Facilities management is the seventh largest industry sector in the world and the fifth largest in Europe.

A major area of expenditure within facilities management is on cleaning contracts, in part due to the large portion of labour inherent in the commercial model (on average 60% to 74% of the total charge is labour). It seems hard to believe that there is room for contractors to make super-margins on FM cleaning contracts with so much of the revenue spent on salaries.

You’d be wrong, super-margin contracts are still out there, you just need to know where to look. With an average cleaning contract, there is plenty of scope for a contractor to turn a small margin into a super margin. However, a procurement generalist will not see these hidden costs, nor would they be expected to see them because, to do so, it requires the skills of a specialist facilities management professional with experience in cleaning contracts.

Previously, most cleaning contracts were awarded based on “input specifications”. The input specifications would outline in detail what a cleaning contractor was required to do to fulfil their contractual obligations. Contracts relying on input specifications are prescriptive by their very nature.

In recent years, there has been a shift towards contracts based on “output specifications” which are “quality” driven. With these types of contract, the client decides what the quality-driven result should look like and it is then up to the contractor to perform to these standards.

With output specification contracts, there is much more room for manoeuvre for the cleaning contractor from a commercial perspective. However, a procurement department supported by an SME will be able to see the techniques employed by the contractor to transform their 5%-7% headline management fee into an 16%-24% overall contractual margin.

Additionally, a contractor may agree a target price contract with their client, often on an “open book basis”. Target price contracts incentivise a supplier to provide a service within an agreed target cost, or within a client’s budget. Again, these are flawed models and can attract super margins from hidden margin sat within costs.

On previous articles, TGB discussed how clients wrongly expect contractors to operate on wafer thin margins because they wish to reduce their expenditure. As a response, cleaning contractors shift the operating model from input specifications to output specifications to give themselves an opportunity to increase their margins on a contract. Both positions are understandable and justifiable, but not sustainable.

If clients want to procure the best value and best service models, they must allow a contractor to make a sensible profit and they should not constrain them to a single digit, unsustainable margin. Clients who continuously look for ways to attack their contractors’ margins are unwittingly forcing many of the behaviour’s contractors engage in to increase or sustain their level of profitability on an engagement.