Against the difficult background of contracting, our Audit insights report examines four key areas that need to be addressed by construction firms, to run sound, well-managed businesses.

When construction companies and clients get it right – through project selection based on responsible tendering; diligent delivery and monitoring; and a proactive attitude to deal with issues such as cost and timetable overruns – they deliver contracts that are more profitable and provide more enduring value to society.

The challenge facing the construction sector is that even in better times contracting can be precarious. The lethal cocktail of low margins and high risks means even the largest firms can find themselves just a few contracts away from slipping into the red. This pressure is further compounded by the longest decline in bank lending for construction companies since 2011 – because of fears of a downturn in the economy and the impact of Brexit – at a time when firms need to manage their debt.

Against this difficult background, our Audit insights report examines four key areas that need to be addressed by construction firms if they are to run sound, well-managed businesses:

• Bidding for lasting value
• Delivering for success
• Rebuilding confidence through increased transparency
• Getting fit for the future

This report brings together the expert insights of auditors with many years’ experience of independently examining and auditing construction firms.

Bidding for lasting value

If construction businesses want to generate sustainable profits, they need to get the price right at the tendering stage. Some companies have become better at pricing their services realistically to reflect their true cost. But we are also seeing businesses bidding at too low a price for large complex contracts in the expectation that they will improve their profit margins because some aspect of the project will change. This is a risky strategy as unforeseen changes can quickly turn small profits into losses, and make it difficult to return to profitability. Businesses need to adopt a robust approach to bidding for projects and be selective when choosing those projects.

Delivering for success

In the construction sector it is especially important that financial rigour is applied to key estimates and judgements throughout the project’s life cycle. Competition is so fierce and margins are so thin that reliable financial information and analysis can determine a project’s success. One way to achieve this objective is to form strong delivery teams where project managers work closely with finance/commercial teams. We do not see enough evidence of this in practice, and urge firms to remedy any lack of collaboration.

Rebuilding confidence through increased transparency

The UK construction sector continues to suffer from a reputation that it lacks enough transparency, particularly on cost and performance. In many cases, poor or unexpected results are caused by a lack of internal transparency. Executive management and boards need to ensure the tone from the top encourages and supports employees early reporting when problems occur. Without early reporting, projects are less likely to remain on track and management may be unaware of a problem until it becomes significant.

Getting fit for the future

The highly fragmented nature of the sector and lack of training and innovation has been contributing to low productivity. Government can help to build confidence in the construction sector by showing more ambition and urgency in facilitating a reliable pipeline of major infrastructure projects. The introduction of the National Infrastructure Pipeline was meant to herald a sea-change in public asset procurement. And yet, there are still delays and slippages in projects coming to market. The consequences of these programme delays and the related cost pressures can be severe. The requirements of employment regulations and the need for reasonable strategic planning to determine a suitable level of headcount for contract tender success mean that overhead expenditure cannot be turned on and off like a tap.

We welcome the Government’s announcement of £600bn in infrastructure investment over the next ten years. However, major infrastructure programmes have historically been difficult to implement within expected timescales. The Government will need to commit to specific timings to guarantee that projects will be tendered.

The construction sector is losing many skilled workers to retirement, and the costs of replacing these employees are impacting already tightly-squeezed margins. Businesses need to form partnerships with their local schools, colleges and universities to educate young people about the wide range of career opportunities available, creating a pipeline of future young talent.

To increase its talent pool, the sector also needs to consider how it can attract more women and ethnic minorities. The construction sector has historically failed to engage with these groups. As well as addressing any pay gaps that exist, the stereotype of the hard hat-wearing construction worker needs to be retired and replaced with the image of the planner, architect, surveyor, engineer and skilled trades person.

The report, Audit insights: construction – Bidding for lasting value, delivering for success, is available here.