T4 industry familiarisation_book_may_2011

T4 Part B Case
Study Examination

BeeZed Construction
Services (BZCS) case

Industry
Familiarisation

March / May 2011

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Published by:
Kaplan Publishing UK
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© Kaplan Financial Limited, 2011
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ii KAPLAN PUBLISHING

Contents

Introduction

Chapter 1: Background to the industry
Chapter 2: Construction supply chain
Chapter 3: Industry sectors
Chapter 4: Key players
Chapter 5: Risk management
Chapter 6: Strategies for growth
Chapter 7: Corporate and social responsibility
Chapter 8: 25 Quotable facts

Industry speaker notes

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Introduction

Introduction
The aim of this booklet is to give you some
background to the issues faced by construction
companies so you are able to better assess the pre-
seen information for the BZCS case.
Whilst there may only be 5 diversity marks available
for “displaying knowledge of relevant real life
situations within the same or similar context as that
in which the case is set”, a sound understanding of
how the industry operates is essential to passing the
Case Study Examination.
Without it you will be unable to demonstrate good
commercial judgement on the day. Without good
judgement, you will be unable to offer sensible and
realistic recommendations. This booklet should not
therefore be regarded as a quick way to get 5
diversity marks. It is more a key to unlock nearly
50% of the marks on your Case Study paper.
For each area, we provide some guidance on how
this might be relevant in your exam. In addition, the
final chapter contains a list of 25 easy to remember,
quotable facts, grouped under topics that may come
up in the exam.
If you are a Kaplan registered student, you can
further develop your understanding of the industry,
by watching our “industry expert” podcasts, and by
using the discussion forum, both of which are
available via Kaplan EN-gage.

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Chapter 1

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Background to the industry

Chapter 1 – Background to the industry
The impact of construction on the wider global
economy – and the impact of the economy on
construction – cannot be underestimated.
According to the UK Contractors Group, which
represents 30 leading contractors who together
produce some 30 per cent of the UK construction
industry’s output, construction contributes around 13
per cent of GDP.
Meanwhile, every £1 spent on construction is
estimated to generate around £2.84 in economic
activity. And around 9 per cent of all workers in
Britain are part of construction.
This significance is replicated around the world.
According to Global Construction Perspectives and
Oxford Economic, the global construction market is
estimated to be worth around £4.7 trillion,
representing around 10 per cent of global GDP.
Industry statistics
The construction market is very volatile, being
closely linked to economic conditions. The rising
costs of energy and raw materials, a 6% depreciation
of the Euro against the dollar (in 2010) and an
increasingly competitive market resulting in falling
tender prices are all putting increasing pressure on
the industry. With funding being much harder to find
in the wake of the global financial crisis, it is of little

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Chapter 1

surprise that the industry as a whole has been in
decline for the past two years.
According to estimates released by Eurostat, the
statistical office of the European Union, construction
sector output in November 2010, compared with
November 2009, dropped by 6.8% in the euro area
and by 1.7% in the EU27.

Source: Eurostat

Among the Member States for which data are
available for November 2010, construction output fell
in eight and rose in six. The largest decreases were
registered in Spain (-30.2%), Romania (-17.7%) and
Slovenia (-16.0%), and the highest increases in

4 KAPLAN PUBLISHING


Poland (+14.9%), the United Kingdom (+11.1%)
and Sweden (+10.4%).
Meanwhile, in the US construction spending
increased 0.4% in November 2010 (v 2009)
according to the US Census Bureau. However, the
figure was still 6.0% lower than that of November
2009.
Spending cuts
Due to the recent economic conditions, the number
of private projects undertaken by private companies
has declined meaning that over the past 2 years or
so, construction companies have been focusing
more on public work. The recent spending cuts in
many developed nations are therefore expected to
have a considerable impact on the industry.
In the UK, perhaps the most high-profile effect of
spending cuts has been the axing of the Building
Schools for the Future programme, which aimed to
refurbish or rebuild every single state school in
England by 2023. The cutting of the programme has
taken over £36.7 billion worth of work away from
contractors, although a government-commissioned
task force is currently looking at ways in which to
resurrect the concept at a lower cost.
Most sectors of the construction industry face
challenges on several fronts. While many demand-
related indicators are recovering, access to bank
finance is still restricted compared with pre-credit
crunch levels, and on the supply-side, the

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Chapter 1

contractors and suppliers are faced with heightened
competition for the remaining pool of available work.
The continuing government spending cuts will further
reduce that pool of available work, and this can have
disastrous consequences.
Outlook
Available public capital funding will be limited over
the next few years and in many countries,
governments will be keen to secure private sector
funding for a growing proportion of work. The
prospects for more routine repair and maintenance
work, an area that grew strongly over 2009, are
bleaker. Such work is typically funded from
departments’ and local authorities’ current or
revenue budgets and will therefore have to compete
directly with front line services for the limited
resources available.
New construction opportunities remain scarce in
many parts of the UK. The values of underlying
planning approvals have fallen sharply in most
regions over the last two years and there are now far
fewer projects in pre-construction planning.
Inevitably, this is impacted upon the flow of new
projects moving through to the start on site phase
across many regions.
However, supported by the flow of government
funded projects, and latterly the recovery of private
sector confidence, the flow of new projects within the
UK began to stabilise, albeit at a low level, with a

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modest improvement in project starts during 2010
(see Eurostat data above).
The outlook for 2011 holds less reason for optimism,
especially for those regions that have relied upon
government funded projects to support growth.
Outside of the UK, many construction markets
remain depressed, particularly in Europe and North
America. There has also been a clear slowdown in
construction specifically in Dubai in light of payment
rescheduling for state development conglomerate
Dubai World. However, the Middle East retains some
firm potential for development, notably in Abu Dhabi
where an estimated £17bn will be spent on
developing cultural tourism facilities on Saadiyat
Island, and also in Qatar, which is likely to spend
around £64bn in preparation for the World Cup in
2022.
Both India and China are also notable growth
markets. China is expected to be the world’s largest
construction market by 2020, accounting for 19.1 per
cent of global construction output. Meanwhile, India
will grow to be the third largest market. Indeed,
emerging construction markets in Asia-Pacific are
estimated to grow by 125 per cent over the next
decade.

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Chapter 1

Relevance in the exam
An appreciation of the current position of the industry
will help you to judge the current performance of
BZCS and to benchmark any further information we
might be provided with in the exam.

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Construction supply chain

Chapter 2 –Construction supply chain
On any construction project, there are a variety of
stakeholders with contractual relationships between
each other. At the top of the tree is the client, the
company or government body that is commissioning
the project. It is the client that ultimately funds the
project and makes the decisions about which firms
are employed to deliver the works.
Under a traditional contracting process, the client will
commission an architect to design the project
according to a supplied briefing. Typically the client
will have a budget in mind and the architect will
design according to this, which may result in the
budget being modified.
Once a finalised design is complete and has been
approved by the relevant planning authorities, the
client then invites main contractors to bid for the
work. Some of the top firms operating in the UK are
Balfour Beatty, Carillion, Kier and Laing O’Rourke.
Contractors will look across their supply chain and
provide estimates for the total cost of the works, and
the client will select the bid they believe is most
appropriate for their project. Clients will all have their
own internal criteria for bid selection, with
motivations varying between price, quality of build
and contractor track record.
The bid process is competitive. As a result,
contractors are encouraged to minimise their

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Chapter 2

margins on a project. Some contractors can be
particularly keen to win a project to the point that
they will issue what is colloquially referred to in the
industry as a suicidal tender – a proposal that will
result in a net loss to the contractor. Doing so can
have the benefit of getting the contractor on a client’s
supply chain, but the strategy does include an
inherent amount of risk and a firm that does this too
frequently can find itself facing bankruptcy. Another
option is to tender at break-even levels – a survey by
KPMG suggests 39 per cent of construction firms are
doing this.
However, on many projects, while the main
contractor will be responsible for delivering the
works, they will not be responsible for carrying out all
the actual work on site. All main contractors have a
supply chain of subcontractors, which tend to be
smaller firms that specialise in particular elements of
construction. A main contractor will typically have
dedicated subcontractors for elements such as
mechanical and electrical works, site preparation
and demolition. These subcontractors may also
competitively tender for work, presenting bids to the
main contractor. Although there are several major
national subcontractors, typically the sector features
a high number of SMEs. Nearly a quarter of all UK
SMEs work in construction, generating around
£174bn per annum.
There are also other varying forms of contract,
notably design and build contracts, where the
10 KAPLAN PUBLISHING


contractor will be required to develop a building
design and then deliver it. Last year in the UK,
around a fifth of all projects were contracted on a
design and build basis.
Contracts broadly come in three forms. A fixed price
contract finalises price for the client (subject to any
agreed changes in specification) and so the
contractor must deliver the job at a cost lower than
the price to retain a profit.
Another option is a cost-plus contract, where the
arrangement with the client is that the final sum paid
to the contractor is the cost of delivering the project
plus an agreed percentage profit. When combined
with a fixed ceiling price, this is known as a
guaranteed maximum price contract.
Finally, PFI contracts will include paying the
contractor for the construction work plus revenues
from facilities management and maintenance. The
latter are intended to be long term agreements,
lasting for more than 20 years. In the UK,
government cuts have had a significant impact in
winding down PFIs in several sectors, notably social
housing and education. The system is still seen to
have some mileage in infrastructure projects,
however.
Contractors can also join frameworks, where a bank
of contractors will be listed by a client as ‘approved’
for works. Some frameworks will maintain an
element of competitive tendering, where contractors
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Chapter 2

on the frameworks will be invited to bid for projects.
Others will allocate contractors by region or project
type. Major frameworks currently in operation include
the Department of Health’s Procure 21+ and Ofwat’s
AMP5 framework for water utilities. Getting on a
framework can result in near guaranteed work for
several years.
Timescales
Timescales associated with tendering vary
dramatically according to the scale and complexity of
the project, and also whether the project faces any
planning challenges. However, strict regulations
govern the advertising of public sector contracts for
works worth more than £3.9m within the EU. Such
projects are covered by the EC Procurement
Directive and must be advertised in the Official
Journal of the European Union (OJEU). The
minimum amount of time a project has to remain
open for tender can vary according to the bidding
procedure, from as little as 10 days to 52 days.
Cost drivers
Costs in construction can be strongly driven by
material costs, particularly those of steel, copper,
cement and aluminium. Contractors need to
anticipate these costs in advance when bidding for
projects, working from predicted prices, or ensure
they already have the materials required within their
supply chain. Subcontractors will often assume
responsibility for both materials and labour relevant


to their role on a project, and Infrastructure UK
suggests that costs can be reduced by around 15
per cent through making efficiency savings in the
supply chain.
The cost to a main contractor is also affected by the
cost of employing their subcontractors. Good
relationships with the supply chain can help bring
down costs for main contractors, although larger
firms need to be cautious as it isn’t unknown for a
subcontractor to charge a higher price under the
impression the larger firm can afford it.
Sectors and regions are also subject to the laws of
supply and demand and if a particular region or
sector has a small number of projects open for
tender, this can lead to contractors trying to cut their
prices in the hope of winning business.
Sustainability can also create costs for projects,
partly as a result of changes to building regulations
which came into force in 2010. Generally, buildings
aiming for certification under a green building rating
scheme as the US Green Building Council’s LEED
system or the UK’s BREEAM system can expect to
come at a cost premium because of the added
expenses involved in sourcing adequate materials
and testing. Meanwhile, new building regulations
have placed onerous demands on projects which
may require the use of additional mechanical and
electrical features such as ground-source heat
pumps or mechanical ventilation and heat recovery.


Chapter 2

Raw material costs
Year-on-year, the majority of materials used within
construction have increased in cost as a generalised
slowdown in construction has had a knock-on effect
on the rate of production.
Significant variations have been seen in metal
prices, which have surged by 20% - 40% since June
2010. Other variations include:
Material Year-on-Year Last
price Updated
movement
Cement -1.04% 14/01/2011
Bricks 1.11% 14/01/2011
Pre-Cast Concrete -0.42% 07/01/2011
Builders’ Woodwork 5.91% 07/01/2011
Sand and Gravel 13.55% 07/01/2011
Ready Mix Concrete 2.59% 07/01/2011
As well as providing some good general background
for the way in which the industry operates, an
understanding of the supply chain will help you
appreciate the power exerted by different
stakeholders. It will also help you identify potential
risks for contractors.


Industry sectors

Chapter 3 – Industry sectors
Offices
Office construction was one of the fastest
expanding areas of construction activity over the
three years to 2007 and a key driver of industry
growth, with office construction output in the UK
rising by more than 50 per cent between 2004 and
2007.
However, the crisis in global financial markets and
the subsequent downturn in the many economies
have hit the sector especially hard as developers
have fretted over the implications for occupier
demand, and securing project funding has become
more difficult and expensive.
The central London office market dominates the UK
sector, with the capital typically accounting for
40per cent of new office projects. The previous
boom in new office projects was underpinned by
rising demand for office space, in part from a
buoyant financial services sector which, at its peak,
had taken on an additional 210,000 people since
2004.
Whilst the flow of new office projects remains
extremely weak, market conditions have moved off
the low point reached in the first half of 2009. The
take-up of central London office space improved
considerably during the final six months of 2009 as
occupier confidence strengthened, with the


Chapter 3

turnaround most noticeable in the City. Construction
project database Glenigan predicts there to be a
large 41 per cent rise in office projects during 2011.
Such an upturn would still leave the value of project
starts some 50 per cent adrift of 2007 levels.
Furthermore, if there is a renewed weakening in
economic conditions, the downside risks for the
sector will increase.
Sports facilities
The UK’s plans for the next sporting decade are
positive for the sporting construction sector. Aside
from the 2012 Olympics, Britain will also host the
Rugby Union World Cup in 2015, the Rugby League
World Cup in 2013 and Glasgow will be hosting the
2014 Commonwealth Games.
As a result sports clubs have been preparing
expansion plans in a bid to get involved in the
action.
Many of the projects include bolt-on developments
such as hotels, conferencing or community facilities,
with sports clubs wary of the need to generate
revenue outside of match days.
However, currently there is around £2bn worth of
stadium projects on hold and the failure for England
to secure the 2018 World Cup is also likely to have
an impact on the number of projects coming to
fruition.


Industry sectors

Further afield, both Russia and Qatar will see an
increase in the number of stadium projects and
related infrastructure after their successful wins of
the 2018 and 2022 World Cups. Brazil, already a
growth market, is also likely to see further growth as
a result of it hosting the 2014 World Cup and the
2016 Olympic Games.
Infrastructure
Infrastructure, more than other sectors, relies on
major project spending. The sector saw the value of
underlying planning approvals in the UK fall
significantly during 2008, finishing 69 per cent down
on the previous year.
In addition, whilst the value of underlying project
starts during 2009 was 3 per cent up on the
previous year, major schemes—including the £275
million Blackfriars Station redevelopment and the
£6.3 billion M25 widening contract—almost trebled
the overall value of project starts. Again, these large
projects will boost sector activity over the next two
years.
Major projects (schemes of £100 million or more)
account for a significant proportion of overall sector
workload. A clutch of major projects starts will help
boost overall sector activity over the next two years.
Several large road contracts started on site in
September and October 2010 and these, combined
with more recent scheme starts such as the M80


Chapter 3

upgrade and the £6.5 billion M25 motorway
widening, will help lift sector output.
Preparations for the London Olympics will also
stimulate transport infrastructure construction starts
in the Capital. In addition, rail will be a key sub-
sector over the next year, with preparatory works for
the £16 billion Crossrail scheme recently starting on
site and work continuing on Thameslink.
However, there are significant downside risks to this
positive outlook for the sector. The greater
concentration of sector activity upon a selection of
large, high profile schemes has implications for
contractors and suppliers operating in the sector.
The emphasis on large schemes favours major
contractor groups who are best placed to win such
projects, but also means the potential risk of feast
or famine hangs on securing these same projects.
Rail projects in particular seem set to grow in the
Middle East and Asia. The UAE plans to build a
£7bn railway network with the first trains scheduled
for running in 2013, and the project is likely to plug
into a larger Persian Gulf network which is
predicted to cost around £15.7bn.


Industry sectors

Community projects
In the UK, the NHS has seen capital expenditure
grow by 148 per cent since 2000/01, with PFI
funded projects boosting investment further. Against
this background, health-related construction output
(in current prices) more than doubled between 2000
and 2007. Similarly, education had been one of the
strongest performing construction sectors over the
last two years. The sector was buoyed by a strong
government investment programme centred on the
now-cancelled Building Schools for the Future
(BSF).
Looking ahead, the prospects for continued growth
in the education sector are remote. Although
education received a slight increase in its overall
budget from October’s Spending Review, its capital
spending budget was cut by 60 per cent. In 2011-
12, the capital budget will fall by 36 per cent with 14
per cent and 21 per cent drops to follow in
subsequent years. Overall, capital spending in
education will be just £23.4 billion during the five
years to 2014-15, with 2010-11 seeing a spend of
£7.6bn decreasing to just £3.4bn in 2014-15.
Heathcare projects are still in a difficult position too.
The coalition government has announced that a
shake-up of the NHS is to take place, with GPs
handed more control over funds. While the Health
Service has avoided the spending cuts that most
other departments have had to endure, funds have


Chapter 3

been channelled away from construction projects to
‘frontline’ services.
The NHS will see its capital spending budget cut by
14 per cent in 2011/12 following October’s
Spending Review. However, capital spending will
be stable in subsequent years totalling £17.8bn.
Planned redevelopments of St. Helier, Royal
Oldham, and West Cumberland hospitals will go
ahead.
The spending reductions mean that while the
outlook is not as bleak as other sectors of the
industry, project starts are still likely to take a hit
over 2011.
Energy
The energy sector grew strongly during 2009, with
the value of underlying construction starts in the UK
rising by 17 per cent year-on-year. The rise was
driven by several mid-sized construction projects in
the renewable energy sub-sector. In particular,
Wales benefitted from the strong interest in wind
farms (and other renewable energy options). Other
parts of the UK have also seen growth, with
Scotland seeing work start on site on a £2 billion
biomass CHP project and several offshore wind
farms.
However, the fallout from the credit crunch is
hampering some clients’ access to capital funding,


Industry sectors

albeit to a lesser extent than faced by developers
and housebuilders, delaying some project starts.
Nevertheless the sector, which tends to have longer
lead times, is now benefitting from a relatively
strong pre-construction pipeline. For instance,
several wind farm projects are scheduled to start on
site over the next twelve months; although, it should
be added that such projects are politically sensitive
and vulnerable to delay.
October’s Spending Review was relatively kind to
the sector as capital spending is budgeted to
increase by more than 40 per cent over the next 5
years. In particular, government spending will
continue to focus on renewable energy including
£200 million for offshore wind technology and
manufacturing at port sites and up to £1 billion of
investment to create one of the world’s first
commercial scale carbon capture and storage
(CCS) demonstration plants.
Environmental
Both the water utilities and several major UK ports
are pressing forward with strong investment
programmes. Having risen 17 per cent in 2010,
underlying projects starts are expected to grow by
14per cent this year. The new five-year capital
expenditure programme agreed with Ofwat, the
industry regulator for water companies in England &
Wales, started last April. Historically, the first year of
these programmes (2010 is the first year of the

Chapter 3

current five year investment programme) have seen
sharp falls in project starts as the companies
finalise their new investment plans.
However, the timing of planned major projects will
remain an important influence upon the overall
value of project starts in the sector. Several large
projects (that is, projects greater than £100 million)
in pre-construction planning are also expected to
boost the flow of utilities-related project starts. Major
expansions at many of the UK’s largest ports will
generate high value construction work over the next
12 months. For instance, a £400 million project at
London Gateway and £200 million project at
Felixstowe started on site late in 2008. In addition,
major port developments are also planned for
Middlesbrough and Belfast and these could see
construction work starting on site within the next 18
months.
Additional environmental factors are also affecting
upcoming projects. The UK has a target to reduce
carbon emissions to 80 per cent of 1990 levels by
2050, which is driving a retrofit challenge across the
country. Other initiatives include plans for all new
build homes to be zero carbon by 2016.


Industry sectors

Although much of above reflects the position of
these sectors in the UK market, this provides a
good barometer of how each sector is performing in
many developed countries.
This awareness will help when considering the
prospects for each of BZCS’s divisions, particularly
if re-structuring options were being considered.


Chapter 4


Key players

Chapter 4: Key players
There are a number of key players in the market.
Detailed below are a few of the ones that have many
similarities with BZCS.

Balfour Beatty is an international infrastructure
services business. They operate across the
infrastructure lifecycle with four businesses in
professional services, construction services, support
services and infrastructure investments.
They deliver services essential to the creation and
care of infrastructure assets including investment,
project design, financing and management,
engineering and construction, and facilities
management services.
They work for customers principally in the UK,
Europe, the US, South-East Asia, Australia and the
Middle East and aim to differentiate themselves
based on the highest levels of quality, safety and
technical expertise.
Total revenue for the y/e 31 December 2009 was
£8.95bn.


Chapter 4

Based on their interim accounts to 26 June 2010,
key financial indicators include:
Company Industry
Sales (5 year 20.74% 4.24%
growth)
Net profit 2.44% 1.75%
margin
Return on equity 29.97% 4.95%
Current ratio 0.87 1.89
Debt to equity 0.37 0.52
In 2009, 59.9% of revenue comes from the UK,
31.7% from the US and 8.4% from the rest of the
world.
In addition to their strong financial position, other
strengths of the business include:
- A strong order book. In the y/e 31 December
2009, the company reported a 10% increase in
the size of their order book (year-on-year) to
£14.1bn, 1.6 times the revenue earned in 2009.
- Diversified revenue stream which helps to reduce
exposure to any one particular market sector.
However, weaknesses of the business include a
limited presence in emerging markets and a weak
liquidity position.


Key players

Kier Group is a construction, development and
service group specialising in building and civil
engineering, support services, public and private
house building, property development and the
Private Finance Initiative (PFI).
The Group employs over 11,000 people worldwide
and has annual revenue of £2.1bn, of which £1.5bn
came from the construction and services division.
Based on their financial accounts for the year to 30
June 2010, key financial indicators include:
Company Industry
Sales (5 year 5.5% 4.24%
growth)
Net profit 1.97% 1.75%
margin
Return on equity 41.35% 4.95%
Current ratio 1.15 1.89
Debt to equity 0.29 0.52
Similar to Balfour Beatty, Kier has a strong order
book and a well diversified revenue stream.
Additionally, its profitability ratios are increasing,
primarily because of its low cost operating model.
However, it has limited exposure to different


Chapter 4

geographical areas and suffered a fall in revenue of
£55.9m from 2009.

Carillion plc is another support services and
construction company, employing around 50,000
people. They have annual revenue of around £5bn
and operations across Britain and in Europe,
Canada, the Middle East, North Africa and
Caribbean.
They have a portfolio of work in areas such as
health, education and regeneration, road, rail,
defence and commercial property.
A key strength of the business is its brand
reputation. The company has won awards in
recognition of its services from sustainability and
community engagement to technical innovations and
safety. Revenue in the year ended 31 December
2009 was 4% higher than the previous year, with
operations in the Middle East expanding by 19.2% to
just over 10% of total revenue.
Carillion also has a history of value added
acquisitions, including Carillion JM Ltd (formerly
Mowlem Ltd) and Alfred McAlpine. Both of these
acquisitions yielded significantly higher cost savings
than had originally been expected.


Key players

On the downside, the value of Carillion’s order book
at 31 December 2009 decreased by 13% from the
previous year to £17.7bn.
Relevance to the Exam
An awareness of the strengths and weaknesses of
other key players in the market will allow you better
assess the position of BZCS and evaluate how
significant their own strengths and weaknesses
might be.


Chapter 5


Risk management

Chapter 5 – Risk management
Risk is an inevitable part of the construction industry
– as indeed it is part of any profitable industry. As a
result, contractors need to plan carefully to mitigate
these risks
Successful risk management requires a
commitment from senior management and the
creation of a corporate culture that constructively
avoids apportioning blame.
The success of any construction project is partly
down to the attitude taken to risk. A positive attitude
where the goal is to succeed will generally
encourage staff to be more innovative, take more
risk when appropriate and work harder to manage
risks. Meanwhile, a negative attitude where the goal
is to avoid failure will discourage such activities.
Risk management in construction projects involves
identifying and assessing the risks in terms of
impact and probability, and establishing and
maintaining a joint risk register agreed by the
integrated project team
Insolvency
Construction has traditionally been a high risk
industry for insolvency. This was borne out in Q4
2010, when construction firms accounted for around
15 per cent of all insolvencies, the single largest
sector affected. There is little guidance for
subcontractors facing an insolvent main contractor.

Chapter 5

For example, although now out of date, the JCT
form of contract, one of the two forms most
commonly used in UK construction, only has a
practice note for employers in the event of the
insolvency of the contractor.
With weekly stories of developers being put into
administration, there will be numerous contractors
considering their next move. Dundas & Wilson
senior associate Claire Donnelly says that under a
standard JCT 2005 contract
The contractor should prepare an account setting
out:
- the total value of work completed at termination
- loss and expense claims
- removal costs
- costs of materials or goods paid for or on which
payment is due; and
- direct loss and/or damage suffered because of
termination.
In reality, the contractor is unlikely to receive what
he is owed and will join the list of unsecured
creditors. Even if money does become available, he
may only receive a proportion of what he is owed.
Before signing a new deal, contractors should
remember the administrator is only an agent of the
employer, and not personally liable for the


Risk management

employer’s obligations, therefore contractors should
prioritise financial protection. The contractor should
consider negotiating a combination of payment
guarantees, advance payments, and payment on
delivery of goods.
Cash flow
Cash flow management can be the biggest
headache a small company boss faces, especially
with payment dates of 60 days or longer.
Now that large clients prefer to bundle up work and
award it to main contractors rather than deal directly
with local firms, the headache can become a
migraine.
Cash should be thought about from the outset,
rather than when problems occur. When tendering
for a job, contractors should consider not just how
much it is worth but how it will be funded. SME
contractors should not be afraid to ask for funding
information from their potential customers, whether
they are clients or main contractors.
Even if a subcontractor can’t get access to a client’s
or main contractor’s funding bank, they can do a
credit check on them and continue to monitor their
business, noting project wins and growth.
Contractors may consider other parts of a tender
such as its worth, materials and their own suppliers
but not about funding the contract until it is won.
Alternatively, credit insurance will pay out when a


Chapter 5

customer goes bust or is unable to pay for work.
While it doesn’t manage cash flow directly, it can
give a company security and more bargaining
power. If a company is seriously overdue in
payment then the contractor should have some
systems and procedures in place which might
culminate in taking staff offsite and stopping work.
Safety risks
All construction projects that will last longer than 30
days or 500 man hours must be notified to the
Health and Safety Executive (HSE) as per the
Construction (Design and Management) (CDM)
Regulations 2007.
Contractors must check that the client is aware of
their duties, check that a CDM co-ordinator has
been appointed and ensure that HSE has been
notified before the work starts
They should also co-operate with the principal
contractor in planning and managing work, including
reasonable directions and site rules and provide
details to the principal contractor of any contractor
engaged in connection with carrying out work.
Contractors must provide any information needed
for the health and safety file and inform the principal
contractor of any problems with the plan, or of any
reportable accidents, diseases and dangerous
occurrences.


Risk management

Construction remains one of the most dangerous
industries in which to work. In 2009/10 there were
42 fatalities, giving a rate of 2.2 per 100,000
workers. However, this still represents a massive
decrease on previous years, with fatalities dropping
by 72 per cent since 2001. Prosecutions by the
HSE can be costly, with total fines last year coming
to £2.7m, or just over £10,000 per firm fined.
These are all risks which BZCS must be aware of
and have plans to mitigate.


Chapter 6


Strategies for growth

Chapter 6 – Strategies for growth
Successful businesses can’t afford to stand still, and
this is particularly true for the construction sector.
Market development – entering new countries
Britain is home to some major industry talent and as a
result, British firms can compete for construction
contracts across the world.
How a contractor can get into another country
depends on the local legislation. For instance, many
Middle Eastern countries such as Saudi Arabia or the
UAE require that foreign firms enter in joint ventures
with local companies. However, in countries where
wages are typically lower than in the UK, construction
firms may find themselves operating in a slightly
different way. For general construction services, some
firms partner with a local contractor as it can be hard
for British companies to compete on price otherwise.
Some contractors may also find their expertise has
value in putting them in a position beyond basic
contracting duties. For instance, Mace, which is
working as a main contractor on the Shard in London,
operates in a project management capacity in Qatar.
Product development - changing sectors
Although large contractors will work across the whole
gamut of sectors, some firms will tend to focus on
particular areas. Diversifying the project portfolio can
help reduce the impact of a decline in a particular
sector but comes with its own set of challenges.

Chapter 6

Broadly, a contractor doesn’t need to set up a new
division to enter a new sector, although some firms will
acquire and incorporate smaller contractors who may
already have a presence. Acquiring smaller firms that
already have expertise in specific sectors can be
quicker and cheaper than developing entirely new
departments. One example is main contractor Kier’s
acquisition of solar panel installer Beco in December
2010. The company has become the delivery arm of a
new unit, Kier Energy Innovations, which is likely to
take advantage of the Green Deal, a forthcoming
government programme that could unlock up to
£170bn for energy-efficiency upgrades to the UK
housing stock.
Certain sectors will require contractors to contain
specific elements. For instance, most sporting stadium
projects will require a contractor with a strong in-house
design department.
What is crucial for all sectors, however, is that the
contractor can demonstrate its supply chain is geared
up to meet the demand for a sector. Therefore it is
possible for a main contractor to expand into a new
sector without the need for new divisions or joint
ventures provided the supply chain base already has
the necessary experience.
Other expansion plans
Given that PFI and PPP contracts tend to incorporate
a maintenance or support services element, any
contractor looking to enter into these agreements will

Strategies for growth

need to have expertise beyond the element of
constructing. Joint ventures can be a common way of
bringing these expertise to the table and a contractor
will submit a bid in conjunction with a facilities
management firm. Some firms, however, prefer to
keep the work in house. For instance, Balfour Beatty’s
works are carried out by Balfour Beatty Workplace.
The firm originally started life as independent firm
Haden Building Management, but was acquired by BB
in 1986 and subsequently rebranded in 2008.
Mergers and acquisitions
2010 saw several major mergers and acquisitions,
notably as a result of the collapse of contractors
Connaught and Rok. Connaught, which worked
primarily in property maintenance for the public sector
and providing affordable housing, went into
administration in September 2010 with debts of
£220m. Rok, meanwhile, called in the receivers in
November and worked mostly in providing building
services to the public sector
So for example, Morgan Sindall subsidiary Lovell
bought a number of maintenance contracts and assets
from Connaught’s administrators for £28 million in
September and Balfour Beatty subsidiary Mansell
bought the majority of Rok’s remaining business in
November for £7 million.


Chapter 6

But acquisitions aren’t just as a result of company
collapse. As this book goes to print there are some
significant hostile bids in the offing including Costain’s
approach for Mouchel and ACS’s attempted takeover
of Hochtief. Keep an eye out for how things progress.
These all represent opportunities for BZCS to expand.
Key to the discussion of any of these options is to
address the risk involved.


Corporate and social responsibility

Chapter 7 – Corporate and social responsibility
With such an impact on the global economy, there
are several CSR issues that face the construction
industry – and the industry itself may also be crucial
to helping other firms meet their CSR requirements.
Sustainability
Given the carbon generated by actual construction
work, and the impact buildings have on the country’s
carbon footprint, sustainability needs to be high on
the agenda for all construction contractors.
Construction companies must look at the carbon
footprint of their own businesses and integrate
across the supply chain if they are to meet the legal
obligation to cut carbon emissions by 80 per cent by
2050 according to the government’s chief
construction adviser Paul Morell.
Additionally, the Waste and Resources Action
Programme (WRAP) has a voluntary agreement
commitment to halve the amount of construction
waste going to landfill in the UK by 2012. Since the
programme’s launch in 2008, over 400 contractors
have signed up. Contractors looking to participate
within the agreement need to set a target for
reducing waste to landfill and assign a team member
with responsibility for delivery, embed the target
within corporate policy and processes, set
requirements in project procurement processes and


Chapter 7

engage with the supply chain, measure performance
at a project level relative to a corporate baseline, and
report annually on overall corporate performance.
Imperial College in London used off site construction
for the first phase of their £100m Riverside scheme
and, together with clever on site segregation, ended
up only sending four skips per month to landfill
instead of as many as 80 skips.
Health and safety
The nature of work within the construction industry
means a high priority must be placed on health and
safety. Companies must do all that they can to
ensure their staff return home safely each day from
work. Furthermore, the duty of care can stretch far
beyond the working day as contractors need to be
mindful of their staff’s exposure to materials such as
asbestos when working on refurbishment projects.
Despite the dangers in construction, the situation is
improving. In December 2010, the National
Specialist Contractors’ Council’s (NSCC) Accident
Survey, covering 157,000 workers, showed injury
rates were at their lowest levels since the survey
began in 2003/2004. The major injury rate was down
47 per cent compared with last year alone.
Over half of all accidents resulted from either
handling, lifting and carrying or slip and trips. The
NSCC said this was consistent with all industries in
the UK and the construction sector as a whole.


Taking a proactive approach to safety is vital.
Mansell safety, health, environment and quality
director, Janice McCann, states “It’s a mandatory
condition that everyone on a Mansell site holds a
Construction Skills Certification Scheme card [a card
which demonstrates a worker has achieved a
measureable level of competency]. We don’t have
anyone on site who doesn’t know how to use the
tools. We’re confident of the competence level of
people arriving,” she says.
Following on from this basic training are site
inductions, where method statements are put
together, outlining which tool should be used for a
specific job. “The requirement to use the right tool
and not improvise is covered in the site induction.
Even subcontractors need to supply a method
statement which is evaluated by site management,”
says Ms McCann. The tool operative then just needs
to comply with that particular method statement.
Cutting back on the health and safety budget can
have wider impacts on quality. A main contractor that
doesn’t make sure its subcontractors aren’t keeping
up runs the risk of paying for substandard work.


Chapter 7

Bid rigging
September 2009 saw the Office of Fair Trading fine
103 construction companies a total of £129.5 million
after they were found to have colluded on building
contracts.
The firms were each fined an average of £1.26
million – or 1.14 per cent of their annual worldwide
turnover. The decision followed what was one of the
OFTs largest ever Competition Act investigations.
The breaches affected a series of building projects
across England, including schools, hospitals and
residential schemes, worth a total of more than £200
million.
Since the fines, the OFT has hailed significant
improvements in contractors’ awareness of illegal
business practices since it delivered the results of its
investigation into bid-rigging in the construction
industry in England last September.
The primary method for bid rigging targeted by the
investigation has been cover pricing. Through this
method, contractors have in the past been able to
inflate the costs of their contracts.
Cover pricing is when a contractor bids for a job with
no intention of winning the tender. Often, a
contractor will be on a client’s supply chain, and
usually will wish to stay on that list, but they may not
have an interest in working on a particular project.


By submitting an artificially high bid, the contractor
avoids the risk of winning the job but maintains its
place on the tender list.
Where this infringes competition is when the
contractor trying to avoid winning the job contacts
another contractor who is attempting to get the
contract and asks for a cover price. The second
contractor then supplies a price around 10 per cent
higher than its own bid. This higher cost can then be
submitted by the first contractor as a bid. It is the
collusion between two bidders that infringes the law
– and of course, if an arrangement is made where
both contractors will benefit at the expense of the
client through cover pricing, this ultimately drives up
the cost of construction. A report published by the
OFT has uncovered increasing awareness and
understanding of competition law and business
behaviour in a number of areas including:
- Nearly 75 per cent of contractors are aware of
the OFT’s decision on bid rigging in the
construction industry. In 2008, fewer than a
third were aware of earlier infringement
decisions in the construction sector
- Nine in 10 construction firms now recognise
that bid rigging, including cover pricing, is a
serious breach of competition law with
associated penalties


Chapter 7

- Three-quarters of contractors are aware of
fines as a penalty for cover-pricing, compared
to less than half in 2008
- Approximately two in three procurers have
introduced a new mechanism in the last two
years to detect or prevent anti-competitive
practices.
From firms surveyed by Construction News, most
respondents confirmed their procurement teams
have begun their own investigations into the matter.
When asked what measures they would be taking to
safeguard themselves against anti-competitive
activities, many said new controls were “under
discussion”.
One said: “We revised our ‘invitation to tender’
documents, making it clear that if we become aware
of any anti-competitive behaviour such as cover
pricing, the firms concerned will be struck off our
approved list and we will report them to the OFT or
the police, or both.”
More than half the officials said both cover pricing
and bid rigging distorted competition and were as
bad as each other. A further 16 per cent also said
they still did not understand the difference between
cover pricing and bid rigging.
More than 90 per cent also said the inquiry had
damaged the reputation of the industry. “This has



made us review our procurement policies and will
ensure we now review large differentials in pricing,”
one senior manager said.
Ethical issues are high on the agendas of many of
the real life construction companies. BZCS needs to
maintain its heavy investment in its CSR policies to
compete.
The cost of non compliance and potential damage to
the brand has increased.
The potential list of ethical issues that could arise in
the exam is lengthy. You should ensure you are
aware of the strategies adopted in real life to help
you identify potential solutions and provide sound,
commercial recommendations.


Chapter 8


25 Quotable facts

Chapter 8 – 25 Quotable facts
- Every £1 spent on construction in the UK is
estimated to generate around £2.84 in
economic activity.
- Around 9 per cent of Britain’s workforce is in
the construction industry.
- Nearly a quarter of all UK SMEs work in
construction, generating around £174bn.
- In the UK, the construction value chain
accounts for 13% of GDP.
- The global construction market is estimated to
be worth around £4.7 trillion, representing
around 10% of global GDP.
- Construction sector output in November 2010,
compared with November 2009, dropped by
6.8% in the euro area and by 1.7% in the EU27
(Eurostat)
- US construction spending increased 0.4% in
November 2010 (v 2009) according to the US
Census Bureau. However, the figure was still
6.0% lower than that of November 2009.
- In the UK over £34 billion worth of construction
projects started on site in 2010.
- The number of office projects in the UK is
expected to rise by 41 per cent in 2011,
compared to 2010.


Chapter 8

- The Construction Products Association
estimates that the industry will grow by 5.8 per
cent between 2009 and 2014.
- China is expected to be the world’s largest
construction market by 2020, accounting for
19.1 per cent of global construction output.
- Emerging construction markets in Asia-Pacific
are estimated to grow by 125% over the next
decade.
- Balfour Beatty is Britain’s largest contractor in
terms of turnover and profit, at £8.9bn and
£282m respectively.
- Over 2010, the average turnover for the top
100 contractors increased by 3.8 per cent.
- Jarvis, Connaught and Rok were three of the
major contractors which went into
administration during 2010.
- In Q4 2010, construction firms accounted for
around 15 per cent of all insolvencies, the
single largest sector affected.
- Average tender prices have risen by 6 per cent
over the last year.
- The average increase in price for commonly
used construction materials is around 6 per
cent over the last year.
- Metal prices have surged by 20% - 40% since
June 2010.

25 Quotable facts

- 39% of construction firms are tendering at
break-even levels according to a survey by
KPMG.
- The minimum amount of time a project has to
remain open for tender can vary according to
the bidding procedure, from as little as 10 days
to 52 days.
- Fines issued by the Health and Safety
Executive cost the UK construction industry
£2.7m over the last year.
- Major injuries in the construction sector were
down 47 per cent in 2010, compared to 2009.
- Bid rigging fines cost the UK construction
industry £129.5 million in 2009.
- The number of fines equates on average to
each fined firm losing over 1 per cent of its
turnover.


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