Blog: The Importance of SMEs in Construction

17 January 2024

Enabling SMEs to succeed

Simon Newton, SECBE Board member and Joint Managing Director Darke & Taylor 

As a sector, do we give enough credit to SMEs? For instance, SMEs bear very similar economic challenges as Tier 1 contractors but with fewer resources and less financial security. Do we do enough to enable them to succeed in the ever-changing economic and legislative environments?

Simon Newton, SECBE Board member and Joint Managing Director at Darke & Taylor, delves into the issues SMEs face and provides valuable guidance for SMEs on how to survive and thrive. Simon also looks further and calls on the sector to support SMEs.

The importance of SMEs in Construction

99% of businesses in the UK are SMEs (1) and according to estimates nearly a fifth of all SMEs play a role in the construction industry (2) providing specialist skills, know-how, technological advancement and an essential share of the workforce required to deliver the projects in the UK built environment. SMEs are recognised by many as a crucial part of the sector and a driving force within it.

Land of opportunity….

Construction is vital to the UK economy, driving growth and employment, and the underlying need to deliver improved environmental performance and incorporate smart technology suggests that there is a land of opportunity for the circa 300,000 SMEs operating in the sector. Addressing opportunity is what makes businesses succeed and generate profits.

But beware the risks….

Yet operating as an SME in the construction sector can be challenging, where long supply chains, complex contractual arrangements, poor payment practice, retentions, working conditions, material inflation and skills shortages all combine to increase risk and reduce the attractiveness of the sector for entrepreneurs, business owners and workers.  Credit risk in the sector is high: construction accounts for almost a fifth of all corporate insolvencies in the country and figures are currently rising. Succumbing to risk is what makes business lose money and ultimately fail.

The Problem

So here’s the problem - if the risks of operating as an SME in our industry outweigh the opportunities then entrepreneurial endeavour, business owner investment and attracting talent into the industry all suffer – and that sounds like a really bad outcome, not just for construction, but also for the UK economy.

So how do we make the sector a safer, more appealing place for SMEs to operate and their employees to earn their living? Who holds the superpower to enable SMEs to thrive?

When it comes to driving a better procurement practice, the Clients stand atop the pyramid. SECBE, through its Client of the Year Award, promotes the sharing of best practice that fosters an environment where SMEs can flourish. Recognising the pivotal role Clients play in SMEs' success is essential to inspiring these key players to drive positive change.

Profit is not a dirty word

In the construction sector a lowest price mentality often pervades (clients, contractors and subcontractors all play their part in this) and it is estimated that average profit margins are at a paltry 1.5 to 2%, a far cry from the far higher margins experienced in many other industries. We need to accept that profit is not a dirty word in construction (or any other industry for that matter). Construction SMEs should be encouraged and proud to make a profit and clients and contractors should wholly embrace the positive economic impact of having profitable companies in their supply chain.

Long-term, sustainable businesses re-invest their profits

To sustain long term business growth and success, construction SMEs need to both organise themselves properly and invest in their future. Here are a few ways in which this can be done:

  1. Invest in management information systems: successful construction SMEs have excellent systems and they stay on top of labour and material cost control and regularly review profitability.
  2. Play people to their strengths: most SMEs rely heavily on the people working for them and often the temptation is to ask staff to do a bit of everything, but it is better to understand their strengths and get them to focus on what they are good at.
  3. Invest in training: Construction SMEs need to invest in training their workforce and take responsibility for addressing the skills crisis in our industry. Companies that offer training programmes are more attractive to those looking for employment.
  4. Investment in technology: improved processes, IT systems, apps and technology that aids project delivery can have transformative effects on productivity.
  5. Be financially aware: credit check the companies that are in your payment chain and don’t accept unreasonable payment terms. Once you have accepted a contract organise yourself to apply for payment on time, get feedback on your payment applications and chase through payment notices/certificates. 
  6. Join a trade association: most specialisms in construction have a trade association and they provide really excellent support to SMEs, including legal and technical advice and they are a great way to share experience and learn from others who do similar work.

Finally, if you are the entrepreneur or business owner and you got into the industry because you are good at a skill, don’t forget to value that skill, expect to make a profit from it and then invest a bit of time and money on yourself and your business. Don’t rely wholly on your “construction skill”, educate yourself on how to run a business, get a business coach or mentor and set aside time to work on the business. 

With fair treatment and a healthy attitude to profit, and a willingness to invest this profit, SME’s will be able to grow, thrive and succeed in construction which is a good deal for the UK economy.

(1) BEIS small and medium enterprises (SMEs) action plan: 2022 to 2025. Published 26 January 2023.

(2) RICS Construction Journal: The role of SMEs in the UK construction industry. Published 24 February 2019.

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