Doing the business
Contract work. It’s lower margin, buying decisions are often considered to come down to price alone, and the market is somewhat tied to the performance of the housing market. But is that the whole story? Is there any real money to be made on such projects? And what are the risks?
Rebecca Winward asks several industry specialists for their opinions
“House builders are shifting away from lower-priced product”
“We started out as an installation company, working originally for the domestic market, then doing a proportion of contracts work, particularly refurbs for hoteliers.
“Later, we set up our showroom, to grow the domestic installation business, and things grew from there. We moved to a larger showroom and started focusing on premium brands, which is when our supply-only work in the contracts market really took off.
“Contracts work now represents the larger part of our turnover. We have found our niche – working supply-only, with small regional developers building four or five luxury houses on each site, which would typically have a sale price of £600,000-plus. And we do it very well.
“This has meant that our growth has been organic – our contracts customers have so far found us. However, we are looking to be more proactive going forward, and will be approaching prospects in a very targeted, tailored way.
“I think some house builders are starting to shift away from making buying decisions based on price only, and are no longer most likely to source product from builders merchants.
“With European manufacturers developing market-specific products at lower price points, and exchange rates and import taxes forcing up the cost of Chinese goods, developers are realising that just by spending an extra 10% they can get much better quality.
“This elevated quality doesn’t just apply to products, either, which today’s savvy consumer demands. The service is far superior, too. Our service goes above and beyond that offered by price-led suppliers, and is one of the reasons we can compete.
“Our specialist product knowledge is invaluable to customers from well before a buying decision is made, right until after the product is delivered to site and installed.
“The average plumber isn’t used to dealing with a premium product, so the fact that we’re available to offer advice and support makes all the difference to the finish, which of course is critical to marketing properties at this level.”
“A balanced view of risk”
Trevor Price, managing director, Credit & Business Finance
“The construction industry has certainly seen some welcome growth in recent times, with the Office for National Statistics recently releasing figures that show output has grown for four consecutive quarterly periods.
“However, a fairly recent Construction News Barometer published some less reassuring statistics – for example, more than 54% of contractors have seen projects scrapped or paused following the EU referendum.
The Insolvency Service Report regularly puts the industry at the top of the list for the highest number of company insolvencies, so a balanced view is appropriate, especially when you add in uncertainty over the general election and Brexit. It makes perfect sense that risk-reduction is still very much at the forefront of our construction-sector clients’ minds, and in fact, especially those predicting strong growth in the coming months and years.
“More and more companies are protecting their businesses with credit insurance, but it’s still something that isn’t widely understood. For example, many don’t realise that it’s not only a safety net to guard against bad debt, paying out up to 90% of unpaid invoice amounts, but it also serves to support funding (as lenders view such risk-reduction very positively), protects cash flow, and helps to establish a stable basis for growth.
“There are a lot of options in terms of credit insurance cover available – from protecting a single contract or customer, to the whole sales ledger.
“For companies working in the construction sector, it’s particularly important to ensure specialist credit insurance is in place, rather than a generic product like a bank’s bad debt protection.
“Credit insurance policies should cover retentions, binding contracts, applications outstanding not certified, work certified and not paid, variations properly instructed, sums not due by the contractor due to the operation of a ‘pay when paid’ clause, work done on- and off-site, and sums falling due under an adjudicator’s binding decision.
“This is why it’s best to consult an independent broker with broad knowledge of what is available from the various underwriters, so that a tailored policy can be created to suit a business’s specific needs. Only then can it really offer the best value that it can deliver.”
“Developers are more straightforward to deal with”
Micheal Taplin, owner, Elements Kitchens
“Our business started as retail only, but we gradually built the contracts side over the years, and we’re currently doing 70% retail, 30% contracts. We now think it’s better than retail. There are a lot of opportunities out there.
“Yes, the margins are lower than in retail sales, but the buyers are professionals, so they are more straightforward to deal with, plus the benefits of longer-term projects and a more dependable income stream balance that out too.
“The ideal size of customer for us is a developer building anything from one to 30 or 40 units a year. The higher end of that is better, as projects are easily scaled up, but we’re not interested in the larger house builders, as they’re very cutthroat. We’re currently doing a lot of our bigger contracts in the office-to-residential conversion market.
“We also like working with smaller developers, because they tend to take more pride in what they’re doing and spend more, because they know that the quality of the kitchen will really help them sell their properties. However, some will get their potential purchasers involved with kitchen decisions, and that can be a nightmare – it’s like doing a retail job, for contract margin, and you can’t discuss costs, even when the potential purchaser wants something that doesn’t fit in the budget.
“There are developers out there who are problematic to work with, but a lot can be achieved through good communication, and making sure they’re aware of what needs to happen on-site before we come in, so that the fit runs smoothly. Of course, it doesn’t always work.
“You have to be particularly careful with the less-well-funded developers, whose money is being released in tranches. We’ve even been asked to fit a kitchen in a house that was missing walls, and only had temporary hoardings in place – because it was the next check-list item, and the bank would only let the developer draw down funds when it was ticked off.
“Mostly, our customers are very good to work with, though. Most will stick to the pre-agreed contract, and they understand the process and what they’re ordering.
“We rarely have any major problems, and we have about an 80% repeat business rate, which we’re very pleased with.”
“Organisation and working in partnership is key”
Jonathan Turner, purchasing manager, Bardsley Construction
“Bardsley Construction is a medium-sized main contractor, working throughout the North-West on private developments, housing association and public-sector builds. We have our own joiners, so we will buy and fit kitchens ourselves, but we don’t carry our own plumbers, so bathroom installation is where we’ll employ specialist subcontractors.
“When it comes to choosing a subcontractor, it usually comes down to price, though of course service and past history come into it too. If they’ve worked with us before, that certainly helps, as a pre-existing relationship usually means that there will be less hassle. We know how they work, and they know how we work.
“Organisation and working in partnership is key. The process needs to be managed properly – we run into problems if a subcontractor won’t put a dedicated foreman on site, or arranges deliveries at the wrong times. Our subcontractors get scored every month, and poor performance will see them reprimanded. But we will use them again if they’re offering good rates, however our supply chain managers will be keeping a very close eye on them.
“Most often, kitchen and bathroom design is done by the architect, and the choice of brands is client-led and depends on the eventual market of the properties. For us, it’s a case of comparing the best prices on equivalent quality and style to fulfil this brief.
“You can tell the market is busy at the moment, because prices are increasing. I think that the market is showing resilience, despite uncertainty around Brexit and also the General Election. Developers are pushing ahead with schemes no matter what.”
“This year, we’ll do 400% of the business we did last year”
Ray Tollerfield, managing director, KPS Pronorm
“The contracts market has been subdued in the North. Over the past four or five years, it’s mainly been smaller developers. Then, maybe 18 months ago, the market woke up, and intake this year is off the chart.
“The bigger schemes are definitely back up and running – for example, we have one under way that has 1,131 plots on one site. This year, we’ll do 400% of the business that we did last year.
“There’s been a massive increase in private rental sector (PRS) projects, because there’s just not enough housing in the UK.
“A whole generation is paying off student debt and so cannot realistically aspire to owning a home until almost middle age. PRS is a great opportunity for our industry, but because of the way the projects are funded, they have different parameters and requirements.
“Investment companies are driving the specifications, and they’re looking for a lifespan product, to last a specific length of time. I’ve been working with Pronorm for so long that I’m able to show them kitchens that were installed a decade ago and are still looking good, so that definitely helps secure this type of contract.
“We partner closely with all our customers, as good relationships make all the difference to a job, plus they’re invaluable going forward in terms of future business. We’ll get proactively involved at the earliest possible stage, to iron out any potential problems before they occur.
“Our lengthy experience means that we can predict the usual issues, and even some of the more unusual ones. Some sites have particular complexity surrounding access – I once had to arrange the delivery of 200 kitchens through a fourth-floor window.
“Technology also helps us to remove some of the impediments from the process, keeps things moving forward, and enables greater transparency and control. All our fitters have tablets on site with them, so they always have the kitchen plans to hand. It’s also a way of keeping track of the chain of ownership.
“They will take photos of a space at survey, after first-stage fit, then before and after it’s been protected, and upload them to our cloud-based system. Also, it’s not until they upload the signed completion notes and photos that their invoices will be processed.”