The current set of circumstances – inflation, a chronic labour shortage, economic gloom, and concerns about social value and environmental sustainability – is exerting pressure on margins and creating uncertainty as to the direction of travel.

How? Well first, the evidence. A well-known research body reported recently that net profit margins in commercial cleaning averaged only 2% last year. That is very worrying. It might be an after-effect of the pandemic, despite many contractors performing reasonably well because of the additional work generated by that crisis. What is more concerning, however, is that the effects of inflation had not really taken hold last year, raising the question as to where that 2% is going to go once the rising costs of labour and supplies works its way through to this year’s P&L account.

The most serious challenge we face, of course, is the labour shortage and the upward pressure this is putting on pay rates. On the positive side, it is good to see cleaning operative wages rising and, under normal circumstances, that would filter through into increases in contract charges and the maintenance of percentage margin, especially where there is some sort of indexation tied to headline inflation or legislated pay rate increases. These are not normal circumstances, however, and because inflation is eating into corporate profits, I am hearing through the grapevine that some clients, particularly those whose agreements are not indexed, are effectively saying that they will fund legislated frontline pay increases, but not corresponding increases to overheads. That presents its own peculiar problem, since rapid growth in front line pay rates has a knock-on effect up the chain as the differentials between job grades are eroded. You might well say that management are just going to have to live with smaller increases, but has anybody tried recruiting or replacing a manager lately? You will know that the job market for management at the moment is as tight as it is for front line staff, and we know what happens when supply is short.

You could say the problem will resolve itself naturally. Historically, high inflation leads to unemployment as firms go bust. But we are at an unprecedented moment where the labour supply is highly constrained and the traditional economic relationship may not kick in for some time, if at all. More likely, firms will just eat into their reserves, if they are lucky enough to have them.

Something has got to give, but what? Which brings me to my final point. Like many other contractors in the industry, we have been working hard to embrace sustainability, both in environmental terms with our net zero programme, and with other initiatives to create an enjoyable working environment where our staff can thrive. I have mentioned in previous columns how this meets two objectives: firstly, it helps to attract and retain staff, and secondly it meets the ever-growing expectations of clients who insist on sustainability credentials as a prerequisite to working with them. To develop the company in this way is fantastically rewarding and satisfying, but of course it comes with associated business overheads. My concern is that as the economy flounders, clients may begin to view such activities less as must-have and increasingly as nice-to? have and will gradually reduce the weighting they give to such activities in supplier selection. Meanwhile, we have built all these costs into our business, and whilst we have no intention of pulling back from them, it would be a massive shame if our industry is pushed back towards the race-to-the-bottom mentality that, thankfully, we seemed to be slowly exiting.

Published in August issue of Cleaning & Maintenance.