‘Offsite in the UK is still a cottage industry. It’s not the answer for today’

Osborne CEO talks to Construction News and here is their article:

“Lucy Alderson at Construction News, sits down with straight-talking Osborne boss Andy Steele to talk Brexit, offsite, and why he thinks the industry can’t afford to tackle late payment practices under the industry’s current business model.

Osborne chief executive Andy Steele isn’t pulling any punches.

Half an hour into our interview, he has already said the country needs to press on with Brexit: “To me, yes. We should get the deal done.” He’s also told Construction News that the industry “can’t afford” to improve its payment practices under the current contracting business model, and argued offsite solutions are “not the answer of today”.

At face value, some may consider these comments to be controversial.

But the sense of urgency in Mr Steele’s voice, as we talk about what he thinks are the biggest challenges the industry faces, is palpable. His evaluation of the scale of these financial and operational issues is both accurate and worrying.

He has mulled over these issues for a while – hardly surprising, considering he has spent most of his time as Osborne CEO navigating the company through Brexit uncertainty. During his near four-year tenure, having been appointed to the role in April 2015, Mr Steel has had only 14 months in which Brexit was not an issue to contend with.

Amid the uncertainty, a new credit crunch has hit the industry and companies have found themselves operating in a climate where financing has become tight again. Both Laing O’Rourke CEO Ray O’Rourke and former Kier chief Haydn Mursell have said banks are reducing their exposure to the sector, making it tougher for firms to access finance.

Meanwhile, late payment is an issue that has come onto the government’s radar following the high-profile collapse of Carillion.

These events have culminated in a perfect storm – one in which some major contractors might struggle to keep their heads above water, predicts Mr Steele.
But he believes he has identified the root cause of all of these issues: risk.

The distribution of risk is too heavily weighed towards contractors, he argues. Until all parties take a more pragmatic approach to deciding who takes on which risks, the industry will continue to struggle.

While the government has proceeded with Brexit negotiations, the company has suffered its share of setbacks.

Osborne revealed in its latest financial result in October last year that several projects had been shelved as a result of Brexit, and turnover had dipped by 8.5 per cent, from £348.1m to £318.3m.

It may come as no surprise, then, to hear that the company has introduced clauses into the majority of its contracts as a safeguard against problems on projects caused as a result of Brexit. In an attempt to better handle the risk,  “Brexit clauses” have been put into most of its contracts since October, when Mr Steele felt it was looking increasingly likely that the UK would walk away from the EU without a deal in place.

“How can a customer realistically, in a collaborative, open relationship, turn around to its contractor and say ‘Nobody understands what the impact of Brexit is going to be, but we want you to take all that risk on board’?”

According to the clauses, Osborne would be granted an extension of time or changes to the contract in the event of potentially “drastic changes caused by a Brexit event”, such as a fall in the availability of labour, shortage in the supply of materials, as well as other key risks.

Mr Steele says all of this marks an effort by the company to protect itself, especially from the threat of legal damages.

The response from Osborne’s clients has been positive, says Mr Steele. And although there have “been some interesting conversations” with clients and “some initial push-back”, most customers understand that a more pragmatic approach to handling Brexit-associated risk is needed.

He says: “How can a customer realistically, in a collaborative open, relationship, turn around to its contractor and say ‘Nobody understands what the impact of Brexit is going to be, but we want you to take all that risk on board’?”

As for the Brexit deal itself, Mr Steele thinks Theresa May’s proposals to leave the EU should be accepted and passed by MPs.

“For me, we should get the deal done,” he says. “We [constructors] can’t deal with uncertainty. The worst thing, to me, would be to extend article 50 with no certainty as to what that means. Being in limbo land is no use to anybody.”

Financial squeeze

Brexit has also created another complication for the industry, says Mr Steele. He believes it has caused a change in appetite from the financial sector, with banks limiting their exposure to the industry.

“Financial institutions are not lending to the industry; we’ve seen the financial squeeze,” he says. “European banks are not lending or investing in the UK, and they’re not investing in construction. [Osborne does not] have any borrowings, luckily, so we’re in a relatively strong position compared with a lot of our competitors. Because we’re not paying big finance, we’re not having to pay big interest bills every year just to keep trading.”

This latest credit crunch, combined with the government’s crackdown on late payment, has created a perfect storm, according to Mr Steele. In fact, it creates an “impossible situation” for a lot of the industry, he believes.

“Those two dynamics do not work together,” he says. “Large tier ones with big borrowing requirements that have historic poor payment performance are under a huge amount of pressure. We can’t change the business model overnight, so there has to be a realistic understanding from government over the state of the construction industry today.”

A CN analysis of the top 20 contractors found that it took an average of 47 days for companies to pay their suppliers, according to payment data that all companies that satisfy two out of three thresholds (turnover greater than £36m, £18m on their balance sheet, or 250 employees or more) are required to submit to the government. But Mr Steele says this is not possible while banks are pulling away from financing construction companies.

This is because, in order to pay their supply chain earlier, companies would need to take out loans to fund this as, historically, contractors have “held the cash to get their business models to work”, he says. This has created an “impossible situation” for a lot of the industry.

Although Mr Steele does not doubt that companies want to pay their supply chains quicker – “and quite rightly, they should be paid quicker” – it is not possible to do so at present.

“We can’t change the business model overnight, so there has to be a realistic understanding from government over the state of the construction industry today,” he says. “It is to nobody’s benefit if big companies continue to get into trouble.”

Mr Steele says the problem cannot be tackled in isolation.

“You can’t just dictate down to companies that you have to suddenly comply with these changes in your payment practices, because the industry can’t afford it. It can’t do it in one go.  The impact of those decisions has to be recognised.”

The contracting model itself needs to change before any improvements in payment practice can be made, states Mr Steele. “It’s all about understanding the business model – risk has to change,” he says, adding that to do this, both public and private sector clients need to start paying main contractors earlier.

“There has to be some form of recognition in [the government’s] payment practices and in customer payment practices to help continue the finance into the industry. They have to understand a flow of money is needed through the industry.

“If best payment practice is 30 days, then money from the customer has to come earlier than 30 days.”

Osborne’s own payment data, according to the figures it submitted to the government, is by no means the best in the industry: it takes an average of 47 days for the company to pay its suppliers. Analysis by CN revealed Willmott Dixon was the promptest payer among the top 20 largest contractors, taking an average of 33 days to pay its invoices (92 per cent of these were within agreed terms).

When I ask Mr Steele about the company’s payment terms, he admits the firm could do more to improve its current practice: “There are ways that we can improve our payment performance,” he concedes.

“We have implemented changes to improve it: we’ve adopted Web Contractor [an online payment system used to manage subcontractor invoices] so we can have full transparency of payment.”
As we expand on other challenges the industry faces aside from Brexit and financing, Mr Steele touches on the issue of offsite construction. Often put forward as one solution to the “modernise or die” conundrum Mark Farmer posed in his stark report on the construction industry in 2016, some contractors have pushed ahead in this space, including early investors Laing O’Rourke.

The government also announced in 2017 that it would favour projects delivered through offsite construction methods by 2019. But offsite is unprofitable as it currently stands, insists Mr Steele.

The industry runs on a project-to-project basis, which is incompatible with the conditions manufacturing businesses need to operate under. The company has been doing offsite manufacturing for 11 years, but Mr Steele says Osborne makes no money from this.

“Manufacturing companies need consistency of workflow, otherwise there is no advantage,” he says. “If you look at our order book, despite the fact the government wants [contractors to operate] offsite […], if we have one or two schools that suddenly don’t flow through because the contract hasn’t gone through on time, then you have a hole in the factory [work schedule].”

He adds that huge investment is needed to operate these factories, but at the moment, the erratic nature of the industry’s workflow is difficult for manufacturing businesses to operate within.
“We need commitment from the government to these factories, so you can keep production levels at these factories consistent,” he says. “Offsite in the UK is still a cottage industry. It’s not the answer for today.”

It is clear that the current uncertainty shrouding construction is a key concern to Mr Steele. From financing to offsite to payment, it is clear that a change in how the industry operates is imminent – but how the contracting model will change remains unclear.

Brexit further compounds this. At the time of writing, MPs were scheduled to vote on the prime minister’s deal on Tuesday 12 March, which, if it goes through, will see the UK leave the EU on 29 March.

If MPs reject the deal, then the UK could leave without a deal or extend article 50; either of these options present further uncertainty (the possibility of another referendum is generally thought to be unlikely).

The industry is keenly anticipating the outcome of Brexit to get a clearer view of what the future will hold – including Mr Steele. But until then, like he says, the sector remains in limbo.”

This article was written by and featured in Construction News.