The contract cleaning insider
18 January 2019
Lee Andrews, CEO of DOC Cleaning, asks: are legislative cost pressures putting service standards at risk?
Latest reports put average net profit margins in contract cleaning at 2.79% – down on the 4% quoted as the industry norm a couple of years ago. This flags up two concerns: is the downward trend set to continue and what impact could this be having on service levels?
Increases in both National Living Wage (NLW) and Living Wage Foundation (LWF) pay rates are pushing up front line wages at an average of 4% per annum, which in turn has a knock-on effect on the pay of supervisors and managers looking to keep their differential in place. Elsewhere, the cost of employer pension 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, etc.
Asking clients to cover rising direct labour costs can be a tricky conversation, particularly if your contracts are not tightly worded in this respect. Many contractors have at least a ‘statutory increase’ clause in their contracts, which can make the discussion easier, particularly if staff are paid the NLW. Things can get difficult, however, if your staff are paid a premium to the NLW, even with the client’s agreement. In this situation, a substantial rise to maintain the premium – and next April will see a 4.85% increase in NLW – may not be warmly welcomed.
Where a client funds LWF rates, there is an argument that the benefits of lower staff churn, combined with increased motivation, can filter through to higher productivity. This can form the basis for a sensible client discussion around working methods and investment in labour-saving equipment to help manage overall cost. However, I hear from contractors about clients who point blank refuse to pay any increase, or ask for fully offsetting savings to be made. Unfortunately, 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.
If cost pressures are forcing contractors to look for new ways of improving productivity, and work more closely with existing clients to explore savings, then it can’t be a bad thing. But if these joint discussions don’t happen, the enforced savings could lead to a decline in standards and a soured relationship. If discussions do take place, contractors mustn't forget that when they take out labour cost, they need to preserve the cash margin element to cover their overhead.