Jacob Austin** (((00:00:17))) - - Hi all Jacob Austin here, and welcome to episode 49 of The Subcontractors Blueprint, the show where subcontractors will learn how to ensure profitability, improve cash flow and grow their business. Today's episode I wanted to talk to you about the future of main contracting, the state of the market in general, and what this might mean for you as subcontractors. If you're new to the show. Please subscribe for more user friendly advice on all things subcontracting. So we'll hear the term main contractor and also principal contractor. And a lot of people would assume that those two things are the same thing, when actually these two things have slightly different meanings and they come from different places. So main contracting typically comes from the role of the main contract, as in the document in force between the client and the contractor delivering the work on the client's behalf. And that differs from subcontracting because the subcontractors are working for the main contractor to deliver a small portion or a specialist element of a larger main contract, and a principal contractor can actually be a subcontractor working for a main contractor at the same time.
Speaker Austin** (((00:01:35))) - - And the reason for that is that the principal contractor is the lead contractor on a given site at a particular time. Now, some clients may stipulate in part of their requirements that the main contractor must always act as the principal contractor. But on occasions, what the contractor may well do is if there is only one particular element of work that can be completed at a particular time, and we're usually talking early on in the job, we may have some groundworks being undertaken, and at the same time they may coordinate with either a piling contractor or a services contractor. And during that time, as there isn't anybody else really required on site, the main contractor may assign the principal contractor role under CDM to that subcontractor, and in that instance, they may be picking up certain responsibilities from a safety perspective. Whilst the main contractor doesn't necessarily need a full time site presence, so that subcontractor might be managing 1 or 2 trades and keeping on top of the safety themselves. And it's really recognising that the principal contractor role is something that is there to be the lead contractor from a safety perspective, and it differs from the term main contractor, and main contracting has changed from the role that it typically would have been in, say, the 70s, where there were several large national and several large regional main contractors that carried large volumes of tradespeople that they employed direct.
Speaker Austin** (((00:03:15))) - - And there would be elements of regular trades, at least, that main contractors would retain labor for on a long term basis, that they would move around from job to job to fulfill their main contract obligations, and that labor would all have the benefit of the usual company benefits, pensions, bonuses, paid holiday days that would also typically own quite a lot of their own plant. So a main contractors would have a plant, yard and their own accommodation yard and all of the people necessary to manage those places. It then wasn't uncommon for there to be specialist divisions within a main contractor, so that you'd have either your own surfacing team or your own bricklaying and painting divisions and joinery specialists. And the first company that I worked for had the remnants of those sort of specialist teams within the business unit, and I think part of it was that main contracting almost was more entrepreneurial previously, because what you would see is that a lot of main contractors had their special civil division, and they had a housebuilding team, and they would reinvest some of their cash from the main contracting work that they did into building houses to make extra profit.
Speaker Austin** (((00:04:30))) - - And they would also do things such as deal with their own waste management so they might own their own pieces of land, which were treated as tips. They might also quarry their own sand and stone. So these companies thrived and survived by making layers of profit upon profit as they're selling internally their services, bits of materials between various different bits of the business. And if you think about the potential profitability on running an operation like that, it's got to have been vast. Whereas you compare that to the modern day main contractors who don't own any of their own plant, who don't have their own men on the books they're subletting on any typical project anywhere in the realm of 30 to 40 subcontractors. And actually, because of the way some of these contracts get awarded, there may be as much as 60 to 70 subcontractors on a given site, because the main contractor may place an order for, say, electrical works, which the electrical contractor themselves split down further and appoint specialist data and communications contractors. Fire alarm and security contractors.
Speaker Austin** (((00:05:43))) - - Access control beams, specialist lighting if there is any i.e. things like stage lighting, generators and UPS, contractors and so on and so on. And before you know it, there could be ten sub subcontractors working under one subcontractor working under the main contract. And this is all an approach that seems to be led by this sort of PLC dream of not holding any risk, but taking the reward. And that's the kind of position that main contractors have been trying to create for themselves, because they don't want to have the risk of knowing whether they've got enough bricklayers and how long they need to employ them for, and whether they're going to still have that same need for bricklayers on the next project, or perhaps across their portfolio of ten jobs, will they need the same number? So they don't want to have that burden of managing a rigid work force. And at the same time, the same sort of thing happens for plant and equipment. They don't want to have it sat there not doing anything in a warehouse, so they'd rather hire it in from somebody else who does just that and then charges the main contractor for it to premium.
Speaker Austin** (((00:06:52))) - - So in the drive to get lower and lower risk, what the contractor is actually doing is reducing their margin further and further as time goes on. And this leaves the contractor in a place where the main contract margins are regularly in single digits. And when I say single digits, I mean the pathetically small single digits of between 1 and 3%. And you couple this with the race to the bottom tendering approach, which many main contractors get involved in And you've actually got a real recipe for disaster. And it's things like this which fuel some of the insolvencies within the industry, because a main contractor can get tied up to a contract that they're only ever going to make 1.5% out of, but then if by tender error, they've missed a large risk that's present on a site, that 1.5% on a sizeable job can soon turn into negative figures, and that's fine if in isolation, you've got one bad job within a portfolio of 20 other good jobs. But when the market conditions are really tight, we're talking of really tight tenders, all encompassing risk, which is passed down to the main contractor from the client, all the inherent ground risks, program and quality risks.
Speaker Austin** (((00:08:10))) - - And a lot of the time they're relying on specialist trades who have priced the work on their behalf, and then they've collated the quotations from those specialist trades and put them into their tender. And and if a subcontractor makes a tender error, they simply go, I can't start until next July. You'll have to find somebody else that does the job. Whereas the main contractor finds themselves on the hook to deliver a multi-million pound scheme, sometimes based on a flawed price, from a subcontractor who now doesn't want to do the work. And because it really is usually a case of the lowest price wins when it comes to main contracting, the bigger the hole in the price, the more likely they are to win it. And then within the subcontracting realm, you get this similar situation where even subcontractors prefer not to maintain large numbers of lads on the books, because, again, they've got that fluctuating work supply. There's all the added responsibility of administering their national insurance and their pensions and the practicalities of administering holidays and so on, which is all a real shame and a lazy approach in my view, because at the end of the day, it's no good for the staff, it's no good for the people on the ground doing the work.
Speaker Austin** (((00:09:25))) - - Or rather, it's only good for them in good times. Because if you can get paid a little bit more by going and doing the same work somewhere else, then they can clearly up and leave and go and do that. But when it gets to times where everything is a little bit harsher, the prices are tight. There's limited work out there to keep that workforce busy and people can be ringing around looking for jobs, looking for even a day's worth of work at times, and willing to travel, sometimes all over the place just to get that day's work. Sometimes cutting their prices, lowering their expectation of hourly rate in order to try and secure any kind of consistent work. And if you recall, a couple of years ago, there was the big uproar about zero hours contracts and what that meant in the hospitality and retail industries, where you had people being employed with no permanent and reliable income in the form of hours to be worked, and they can just turn up at a bar, at a restaurant, to a waiter or at a hotel, be told they're not needed that day and to go off home and the employer has no obligation to pay them.
Speaker Austin** (((00:10:35))) - - Or alternatively, they're waiting at home, waiting for a text to say whether they've got any work today. And it seems kind of situations when it's like, how do people budget for all of their bills and the food that they need to eat when they can't fathom out with any reliability how much they're going to be working from one week to the next? And if people only knew that this is the way that one of the largest industries in the country is operating regularly. I think there'd be a similar load of uproar about it. And then is there any wonder that there's a lack of skilled labor coming through? Because who wants to go through years of apprenticeships just to find out that they don't have a consistent stream of work at the other end of it? And there's also the problem of who is mentoring these people, because whilst you don't have lads on the books working directly for you, you don't have the supervisor to take on that apprentice because they need to be there full time for that apprentice to learn from.
Speaker Austin** (((00:11:32))) - - So if you're only employing lads on an ad hoc basis, then how do you provide that consistent, experienced hand to pass on the tricks of the trade? There's also the cost implication, because you're actually paying more money to gain yourself the flexibility of whether you employ somebody for all 52 weeks of the year or not. Because if you need to employ the same man for back to back contracts over the course of a year, then you would expect to have paid that man more money than it would have cost you to employ indirect for the same period of time, and the same applies when you're hiring in plant. So why is it that the industry is this way inclined? Well, I think it's all the lack of entrepreneurial ism and the drive of the PLC boards out there wanting to do nothing and still get paid for it. We don't want to take any risk. And so therefore their rewards diminish over time. And I think consistent employment is the only way that we're going to see any kind of rise in the number of skilled operatives coming into the industry, and we all know where we'll be if the trend on skilled labor continues.
Speaker Austin** (((00:12:42))) - - Okay, well, before I turn into a ranting and raving lunatic, I'm going to call it there for today's episode. My mission is to help the million SME contractors out there working in our industry. If you've taken some energy and value away from today's episode, I'd love it if you'd share the show and pass on that value to somebody else who would benefit from hearing it. And of course, subscribe yourself if you haven't already. And thanks for tuning in to today's show. If you like what you've heard and you want to learn more, please do find us at www.QS.Zone where you can subscribe to our training and support system for like minded subcontractors. In there you'll find templates, how to videos, interviews and more. And it's less than the price of your cup of coffee per day. And you can cancel any time. We're also on all your favourite socials at @QS.Zone. Thanks again! I've been Jacob Austin and you've been awesome.
