Ian Bolger speaks to Gareth Lewis, COO for Construction at Mace, about an industry under increasing scrutiny, and what makes the international consultancy and construction company different.
The construction sector has always faced significant challenges including wafer thin margins, high project risks and shortages in key trades and skilled labor – an issue that is worsening following the Brexit vote and sterling’s devaluation.
The industry also faces procurement procedures in which participation can be costly, significant risk can be transferred and where the focus is often purely on bid cost rather than the potential value that can come from greater innovation, and early involvement and design in partnership.
In the public sector in particular, poor procurement practices can drive feast-and-famine cycles due to a short-term focus on risk transfer and bid costs. This approach encourages bidding companies to take on ever-higher levels of financial risk in the hope of winning large, long-term revenues and can potentially jeopardize project outcomes.
The consequences are unsustainable margins and poor cashflow, which ripples down the supply chain in a perilous game of ‘pass-the-risk parcel’. As the recent demise of construction services giant Carillion demonstrates, the results can be catastrophic.
The long-term implications for UK plc are also significant, with this short-term view undermining investment in productivity – from training, design innovation and smart construction such as BIM, modular construction and offsite manufacturing.
The Mace difference
The Carillion collapse has put public sector procurement under the spotlight, given the firm’s involvement in HS2, prisons and the armed forces.
Serco chief Rupert Soames recently accused government of playing a part in Carillion’s fate by forcing companies to take huge risks when carrying out public services. And Carillion may not be the last construction services business to get into difficulties, with Interserve and others also facing challenging times.
Without a more enlightened approach, the public sector may find it increasingly difficult to attract private sector bids and investment in the UK critical infrastructure, as shareholders refuse to take on such large and unquantified risks.
To better understand these issues, we approached Mace to find out what makes their business different and how they deliver year-on-year growth in this challenging market sector.
Privately owned, and with a turnover of £1.97 billion in 2017 and 5,500 staff, Mace has made a profit in every one of the 27 years since it was founded. It has a sufficiently different strategy and approach to customers, growth and delivery which, as the company’s COO for Construction, Gareth Lewis, says, “has served them well so far, and continues to provide a solid platform for continued growth and customer focus”.
Mace operates internationally through four divisions that span the infrastructure lifecycle: 1. Design 2. Consult 3. Construct 4. Operate. The construction arm of the business is Mace’s largest division, contributing around 84% of turnover and responsible for building some of the world’s most iconic structures, such as the Shard in London, and a diverse range of projects from residential and commercial property, to airports, retail and IT data centres.
The company serves around 2,500 clients, three quarters of which are repeat customers, with approximately 80% of its income coming from the top 50. This reflects Mace’s focus on creating long-term valued relationships based on a reputation for innovation, quality of delivery and safety.
The most common pathway to growth and scale in the construction services sector is through acquisition. Mace has taken a different path, focusing on organic year-on-year growth with a stable and long-serving executive team who are committed to its founding strategy. “Our people are our best advert and the heart of our success,” says Lewis. “We look to attract the best people and actively seek customers who share our passion for excellence and value the quality of our delivery.”
For Lewis, the firm’s success is down to its culture, key values and approach to business. “Most of our board members have been here for 20-25 years,” he says, “so our core values of putting safety first, a client focus, a drive to always do the right thing, and creating the right opportunity for employees to excel remain consistent”.
Collaborative supply relationships
Mace’s values permeate everything it does, including its relationships with clients, partners, suppliers and the communities affected by its projects.
Much of its business with suppliers is based on long-term relationships, with the firm recognising that its success and reputation often depends on the quality and longevity of its supply chain.
In fact, Mace is committed to paying its suppliers on time and is one of the few contractors to have committed to a fair payment charter. “If we don’t get paid on time, we still pay our suppliers,” says Lewis, which is not a common approach in the construction sector where thin margins, high risk profiles and late payments put severe pressure on the supply chain – often unsustainably.
Lewis questions the sense and even morality of pushing suppliers onto 120-day payment terms and demanding discounts for prompter payment. “It’s just bad business practice,” he says. “Very few smaller businesses can take the strain this puts on their finances and, ultimately, this pressure just comes back in adversarial commercial behaviours. It also restricts the ability to invest in the drivers of productivity – training, innovation, new plant and technology.”
The company knows the risks of supplier insolvency all too well, having been hit hard by the collapse of concrete contractor PC Harrington in 2015. It works closely with its suppliers to monitor current and future work projections and references to ensure each vendor is financially viable.
We aim for a stable, repeat-order supply chain, where we know the company owners and know what’s happening in their business as best as we can...
The theme of stability flows into the firm’s supply chain strategy. “We aim for a stable, repeat-order supply chain, where we know the company owners and know what’s happening in their business as best as we can,” Lewis says. “We are a demanding but fair client; we expect the best quality and service but will work to resolve issues when we need to.”
Mace also works hard to develop its suppliers, providing tailor-made training programs in management and construction (see box) and aiming to be a customer of choice for the best suppliers.
While this approach is an integral part of building good relationships with suppliers, Mace won’t shy away from difficult conversations.
“If a supplier lets us down, we’ll have a serious, robust conversation, and I make no apologies for that,” Lewis says. “If we weren’t doing a good job for a client, I’d expect to be reproached. So, if suppliers aren’t meeting our expectations, we won’t be short in coming forward.”
Mace is also careful about which projects it bids for, preferring those that consider value outcomes or whole-life costs.
“We prefer to work with enlightened clients who can set out expectations that we can respond to,” Lewis explains. “We want to have a conversation about suppliers, agree a risk margin, talk about innovation and get moving.”
Speed and efficiency of process can be problematic in the construction services sector. Research carried out by Mace in January found that while manufacturing has seen steady productivity growth over the past 20 years, construction has seen productivity flatline. The report, The Size of the Prize, puts the cost to the UK economy at more than £100 billion a year in lost opportunities.
“The whole sector could be far more productive,” says Lewis. “The bidding period for projects is too long – driving up costs, uncertainty and inefficiency – and the effects go all the way along the supply chain, while the procurement process can be hugely ineffective.”
By way of example, he points to how having five bidders on a list adds unnecessary cost when the reality is that most clients will only identify three companies that they can work with comfortably.
“If we’re one of five, we won’t bid. If the judgment criteria are focused on cost, we won’t necessarily win. Whereas if we’re one of three bidders and it’s a client that we know understands value and wants certainty of quality and delivery, we would be well positioned.”
The Mace approach also involves collaboration with clients on design. This helps ensure that the brief is correct from the start, avoiding costly mistakes and delays further down the line.
The company is particularly wary of responding to OJEUs and single-stage design-and-build proposals. Lewis believes that bidders on such projects are too reliant on the quality of the client’s design and scoping documents. The bidding processes themselves can also become something of a lottery, costing bidders significant sums in potentially wasted designs or, if won under a false assumption, costing millions to fix.
As Carillion’s fall demonstrated, incomplete schemes fall back on the client in any case. “There’s no such thing as total risk transfer,” Lewis cautions. “Risk just moves under commercial leverage. Both parties should work together in the bid and design stages to understand who is best placed to manage and mitigate the risk – and continue to have a grown-up conversation throughout the project. Total risk transfer is really an abdication of the client’s proper responsibilities and can come back to bite all parties when projects run into issues.”
Supply chain central
Lewis describes the supply chain as integral to any bid strategy, with professionals making up part of a centralized bid team and key suppliers involved in responses.
This enables a detailed procurement plan to be created, with nominated suppliers, and risks and opportunities identified. “If we’re delivering for the same client in the commercial and residential sector, for example, we can look at the whole account.”
As well as a small central team sourcing common items of corporate spend (e.g. workwear, computers and phones), Mace has around 80 commercial staff embedded in project teams. Their remit is commercial management including procurement planning, execution, and supplier and cost management.
The company also prefers its key commercial staff to have technical expertise, and the ability to oversee a combination of design optimization, product quality, safety, and surety of supply.
This is especially important in complex areas like steel, such as the £90 million package on the Battersea Power Station redevelopment.
Around 50 of the 240-strong team on that project are part of the company’s “commercial and procurement family”. They are supported by a full-time, onsite supply chain manager. They manage the purchase through subcontractor design, to manufacture and deliver. They are accountable for their whole package of work, with each project assigned its own P&L.
Each job then reports through its sector, with seven or eight passing through a business unit director. They have their own P&L before reporting to the board.
Supplier performance is managed centrally, with monthly traffic-light status reports on key suppliers enabling the company to identify trends and act on issues.
We’re not necessarily the cheapest. But half a point on the cost is still best value for certainty of delivery, quality, timeliness, and health and safety. That’s why clients value Mace.
“We work collaboratively with our clients, and they use us because we have a strong value proposition,” says Lewis. “We’re not necessarily the cheapest. But half a point on the cost is still best value for certainty of delivery, quality, timeliness, and health and safety. That’s why clients value Mace.”