Construction Firms Need to Get Better at Managing Risk, Says CBI

Companies within the UK’s construction sector should re-orientate their business models in ways that make them better able to manage risks, according to a new report created by the Confederation of British Industry (CBI).

The report aims to offer some guidance to construction firms on how to improve their profit margins and avoid falling into financial difficulties.

Underlining some of the ways in which construction companies have been held back in recent years, the CBI’s report says that the sector spends twice as much on legal services as other comparable industries.

A key suggestion from the CBI is that “eradicating unfair risk allocation between clients and contractors and embedding better procurement behaviours” will lead to a notable upturn in productivity within the construction sector.

Projections suggest that raising productivity within the sector by just 2 per cent would add around £30 billion to the UK economy on an annul basis.

Improving productivity would lead to more building projects being completed on time and on budget, while also helping companies to maintain more stable financial footings and avoid cashflow difficulties.

The CBI has pointed out that there are some 2.3 million people employed within the UK’s construction sector, which contributes around 6 per cent to GDP.

“Adversarial behaviours built up over many decades coupled with problematic approaches to risk allocation and procurement have resulted in a business model [among construction firms] that too often remains short-termist and unsustainable,” said Josh Hardie, the CBI’s director general.

Among the recommendations made by the CBI to construction companies is that they should be prepared to challenge and walk away from contracts when they’re bidding for them if they deem the risks involved to be too great.

To support decision-making and risk mitigation, it’s suggested that construction sector procurement processes should have two distinct phases, with an initial stage taken seriously as a period in which companies can properly assess relevant risks and price them in or walk away.

“This is a crucial time for the construction industry with the demand for new, sustainable homes, offices and transport infrastructure on the rise,” said Mr Hardie.

“By fixing the foundations of the construction business model between clients and contractors, essential new investments in skills, tech and innovation are possible and we can unleash the full potential of the industry.”