects in the pipeline is needed.

“The NWF could afford to take on a different risk profile to that of a commercial bank. Government talks endlessly about the lack of housing, the need for new schools, the need to upgrade the NHS and the prison sector. 

“And yet I don’t see a long-term pipeline. I see jobs that pop up, and everyone rushes off and bids for them including companies who don’t have enough in the current pipeline so are willing to take a risk on either margin or a sector that’s not their expertise. That's not really helping anyone.” Allowing construction firms to bid for longer-term frameworks with fair and clear allocation of future work would give lenders and other stakeholders more confidence to invest, he adds.

Rigid financial metrics

At the same time, the rigid financial metrics used by the public sector to allow firms to bid for and win jobs are entirely understandable, he says. “It’s absolutely right that as far as the public purse is concerned, they’re trying to make sure that those bidding for jobs are financially stable and secure for the time it’s going to take to deliver those jobs. However, these metrics are all rear facing and based on a historical profit and loss and balance sheet and take little account of future projections. 

“One or two bad jobs in the past can damage a company’s ability to secure work for many years in the future. There has to be a better balance of understanding of how this repeat work can keep coming through without bumps in the road derailing it all.”

Grown-up conversations about margins 

Meanwhile, grown-up conversations about margins are needed to prevent a race to the bottom on price in a desperate attempt to secure contracts. The fragmented nature of the industry and low barriers to entry mean there’s always someone prepared to take a bit of pain just to stay in the game, Duff says.

“If your average net margin on a job is 3% or 4% if you’re lucky, how are you going to absorb the one-off shocker. It kills you. I don’t understand why, in our industry, which is so valuable and imperative to the globe, margins of 8% or 9% are considered unreasonably high.”

Pain/gain share model

Construction works well when clients and contractors embrace a proper pain/gain share model that embraces a whole life concept of projects. “If there’s a more comfortable margin, it means we can put enough risk and contingency in that job to make sure it is exactly what the client wants, there’s no issue with defects, and it allows the client to enjoy the full lifespan of this building, as opposed to focusing on getting a good deal on the two years it took to build.”

“Part of the problem you have is the limited engagement between the people designing a building and the people who are building it. You need a three-dimensional understanding of how the whole thing comes together up front – it’s bonkers that you commit to a price before design stage four.” 

Duff says he won’t do single-stage lump-sum tenders anymore. “Everything should be renegotiable until design stage four. In terms of managing risk – design risk and general build risk and inflation – there’s no point just shoving it all down the chain to the subcontractors because they’ve got even less ability to absorb it than you have.” 

Streamlining planning to increase certainty

Streamlining the planning system would also go a long way to removing risk from the construction process, Duff adds. It takes so long for planning approval. In an environment that’s been carrying high inflation, key trade resource scarcity and 4% margins, you’re in trouble before you even start. It’s very difficult to operate with that degree of uncertainty.” 

The salvage efforts for Osborne meant it continued to trade – and profitably – long after it might have ceased to do so. And the gradual sale of parts of the business preserved many more jobs than could otherwise have been lost. But the Osborne story – ultimately leading to the demise of a famous name in construction – is a sad one, Duff says. 

“It illustrates sector-wide problems will only be resolved with bigger solutions than any one company can provide. It would be nice to imagine that Osborne would be the last famous name to go – but unfortunately until more changes in how the world views and supports construction, that’s unlikely to be the case.”