Blog

By Helen Wheeler, Managing Director – Construction Finance

24 Jun 2019

Rising pressure

Subcontractors are often overlooked. As in our previous reports, our Subcontracting Growth 2019 research reveals the challenges and opportunities that businesses in the construction sector face today, from operational issues to macro-economic factors. 

Linked with fears around labour shortages and rising costs, it’s unsurprising that Brexit is the primary threat to the sector, with a quarter of respondents (25%) citing it as their main challenge. Yet subcontractors are also facing commercial pressure from decreasing work volumes (13%). As pipelines are squeezed, this has driven them to prioritise higher value contracts, increasing to an average contract value of £175,951 this year, compared to £130,968 in 2018. 

Nationally, the sector has been under pressure from softer economic growth projections and subdued demand for new commercial projects. This has been reflected in the construction Purchasing Managers’ Index (PMI) data, which saw the sector contract in February and March this year. 

A period of inertia

Despite these challenges, the sector is still performing well. Our research found that it is business as usual for more than one in ten (13%) subcontractors, whilst other subcontractors consider their biggest opportunity to be new, larger or better contracts (9%). However, the fact remains, the sector is experiencing a period of relative inertia. 

Whilst a cautious attitude is driving much of this behaviour, there are signs subcontractors are taking unnecessary risks. For example, one in four said that they do not always thoroughly check their contracts, and nearly half (48%) find them difficult to understand. Despite this, a majority (59%) do not seek professional support in relation to checking contracts. 

The reason for this, in part, is a power imbalance between subcontractors and main contractors. Many subcontractors simply don’t have the personnel or resources to maintain a large back office function. To give an idea of scale, nearly half (47%) of our subcontractor sample employ nine staff members or less.

Power disparity for subcontractors

Our research also provides further evidence of this power disparity. Over half (55%) said that they have to accept contracts as they are, otherwise, they would lose business. Two thirds (66%) said they do not always receive the full amount billed. This suggests subcontractors do not always have the professional help or internal support they need to do business with contractors on equal terms. 

Addressing this problem requires a change in the sector. Whilst it is perhaps understandable that primary contractors are looking to protect themselves, particularly in light of recent high-profile collapses, they need to realise that subcontractors and their supply chains are crucial to the long-term success of the industry. Backing from the Government and changes to legislation would also support this shift, such as enforcing a mandatory Prompt Payment Code. 

Main contractors need to put an end to the large versus small culture. Recognising the value of subcontractors is one way of doing this but paying fairly and on time would help level the playing field for smaller subcontractors. Failure to recognise their skills and contribution to the construction industry can only cause problems for a sector that needs to work together to achieve growth and prosperity.

Get all of the insights by downloading the Subcontracting Growth Report 2019.


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