Marginal Pressure

Lee Andrews, CEO of DOC Cleaning, asks whether legislative cost pressures are putting service at risk?

Latest reports put the average net profit margin in UK contract cleaning at 2.79%. This is a substantial decrease from the 4% quoted as the industry norm only a couple of years ago, as well as being a much lower figure than the 7% margin recently claimed for FM companies. This raises two worrying questions:

  1. Is the downward trend set to continue?
  2. What impact could the pressure on margins already be having on service levels?
What’s Behind It?

The fact is the last few years have seen the cost of cleaning rising from a number of different sources. Increases in both National Living Wage and Living Wage Foundation pay rates are pushing up frontline wages at close to 4% per annum, which in turn has a knock-on effect on the pay of supervisors and managers who are looking to keep their differential in place.

The cost of auto-enrolment pension employer contributions will have risen from 1% to 3% by next April and the Apprenticeship Levy is now costing medium to larger contractors 0.5% of their payroll. All of this before you consider the rising costs of materials, fuel, and so on.

Is The Issue Understood by Procurement Managers?

Whilst public sector contracts may have wage inflation built into their pricing, this is not so common in the commercial sector. On new contracts or re-tenders this results in two styles of procurement. On the one hand, there is the procurement manager, often externally engaged by clients to manage the process, who is very thorough and will make sure the client’s future requirements are not sacrificed on the altar of cost.

Equally prevalent, however, are those who insist that cost increases over the life of a contract are committed to at the start, leading to uncertainty in pricing and the potential for ‘over-competitive’ bidding based on the hope that things will somehow sort themselves out. The reality of course is that as margins are squeezed, standards will be compromised, leading to reputational problems for both the contractor and the industry at large.

But shouldn’t higher pay rates increase cleaning productivity on existing contracts? The answer is ‘they can do.’ Where a client is sanctioning the LWF rate we, as contractors, can take solace in the financial benefits of lower staff churn and certainly our own experience to date suggests that payment of LWF does filter through to higher productivity and higher standards. This offers the potential for a good partnership based on shared objectives and can encourage investment in innovative, labour-saving equipment – an option that might not otherwise be explored if margins are relentlessly being squeezed.

Elsewhere, however, I am hearing from contractors about existing clients who point blank refuse to pay any increase, or at best are asking for offsetting savings to be made. That is fine, but a 5% pay increase made up of increases to NLW and pensions is unlikely to result in a corresponding increase in productivity, meaning that harder discussions needed to be had around cutting specifications.

A Problem or An Opportunity?

They do say necessity is the mother of invention. If cost pressures are forcing us, as contractors, to look for new ways of improving productivity, and work more closely with existing clients to explore savings, then it cannot be a bad thing.

But my concerns are twofold: firstly, that if these joint discussions do not happen, the savings will lead directly to a decline in standards and a soured relationship; and secondly that if discussions do take place, contractors will forget that when they take out manpower cost, they need to preserve the margin element to cover their overhead. And that, I believe, is what is contributing to the decline in profitability.

Published in June issue of Tomorrow’s Cleaning.