Contractors: Reduce Financial Construction Risks

Shivendra & Co

By Shivendra Kumar, Principal Consultant, Shivendra and Co

Though Australia’s infrastructure boom might keep workers busy, by expecting civil contractors to operate on wafer-thin margins and shoulder the majority of contract risks, the current project pipeline may ultimately damage the industry’s durability. On my podcast, The Competitive Contractor, I spoke with David Castledine, CEO of Civil Contractors Federation New South Wales (CCF NSW), about economic stability for small to medium businesses, shifting the culture within construction, and the importance of small project contracts.

Federal and state governments are investing record levels in critical infrastructure. Yet, small to medium businesses and contractors are struggling to deliver projects within anticipated timeframes, as they’re faced with economic instability, decreased revenues, contract risks and more.

David joined me to discuss how small and medium-sized contractors can take advantage of these project opportunities, rather than crumble beneath the weight of investment expectations.

“If industry reform doesn’t occur, we’ll see a fundamental structural shift in how the markets are arranged with massive tier one contractors and labour-hire companies. Tier two contractors, that traditionally form the backbone and workforce of the industry, may be lost,” David said.

David assumed the role of CEO of CCF New South Wales in 2011. Since then, he has instigated and overseen a significant restructure of the organisation, with notable increases in member services and advocacy representation. Across his career, David has worked as a business consultant serving government and private industry clients across Australia, along with over a dozen industry employer associations.

The importance of small future projects

David said that although the infrastructure boom improves industry finances, contractors are facing critical economic instability and risks.

“In late 2021, CCF New South Wales undertook a survey of members to which 35 per cent responded. It found that 30 per cent of respondents – contractors – lost money. 25 per cent of that group made less than five per cent in profit. We’re seeing wafer-thin margins,” David said.

“In that 2021 survey, 40 per cent of our respondents had a decrease in revenue compared to 2018 and 16 per cent of them had cuts in revenue growth. That’s not a picture that’s synonymous with an infrastructure boom.”

The pain that contractors are feeling is real, and these numbers prove it. So, how do we improve these statistics?

David and I agree that, right now, the industry needs fast, low-risk projects.

We need smart contracts, smaller contracts, that can be quickly put out to market. This will keep the industry sustainable and profitable, while reducing the risk for government investments.

Large projects draw attention and publicity, but they are also detrimental to the long-term sustainability of the industry. We need to be looking at projects that move from concept to commencement much quicker; projects that eventually accumulate to create larger projects.

CCF New South Wales has released an Action Plan that includes recommendations for how to achieve this, called A Dozen Do’s to Construct a Sustainable, Viable NSW Civil Construction Industry. The plan highlights policy recommendations including risk allocation, contracting strategies, support for local labour participation, structured contract sizes, and more.

“If we don’t reform, we’ll be left with a very small number of tier one contractors here in Australia. The government will stop being a price setter and start being a price taker. That is when the community loses,” David said.

“It’s in our interest to have a very viable plan that moves us forward to a sustainable industry, but it must be viable, it must be profitable. We can’t be operating on thin margins, and escalation costs are only smashing those margins.”

Attracting new staff to improve profitability

David said we can’t make these changes alone – we have to choose our partners, advisors, and support team carefully.

“Choose partners that align with your business needs. Similarly, choose your customers wisely. Good quality customers are really important,” David said.

“I think civil contractors can tend to go back to the same customer, and in business, successful small companies are constantly looking for another customer who will be better.

“Especially when you have a risky environment. Don’t overextend yourself to a point where you’re leveraging everything to achieve that golden contract, because it could be what tips you over the edge. So many businesses are struggling with cash during this period of hyperinflation. Navigating this period is going to be critical.”

By also investing resources into changing the culture of construction and striving for things like achieving gender equality, CCF NSW also addresses another major challenge: finding the right people for the job.

In order to successfully navigate this period of increased investment and hyperinflation, small businesses need to prioritise attracting and retaining staff.

Businesses need to respond and adapt to skills shortages. Whether it’s through increased salary, career progression options or award recognition, businesses need to focus on providing solutions for employees to retain staff.

“Don’t focus on buying staff, focus on bargaining and building them, focus on long-term staff retention,” David said.

By focusing on what benefits staff, customers, contractors and partners, we can break down these challenges and construct solutions together.

In addition to advocating for contractor rights, CCF NSW also plays an active role in advocating for women in construction. The organisation has a 2050 vision of 50 per cent women in civil construction roles, and a very strong support program to achieve this.

“The response to the program has been extraordinary. Why we’ve gone down this path is very simple. It’s not altruism – it’s hard economics. In February 2021, females take up 70 odd per cent of administration roles, but only 5.7 per cent of civil roles,” David said.

“We need to make use of the resources that will best suit our ongoing needs. It’s about creating the opportunity for employers who actively want to hire women to shine; to support them and showcase them as employers of choice, and to enjoy the benefits of the people that want to come in.”

In such a competitive industry, it’s easy to feel isolated. By reaching out to new industry bodies, by raising your voice to propose new industry structures, you’re connecting with people who are experiencing the same crisis of confidence during the current infrastructure boom.

By adjusting practices and priorities, we can ensure that large industry structures benefit smaller businesses, smaller contracts and smaller projects.

To hear my chat with David, listen to the full episode of The Competitive Contractor at shivendra.com/podcast.

About the author

Shivendra Kumar is a global construction business advisor and owns the consultancy firm, Shivendra & Co, where he helps small to medium construction businesses increase their growth potential and profitability, improve their processes and execute business strategies.

Shivendra is using his extensive industry experience from previous roles at large infrastructure organisations including Siemens and Downer to transform the construction industry from the ground up and be a voice for Australia’s contractors. Shivendra also interviews infrastructure’s biggest names for the The Competitive Contractor podcast.

/Public Release. This material from the originating organization/author(s) may be of a point-in-time nature, edited for clarity, style and length. The views and opinions expressed are those of the author(s).