Is the risk worth the reward?
Specialist M&E and HVAC sub contractors, are increasingly being expected to take a larger chunk of the risk for a lower chunk of the reward.
Every business in every sector that tenders for work has to weigh up the potential risks versus the potential rewards. However in the construction, refurbishment and maintenance sector we are increasingly seeing the specialist M&E and HVAC sub contractors, being expected to take a larger chunk of the risk for a lower chunk of the reward. They are also facing an increasing number of challenges that they must overcome in order to remain both profitable and competitive.
At Fixmart we work closely with contractors of all shapes and sizes both in HVAC, M&E and general construction and below are some of the issues that they regularily face:
- The Pricing Risk
- Product Availability Risk
- Skills Shortage Risk
- Mitigating Risk
The Pricing Risk
Price fluctuation is one of the major risks. During the tender process contractors are understandably expected to cost every element, however this is often for projects that may not start for at least 6 months. If their tender is accepted they will be held to this price regardless of any marketplace changes. Yes, in some cases prices do go down but in the majority of cases they go up leaving the contractor with a much-reduced margin or even a loss. Other industries have different, arguably better approaches, such as a cost plus model, which effectively protects the contractor whilst promoting transparency.
For example, in October the price of steel increased by 8%. This was a huge problem for some of our customers but, due to the fact that we follow the markets closely, we had decided to bulk buy a large number of products before this increase. With the additional benefit of our 60-day credit terms, we were able to soften the blow for our clients who may need those products in the next six months subsequently reducing the risk involved.
Product Availability Risk
When we visit our clients on site the subject of product availability frequently comes up. It is a constant concern for many that products aren’t going to be available when they are needed. Our customers are often affected by changes in construction schedules driven by other contractors and may need products quickly. We guarantee that 100% of our core lines are always in stock to help our customers avoid additional cost and penalties. We also let them cancel any order up to 2 hours before without any charges as we acknowledge that these changes are often out of their hands.
Skills Shortage Risk
It is no secret that there is a skills shortage in the construction industry and this is causing problems for our customers too. Large numbers of Eastern European workers have returned home, partly due to the weak pound, and Brexit is also having an effect. This means that contractors have to pay their staff more in order to keep them, thereby risking a further reduction in their margins.
We offer our clients a number of pre-assembly options where we part build their products in our warehouse before delivering them to their site. It saves time and labour meaning their section of the build is more likely to come in on time avoiding penalties.
So, it seems clear to me that throughout a project the amount of risk increases as it is pushed down through the tiers of subcontractors with those at the bottom having everything to lose. However, by working closely with a specialist supplier who understands the challenges, those risks can be mitigated to a great extent.
By Carl Ghinn, Managing Director of Fixmart Ltd