Contractors warn of AMP7 cost pressures

Leading contractors have aired their concerns about the impact of cost pressures imposed on the water companies for the next price control period.

Representatives of Tier 1 contractors told Utility Week of their fears that there could be a knock-on effect on the decarbonisation agenda.

A dearth of skilled people in the wake of Brexit is adding to the mix, leading to concerns that the resilience of the sector is at risk.

Energy & Utility Skills chief executive Nick Ellins, who works with a number of the contractors within the water sector is one of those concerned that utility firms could find that in driving out costs, they are driving out construction firms. He, says that after the collapse of Carillion, the contracting community – from tier 1s to tier 3s – have all had to re-evaluate whether or not the clients they work for bring them a sustainable return.

EU Skills has been relaying these concerns to the regulator, said Ellins: “We invited Ofwat’s Rachel Fletcher to meet the contractors to talk about [this shift in procurement] and understand their view about why they would even choose to stick around in water because if they don’t then Ofwat has got to fund companies as doing this as direct workforce and that means bills are going up.”

He said the sector would be better placed to start seeing contractors more as investors given that they are “multi-billion-pound businesses that choose to operate within the utility sector and the day they don’t, costs and complexity for the sector rises”.

His message was echoed by guests at a contractors’ dinner, hosted by EU Skills and attended by Utility Week. Here directors of tier 1 companies, all of which have significant experience in the water sector, raised alarm bells for the next price review period.  They are worried about the twin effects of a switch of procurement model by some water companies and more generally the effect of Ofwat’s final price determinations. This, they said, has sent water companies scurrying to cut costs and pass on more risk.

Margins are already low and risks high, but they accepted that because of the upside. The positives of working in the sector are the blue-chip clients who pay on time and work which is often counter-cyclical to recession. However, they warned that the new cost-cutting regime risked jettisoning all the value they brought to a project in terms of improving efficiency, innovation and working with water companies to bring down carbon emissions. All water companies have pledged to become net zero by 2030.

“The crude cost-cutting undermines innovation and potentially risks health & safety, said one of the guests, “as well as all the work we’ve been doing on well-being, decarbonisation, digitisation”.

“It’s all very well going to tier 2 and 3s, “said another, “but they don’t have any of the central company functions, I heard of one turning to the HR department of the water company to sort out apprenticeships for them. We bring a lot to the party, that just isn’t valued.”

This topic is explored in detail in a new procurement report exclusively available to Utility Week members