It feels like the market for major Engineering & Construction contracting services is shifting with the slowdown in Sydney Metro Work after the best part of a decade of high demand since the Northwest Metro began construction in late 2013 – a truly world-class project that the industry should be proud of.
In the short-term, the Brisbane Olympics is anticipated to fill part of the void (with a July 2032 deadline looming). The demand for net zero projects across the country remains variable, as many projects on the horizon appear more difficult due to remote locations, site conditions and insecure social licencing.
I wrote about the competitive dynamics of the Engineering & Construction contracting market in “The Steel Ceiling: Achieving Sustainable Growth in Engineering and Construction” (Wiley, 2023) using a model developed for this purpose by Michael Porter called “5-Forces”. It feels to be the right time to revisit this model and consider what it suggests about what’s happening in the industry, and what this may mean for profitability of small and medium businesses.
To recap, Michael E Porter of Harvard University’s proposed his analysis (diagrammatically represented above) in a Harvard Business Review article in 1979. His framework draws upon industrial organisation economics to identify five forces that determine the competitive intensity of an industry, and therefore its overall attractiveness for business seeking to generate sustainable returns on investment from that industry.
Let’s consider the five forces defining the competitive environment one by one:
The threat of new entrants to the industry:
I noted in my book some movements/exits of major contractors from the industry, potentially indicating a lack of confidence in the local market. We’ve seen more recently Gamuda establish itself in the market as a major player and Strabag consolidate its presence in Australia with its acquisition of Georgiou.
The bargaining power of buyers:
There are signs of this power weakening for the procurers of projects, especially in Queensland with the Olympics deadlines starting to loom large and deadlines becoming an important factor, and across the country with Government’s commitment to net zero targets becoming increasingly unrealistic, making cost plus based pricing models more of a viable option.
Cost overruns are still a theme (maybe reflecting a lack of reality in establishing budgets for major projects), and unmanageable risk transfer to contractors remains a challenge.
The threat of substitute products:
The rise of Artificial Intelligence is a key consideration here. The current debate concerning Productivity improvement in Australia, which is apparently likely to be used as cover for large corporations shifting numbers of staff out the door, in the wake of COVID becoming a distant memory, will create pressure for Government. The construction industry is less immediately affected by both these issues than other big employers (think the banks and professional services firms) and is likely to be less disrupted in the near future. With Australia’s economic position relying on high levels of employment to maintain stability, the expectation is that Construction will continue to employ more than one in ten working age people in Australia, as it does around the World.
The bargaining power of suppliers:
With skilled supervisors (who know how to build the job) still rare and in strong demand, capable suppliers small and large should be in a strong position. Pressure on suppliers, though, is still high. Given the extent of competition between suppliers, if we see a general downturn in the industry this pressure is likely to increase. This pressure presents major challenges in business investment and growth for small and medium players.
The intensity of competitive rivalry within an industry
Government has a vested interest in and has the procurement levers to support local businesses and maintain a healthy local construction industry with strong local capability. Effective actions would look like:
- Providing a forward plan (pipeline) of work that is accurate and transparent, enabling confident business decisions to be made
- Reducing the reliance on lowest price in tender evaluations and select based on best value
- Consulting with a view to achieving alignment with contractors about objectives for given projects, given alignment of objectives increases the opportunity for collaboration
- Avoiding establishing project budgets too early in the process, when uncertainty is high. This creates price pressure and gets in the way of risk being priced correctly & effectively managed.
Peter Wilkinson – Director, Sam Wilko Advisory
Author of “The Steel Ceiling: Achieving Sustainable Growth in Engineering and Construction” Wiley, 2023
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