The history and future of the main contractor

This article explores both the history and the future of the main contractor. Many recent reports argue that the problems faced at a project level have their origins in the failure of main contractors to sufficiently address the challenges their businesses face today and historically. In this piece, we will look at what main contractors are, why they exist, and whether the future construction industry will require main contractors at all.

So, first things first. What is a main contractor?

In the UK Construction sector, we often hear the terms “main contractor” and “principal contractor”; both are the same. Still, we have these two separate definitions because of the Construction Design and Management (CDM) regulations (which provide a legal definition for the Main contractor. According to the CDM Regulations 2015, a Principal Contractor is:

“…appointed by the client to control the construction phase of any project involving more than one contractor. Principal contractors have an important role in managing health and safety risks during the construction phase, so they must have the skills, knowledge, experience and, where relevant, organisational capability to carry out this work.”

The main contractor and a principal contractor are, in effect, the same thing. In short, the client employs the contractor to manage and coordinate the works, often employing multiple subcontractors to deliver specialist elements.

Why do we have and need main contractors?

Construction is a highly fragmented sector with hundreds of specialist trades ranging from groundworks and concrete to smart technologies like audio-visual and data. Managing this complex and extensive supply chain requires skill and expertise which clients get from main contractors.

In 2013, an Arcadis study highlighted that a ‘typical’ construction project involved up to 70 subcontractors, all of which needed to be procured, coordinated and managed. This is the reason we have main contractors.

The main contractor oversees and manages the construction. The main contractor will have a management team capable of undertaking the procurement, contract administration and project management of all the specialist trades on a construction project.

Main Contractors should be experts in identifying solutions that offer ease of installation, good availability and represent value for money for their clients. A vital component of a main contractor’s success is the quality of their supply chain:  they should have confidence that their subcontractors are familiar with the specialist activities to deliver the work.

What level of profitability do main contractors usually work to?

Construction is a highly challenging sector; for main contractors, their work is not easy; it is plagued with risk and challenge. First, there is the complexity of managing up to 70 subcontractors per project, coordinating them, doing due diligence on them, paying them and managing their commercial relationships. Then there is the client; often, they have huge expectations, a small budget, and a tight programme. Following that, there are other stakeholders like architects, engineers and the like, all of whom have to be managed to ensure the successful delivery of a project.

On top of that, most of the work you do is paid for in arrears. Depending on your contract, you will complete work and not get paid for 30 to 60 days. In short, the life of the main contractor is complex, and every project is littered with risk and late payment. So, therefore is net profit good?

Sadly not, the construction industry in the UK has tended to have a procurement strategy by clients which I would dub “a race to the bottom”.

The lowest price wins.

This means that many main contractors often take on projects with a margin of 10% or less, the largest main contractors often operating at 3% or less. Recent Government guidance, such as the Construction Playbook, advocates for a change in procurement strategies focusing on creating value rather than the lowest price. However, for this to seep through to the industry will take time.

In 2018, The UK’s Top 100 construction contractors collectively achieved a pre-tax profit margin of just 1.5%, according to the Construction Index.

An average of 1.5%! Yes, you read that right.

I’ve always wondered: if you were describing to a young entrepreneur the business of the main contractor, would it be attractive to them? This is a business where margins do not reflect the level of risk you take, and you are paid in arrears. It doesn’t sound too attractive, does it?

Now, the average margin of 1.5% for the large Tier 1 contractor is against revenues in the hundreds of millions and, in many cases, billions, so it is still sizeable and smaller main contractors are much more likely to be operating closer to 10% and beyond. However, still, these are not big profit levels.

So, the question is, is there a future for main contractors?

A report which I strongly recommend those interested in the topic to read is Castles in the Air by Professor Headley Smyth of University College London.

Professor Smyth’s report chronicled the evolution of UK-based main contractors since World War 2 and focused on the systemic failure within the way they practice, writing:

“There is a brewing crisis in British construction. The potential scale of the crisis is almost going unnoticed in the economy and, to an extent, among the contractors themselves. This is despite the recent demise of Carillion, which shows the vulnerability of main contractors. This report shows how the roots of this crisis go back half a century or more.”

What Smyth advocates for in the report is a shift in mentality by the main contractor. The market that grew during the war years was based on survival (for obvious reasons). Due to the low margins, growth was only achieved after that by taking on more projects rather than innovating and changing managerial practices to become more profitable.

One could argue that the emergence of different procurement routes has allowed main contractors to diversify their portfolio of project risks and margins. Yet still, a focus on chasing turnover instead of increasing profit margin will resonate with anyone who has ever worked for the main contractor.

What can clever main contractors do to safeguard their futures?

Construction vacancies are at their highest since records began. A recent RICS report found that 54% of main contractors reported having insufficient Quantity Surveyors and that this was inhibiting growth.

So where can main contractors improve and grow their business without the staff? Many believe the answer lies in technology.

The benefits to be found in technology are undeniable, particularly in a sector which lags behind others significantly. A 2016 McKinsey report on technological innovation ranked construction second last (21 of 22) for digitisation; in short – versus almost every other primary industry of work – construction has not digitised.

More and more, we see digital technologies being used, but I was amazed to complete a recent survey of my own that found 66% of main contractors still rely exclusively on word and excel for procurement.

That might not seem mad at first glance, but please take a step back.

Microsoft Word and Excel were released in 1983 and 1985, respectively. We are now in 2022 – these applications are almost 40 years old, and we still rely on them almost exclusively. Main Contractors recognise the need for technological uptake to improve efficiencies. Still, despite this, a recent survey by Autodesk in 2022 found that only 25% of main contractors will prioritise IT investments over the next two years.

Recently, I have heard many agitating for change in main contracting practice and the industry as a whole. My firm belief (and yes, I am the Founder of a software business) is that for main contractors to thrive, a focus on technology and innovation is critical.

Professor Smyth advocated a shift in mentality, and I believe this can be found in technology. Technology is the way forward to improve efficiencies, manage project risks, and avoid the impact of the skills crisis.

The evidence is clear that for most main contractors, new technologies are not being taken up, and they don’t intend to invest in the coming two years. Therefore, it appears clear that if the main contractor were to innovate and focus on investment in new technologies today, they would be ahead of their counterparts tomorrow.

About Paul Heming

Paul was a Quantity Surveyor who gained 10 years experience of managing £200 million worth of flagship UK projects, including 20 Fenchurch Street and Battersea Power Station. In 2015, Paul founded C-Link with the intention of sharing his expertise of managing major projects with the SME market.