Growth following recession is notoriously hard to manage. At the Griffiths & Armour and Infrastructure Intelligence discussion SMEs debated the risks of walking away from low fees and of investing in BIM. Jackie Whitelaw reports.

Coming out of recession can be more risky than going in which is becoming increasingly clear with major blue chip construction businesses reporting serious problems. What about SME’s in the consulting sector? 

The panel

Michael Coombs, senior partner, Alan Baxter & Associates

Michael Lawson, senior partner, Campbell Reith Hill

Henry Pipe, director, Max Fordham

Neil Sandberg, managing director, Sandberg

Paul Wood, director Elliott Wood Partnership

Dr Brian McConnell, chief excutive, Hydrock Consultants

Allan Cowie, director, Pick Everard

Andy Passmore, director BWB

Simon Offredy, director, Sweett Group

Ruth Lawrence, head of insurance, Hill Dickinson

Stephen Bamforth, group chief executive, Griffiths & Armour

Chair: Antony Oliver, editor, Infrastructure Intelligence

 

Infrastructure Intelligence and professional indemnity expert insurer Griffiths & Armour brought together a group of leading SME businesses to ask this month what were the major issues concerning them.

And we wanted to know how they were planning to avoid financial and insurance claims risks as they reacted to the opportunities offered by a heating market.

The key concerns overwhelmingly were how to get margins back to a rate where firms can afford to retain and recruit the extra staff needed to respond to burgeoning contract wins.

And how to manage the growing use of BIM and in particular the liability issues created by any shift to a fully functioning single collaborative model as the industry moves in the future from the BIM 2 2016 target to BIM 3.

The claims risk issue is an important one, all of our panel recognised. Griffiths & Armour chief executive neatly summed up the issues based on the 80 years of experience his business has to call on.

“We are at the classic stage of the cycle,” he said. “We are coming out of recession, there is more work around but fees have yet to go up to reflect that. And increased workload means stretch and that leads to corner cutting. Three to four years from now claims will start to come through usually when workload takes its next cyclical dip which means contractors and clients looking for money are more likely to pursue them.”

There was also a serious risk that issues that had arisen during the 2010 recession may turn into claims thanks to better times. 

Right now, he said, businesses should be making sure they are not going to leave themselves exposed to future problems.

From the lawyers perspective Hill Dickinson head of insurance Ruth Lawrence said that there hadn’t been a significant rise in disputes. Yet.

“But consultancy claims have a long tail and we are finding that some claims are coming in with the big challenge that all the people involved are scattered.”

Stephen Bamforth: “I expect a hardening of the professional indemnity market. It has been soft until now. And you will see major withdrawals of companies providing PI. So work closely with your broker and make your risk profile distinct to make sure you can get the best PI deals in a hardening market.”

Full Q and A with Stephen Bamforth here

As a group, the panel all agreed they were all in the positive position, after the worst recession anyone had ever experienced, of having a lot of work coming through the door.

But there was concern that they were still operating in the recession mindset of saying yes to everything, whatever the price or the contract terms.

As one panel contributor commented: “People have got back into bad habits and are still thinking ‘just get the job’ and not ‘how am I going to deliver that, at that price’.”

According to Pick Everard director Allan Cowie: “Growth is good but profitability is difficult to maintain and the sheer depth of the recession has been astonishing. We have survived better than most thanks to increased public sector work and in-house growth within our London and the south-east region.

Now that the market has appeared to turn, the issue is do you reinvest and take people on or turn work away? And the issue is not just staff, you have to think about capital investment in additional office space, IT, etc. That conundrum is running all the way up the industry supply chain – it needs to be certain that we have turned the corner.”

Michael Lawson: “The focus will need to be on controlling our growth, retaining staff and maintaining cash flow.”

 

Paul Wood: “The biggest issues
are going to be margins and how put fees up.”

 

Allan Cowie: “We will be concentrating on controlling growth and maintaining profitability, getting paid and reducing bad debt – reducing the time period between doing the work and getting paid is essential for cash flow.”

 

Alan Baxter & Associates senior partner Michael Coombs expressed the views of many. “The backdrop is that low fees have become almost habitual and that is a big problem especially against a rising workload and scarcity of resource. People have to look at what is best for their business and decide their focus. For us it is about maintaining the quality of what we do above turnover and growth. The growth opportunity is there but we see that as a secondary issue.”

Many were struggling with the concept of how to increase fees. “We have done well during the recession,” said Elliott Wood Partnership partner Paul Wood. “We have actually expanded because of the high end residential market. But we are trying to push fees up and every time we do that, we lose the job to someone offering half the fee. So there are some people out there taking huge risks.”

Max Fordham director Henry Pipe had similar experience though he did detect some movement on the part of clients. “On some projects, we have just said no – we are not doing the work for a low fee but we would like to do the job and some clients have changed their thinking. But others have not budged. We are not being hard nosed, just balancing responsibility and risk. And people do come back and say yes, so possibly we are starting to turn a corner.”

According to BWB director Andy Passmore that corner is beginning to turn for his business on fees. “Fees are increasingly becoming a secondary consideration in discussions. The challenge is accepting that we cannot deliver every opportunity and that we need to be selective to maintain our service levels.

This means filtering out those clients who consider consultancy services to be a commodity, and focusing efforts on those who recognise the value we can bring.”

Andy Passmore: “2015 is going to be all about strengthening our resource capability to ensure that we generate sustainable and profitable growth, without compromising our recognised service levels.

 

Brian McConnell: “We are becoming something bigger than an SME; we probably class ourselves as a full blown medium sized business and we’re certainly competing with some of the big boys. We’re feeling good about the future but we have to make sure we keep control of our expansion and bring the cash in.” 

 

Simon Offredy: ‘‘For us it’s going to be about staff retention, in house training, and growth, especially infrastructure growth. Our business in this sector continues to expand and in four years has grown by well over 150%. Given this success we also know that we have to keep a close eye on quality outputs at all times to ensure this continues.’’  

 

For chief executives Neil Sandberg of Sandberg and Brian McConnell of Hydrock fees were going up. “It’s wonderful at the moment compared to 2010,” said McConnell. “Our clients are not going bust and they are paying us!  And fees are not necessarily always an issue, they just want us to do the work.”

Sandberg was also optimistic. “We are able to increase fees slightly and activity levels are very high.  We are having to be very careful about contract conditions – we are still getting some real horrors.  We see ACE Agreements, which is a comforting start, but the words have been carefully edited, never to our advantage!  Normally when we explain to a client that the requested £5million PI and unlimited liability for a contract fee of perhaps less than £5,000 is unreasonable, we are then able to negotiate better terms and reach an agreement.  However there are always some where we fail and at that point we have to decide if we wish to do the work and sometimes ’No’ is the right answer.”

Concern about exposure to risks imposed by external parties brought the conversation neatly on to the implications of BIM and particularly working on a single model and how to protect yourself against other people’s mistakes.

“That is our biggest concern,” said Campbell Reith Hill senior partner Michael Lawson. “With BIM there is increased risk of errors being made without people realising.”

There was general agreement that BIM level 2 where each consultant manages their own BIM model with associated data was something that was achievable and almost enjoyable. “After the false starts we are certainly seeing a number of projects that are full BIM 2,” said Henry Pipe. 

“There are not many jobs, but they are starting to come through,” Sweett Group director Simon Offredy said. “Even the clients who aren’t using it yet will be imminently.”

The wild west nature of the early BIM days had been a concern for insurer Griffiths & Armour said Stephen Bamforth. “Things have settled down now, the protocols are all in place and there is much better understanding so level 2 is of no real concern.

“Probably the greatest risks are for the practices who don’t invest,” said Ruth Lawrence.

However the group were all in agreement that the next stage of BIM3 with all parties operating via a fully integrated design process, is a completely different concern.

As Stephen Bamforth said: “Can BIM3 achieve its potential with traditional professional indemnity or will there be so many constraints that we revert back to level 2?”  

Ruth Lawrence: “The challenge for 2015 will be ensuring we look at the claims that are made without hindsight and against the background of difficult economic conditions from earlier years – something often quickly forgotten by those bringing the claims”

Michael Coombs: “Our issue will be matching workload to resources and retention. It would be nice to get margins up. There is a lot we need to do to invest in the future of the industry and we all need healthy fees to be able to do it.”

Henry Pipe: “I am very optimistic for the future. We are seeing exciting jobs, the most enthusiastic graduates for a long time. But there is a problem with agreements – some clients are asking everyone on the design team to have £20M PI cover on projects where this is completely inappropriate!”

Neil Sandberg “Expanding with the right strategy will be challenging and controlling the risk as we expand.”

It was a good question because the major issues for our consultants were around responsibility and liability for defects. The solution Bamforth maintained has to be Integrated Project Insurance covering the client and all the supply chain to encourage the full collaboration necessary to make BIM 3 a success.

“Without it, if there are any problems you will all rush off to separate lawyers and just at the time when you need a collaborative engineering solution you can’t provide one because you have all gone for a legal solution.”

 Griffiths & Armour is involved in developing Integrated Project Insurance and Bamforth explained how it would work (see box).

“The cost of IPI is included in the overall project cost plan, paid for by the client as the benefits accrue to the client. For the insurer it requires investment on eyes and ears up front as opposed to us becoming involved after the event and spending on legal and forensic costs.

There would be a single, multi party contract, blame free, with a pain and gain share pre-agreed formula so everyone knows their maximum liability. And it is a shared liability so it makes it worthwhile for everyone to help each other out.”

Everyone on the panel wanted to find out more and Paul Wood could see that “the insurance route is the only way to go. If you are going to have collaboration, you have to have a basis of trust and knowing that you are all insured together would help create that.”

“It really is a culture question,” said Ruth Lawrence.

“IPI and BIM3 sound like project utopia but it would completely change the culture not just in claims but in how projects are run. For lawyers all the focus is on protecting your client’s position. We would all be able to move and change to focusing on what is best for the project.”

There were downsides potentially to IPI the panel suggested. “What does it do to our incentive to behave or be cautious. And what about the issues of knowing you are working with less cautious people in the team who may not be as scrupulous in design as you would like,” was one comment. 

“But if it potentially drives more stable relationships and allows us (as SMEs) to establish consortia so we can work as a team it would lead to more fulfilling projects.”

Bamforth concluded;” I think IPI can be a real enabler for SMEs as under IPI the client would be free to chose the best resources (not the richest). That could be a two man team who at the moment would be required to provide at least £10M PI cover which blows them out of the water. Under IPI the decision would be about skills.”