Client contractor relationship Essay
The rapid deterioration in economic conditions has resulted in a sea change between clients and employers. Whereas contractors and employees had an abundance of opportunity and the clients and employers were paying premium rates and in some case were being exploited the opposite is the case. Contractor prices which were affecting affordability have been corrected through the scarcity of work. A client that can afford to build can do so at excellent rates, regardless of procurement strategy. Whereas previously clients were concerned with affordability, now the concerns are sub-economic bids, post-contract claims, supply chain instability and lack of contractor initiative (ibid). It is important to note that the effect of the recession is not felt equally across nations, regions and industries; it is though a general trend.
Underbidding: There are significant risks to a client going for sub-economic bids, underbidding is a strategy employed by struggling firms to stay afloat, in the current economic climate this strategy is increasing. Some bids are so low that the contractors are buying the work at a loss. In 2010 Connaught won a housing maintenance contract worth 17.5 million, the bid was challenged in court by Morrison as being abnormally low at 5.5 below their
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Underbidding can be a strategy to stay afloat or a strategic decision to acquire work and then reclaim money by exploiting loopholes and squeezing the suppliers. According to Constructing Excellence only 47% of projects finished on price, the contract is the start and not the end of negotiations. (ibid) Underbidding and trying to claw back through the supply chain is contrary to the advice of the Latham Report as it breaks trust rather than building it.
Clients and contractors are critical stakeholders and the dynamics of their relationship is pivotal to project success, clients have a responsibility to ensure contractors are capable of fulfilling contractual obligations and therefore must be rigorous in their assessment of bids. Bids that are significantly below others need proper scrutiny. A positive relationship and outcome to projects will not be achieved by awarding work to companies who may be intent on clawing back revenues through squeezing margins of others, it is high risk.
Whereas in recessions of old government intervention might have attempted to stimulate the public sector, there is less buoyancy in this sector. Significant programs of work have been scrapped or significantly downsized such as the 15 Billion Building Schools for the Future programme. Furthermore turmoil in the stock market will potentially dampen private sector demand. When Chancellor Osborne outlined a 83 Billion cut in public sector spending in October 2010 contractors were naturally weary on the impact on public sector clients (O’Sullivan, 2011). In response to events many companies are adopting retrenchment strategies, cutting operating costs and divestment of non-core activities. An employer under pressure to compete will look inwards, into the organisation, the purpose to drive down overheads, increase efficiency, there may be job cuts, wage cuts, reduced investment.
This streamlining is inevitable to remain solvent. In construction projects this pressure will be felt down the supply chain, through to sub-contractors, designers, suppliers of materials, plant and labour, it is an inevitability of the so called invisible hand of market forces, the outcome of reduced demand. The plight of employees is shrinking purchasing power due to reduced income and higher inflation, the effects of the weakening currency, also the threat of redundancy and unemployment, for the self-employed less work and lower rates. According to the public sector client survey public sector clients have been saving funds by cancelling projects. Following the Comprehensive Spending review 58% of new projects were shelved, local authorities cut 63% and the health sector 44%. This reduction in jobs naturally leads to an increase in competition by contractors. (ibid)
The coalition government has signalled that a move away from framework agreements is desired to enable SMEs to access work, in defiance, unwittingly or not, public sector survey clients are turning to frameworks to save money, 40 % of housing associations joined over 6 months in 2011. (o’Sullivan, 2011). Framework relationships, a case study Dean Engel and Andrew Murphy are land surveyors employed by Balfour Beatty. An account of their experiences provides an interesting insight into the compound effects of cutbacks on the framework agreement EMAC contract servicing the Highways Agency Area 2 Contract. Andy is a long time employee of the company with 18 years of service; Dean is a relative newcomer with 5 years of experience with the company.
According to Andy prior to the credit crunch Balfour Beatty (BB) had an issue with training graduates and retaining them as they swapped companies to attain promotions and higher incomes. BB Staff packages were very competitive so more could be earned elsewhere. The situation now is that BB retains staff more easily says Andy, this seems logical; where there is less demand in the workplace loyalty may carry more weight especially if there is risk of redundancies.
Andy has benefitted from consistent and often generous pay increases, he has a final salary pension, a company car with fuel card, is satisfied with his income, employment status and the investment the company has made in him while employed and is now a chartered surveyor. He has benefitted from training courses and has a good annual leave entitlement. The company has clearly made efforts to retain him and has been successful in doing so.
Dean has had a different experience having been employed after the credit crunch when the company recruitment policy altered to reflect circumstances. BB now has an abundance of graduates and can select high quality individuals on competitive packages while the rate of staff retention has improved according to Andy. Both Andy and Dean have had their incomes pegged back, last year there was no pay increase while this year there has been a 1.9% increase. Andy’s income increased steadily over his first years of service whereas Dean’s has been suppressed due to the economic circumstances and he has not been offered a final salary pension. Also Dean has not been promoted through the grades as quickly as was previously the case because of the increased staff retention and subsequent lack of promotion opportunities.
According to Andy Balfour Beatty has a significant order book, with ample major projects on the horizon such as the high speed rail link, and major on-going works such as the M25 widening scheme, a 700 million sewerage processing works announced on the 4th Jan 2012, to name but a few. In defence of Balfour Beatty they are scrutinising costs and overheads to remain competitive, on this contract they have a public client in the Highways Agency who are themselves under pressure to reduce costs. The experiences of these men are interlinked with the wider economy and their experiences are probably shared by many. As Dean says, despite the disparity in incomes, the reduced holidays and pension entitlements, he believes that what he earns is competitive and he is grateful to be in employment, he does though complain that the company “takes the piss”.
The case of these two workers reflects the effects of market forces on the economy. Reduced demand and increased supply has reduced their market value, without the protection of contracts of employment they could well find themselves surplus to requirements or at the very least find their incomes reduced significantly. The construction industry is largely populated by self-employed persons who do not have the protection of employment to sustain their incomes. Frameworks are an aspect of client procurement strategy, for the contractor and supply chain they offer stability and agreed pricing models, this stability offers contractors the opportunity to invest in personnel training and inward investment in their capital base. The problem now is that clients increasingly recognise that they can acquire at lower capital costs and this disrupts stability.
There has always been a whiff of corruption associated with the construction industry, the structure of the industry, the high level of competition, the interface of so many people along a complex supply chain. From inception to the construction a diverse array of actors can benefit from illicit backhanders, the potential for wrongdoing is immense and many fall foul to the temptation of easy money. It can be at a corporate or individual level, over recent years the Office of Fair Trading (OFT) has been immersed in an investigation to expose bid rigging, in March 2007, 57 companies and the OFT uncovered evidence of bid rigging involving over a 1000 contractors in contracts worth over ï¿½2.9 Billion (Agapiou, 2008)
Employer/employee relationships Employer/ employee relationships are affected by the recession. Unemployment, wage pressure, insecurity and increased demands by employers are factors which increasingly strain relationships. These pressures are an inevitability of the trickledown effect of reduced industry demand. According to Experian the construction sector is forecast to shrink 4% in 2012. According to one survey, employer employee relationships are at an ‘all time low’. The reduced demand on construction projects is impacting on salaries of workers. A Hays Montrose survey has pointed out that frozen salaries and salary cuts are hitting morale with half of workers surveyed stating that they are unhappy and want to change jobs within a year. Two thirds said they were overworked and 65% said they would stay with their employer if the workload was addressed. (McMeeken, R, 2011)
The UK construction economy has traditionally suffered from a skills shortage. The Egan report, 1998 identified a “crisis in training” trainees had dwindled by half since the 1970s. (Egan, 1998). Construction is a labour intensive industry despite technical developments. The skills and commitment and organisation of employees are of vital importance in producing a good quality product. Egan identified a commitment to people as a fundamental driver of change in the industry.