The first change is that major clients now recognise that the best way to improve project delivery and minimise conflict is to consolidate their buying power. This realisation is born of clients' dissatisfaction with the industry's fragmented delivery and seemingly endemic disputes. Having tried to buy their buildings using age-old, adversarial project structures and ever more punitive contracts, clients are now trying something else.
Echoing similar trends in other industries, this change in buying patterns is fuelling a polarisation of contractors: the big are getting bigger, the small are becoming niche players and those in the middle are left facing some difficult choices about the future. Even after polarisation, there should theoretically be enough big firms left in the UK to service the new pattern of demand. Some contractors' capabilities may not match the particular clients' needs and some relationships may not survive into the renewal phase. That, quite Darwinian, elimination process will reduce the number of available contractors.
As we all remember from our schooldays, when supply is reduced and demand stays constant, the price rises but, as I know only too well from my bid management days, the plentiful choice of contracting firms has always meant that contractors are price-takers rather than price-makers. Construction is a buyer's market and if clients, particularly multinationals, felt that reduced supply was about to push up the price of major projects, they could well be tempted to invite the foreign super-contractors to the party to restore the level of competition and, with it, their power over the market.
Whether the super-contractors would accept the invitation is a separate issue but the opportunities to invest in PFI, the prospect of exporting the UK's PFI experience and the availability of large framework contracts will not have gone unnoticed.
Without consolidation, it is distinctly possible that the best opportunity in living memory could pass contractors by
The second spur to consolidation is the recognition that the capital companies have tied up in real estate could be better invested in their core activities. Some 150bn euros worth of land and buildings will change hands in Europe in the next three years as large corporations outsource their real estate portfolios. In a groundbreaking recent deal, we acted as lead adviser on the structured sale and leaseback of Abbey National's property portfolio to Mapeley, which will buy, build, own, manage and maintain all of Abbey National's accommodation.
These deals will bring a new type of client into the construction market: the outsourcing provider that will hold huge property portfolios and hence enormous buying power. But with income limited by the deal, profit considerations will switch the focus onto PFI-style whole-life costs. Be ready! Although there is a threat from the outsourcers' buying power, there may be an opportunity for a few major contractors to take a slice of the outsourcing market for themselves. To compete, the contractors would need to be able to finance the purchase of entire portfolios and thereafter provide a range of services to meet all of their potential customers' real estate needs. To break into this new market, the contractors will also need to be able to raise and support large volumes of debt at competitive rates.
This is the second strand of the case for consolidation as it is questionable whether even the largest contractors have the balance sheets necessary to raise debt competitively. Without consolidation, it is therefore distinctly possible that the best opportunity in living memory could pass contractors by.
Postscript
Frank Devoy is a managing consultant at Ernst & Young.
