Balmy days of summer

A rise in collective turnover, a rise in average margin, and – so far at least - predictions of a slowdown failing to materialise: for contractors, Building’s annual top 150 league tables make for far better reading this year than they have for some time. But while these firms might be enjoying a golden summer, or at least what passes for it in an industry which is still plagued by high costs and low margins, is this a trend that’s likely to last – or should firms be bracing themselves for the prospect that winter is coming?

The recently exposed woes at Carillion, the sector’s second biggest firm, which announced an £845m writedown earlier this month, cast an obvious shadow over the sector’s performance. But so too does the spluttering health of a string of other firms in the top 10: Laing O’Rourke, Kier and Interserve have all recently suffered financial hits, partly at the hands of problem jobs. Meanwhile, Balfour Beatty, the UK’s largest contractor, is only just starting to glimpse the fruits of its mammoth turnaround, with the barest glimmer of a margin at 0.09%.

This list of the walking wounded is counterbalanced by exciting performances elsewhere in the sector. Multiplex Construction surpassed £1bn turnover with 67% growth, while Winvic Construction doubled in size. But with so many of the top 10 already showing signs of strain, how healthy really is the outlook for contractors?

While some of the conditions in the market are uncomfortably close to those that accompanied the last recession, there are also some important differences

While margins for the top 50 contracting-led businesses, at an average of 1.78%, are far higher than last year’s 1.05%, this is still only a return to 2014 levels, and offers a poor buffer should things start to go awry. Meanwhile, companies are reporting a rise in single stage tendering, which increases the risk that firms will be caught out by rises in materials and labour costs further down the line. Taken together with the backdrop of the political and economic uncertainty that accompanies a government surviving on the back of an agreement between two parties, contractors could be forgiven for looking over their shoulder and thinking that this all has worrying shades of 2010 about it.

But while some of the conditions in the market are uncomfortably close to those that accompanied the last recession, there are also some important differences that will provide a tonic for those who like their glass half full.

One, ironically, lies in the fact that many companies are still feeling the effects of jobs won at low – or non-existent – margins at the end of the last downturn. While this legacy, in pure balance sheet terms, means companies are less prepared to cope with the effects of any brewing market storm, it also means that they are less likely to repeat the same mistakes by putting in unfeasibly low bids now, even if the market is tipping back in clients’ favour.

A host of large contractors – Balfour Beatty being the most high-profile example – have overhauled their project and bidding controls since being caught out by problem projects won in the last recession. This won’t stop some single-stage contracts from becoming a race to the bottom, but it is entirely plausible that it will have enough of an effect to stop this becoming the dominant market trend, and also to ensure that other procurement routes – like construction management – retain a presence in the market.

The government’s endorsement of the vast majority of the Farmer report’s conclusions last week was encouraging

Meanwhile, while the way the industry works continues to make it extremely vulnerable to cost rises in materials and labour, initiatives to drive modernisation are – albeit slowly – gaining traction. Mark Farmer’s pull-no-punches review of the sector, published last year under the banner Modernise or Die, has provided a fresh impetus for discussion between government and the industry over ways to promote more efficient building techniques, particularly on public sector projects.

The government’s endorsement of the vast majority of the report’s conclusions last week was encouraging. Firms bidding on public sector contracts now need to use that endorsement to their advantage, to put forward proposals that will give them the confidence and security to invest in building methods that will ultimately reduce their cost base.

Just as importantly, however, firms should use the high-profile endorsement of the report – by the housing, education, and construction ministers – as leverage against any public sector clients that attempt to retrench into a pattern of lowest cost procurement.

It is disappointing – although entirely predictable – that the government stopped short of endorsing Farmer’s idea to consider introducing a charge on clients to incentivise them to commission more modern methods of building.

But even so, the behaviour of public sector clients will be crucial as to whether UK contractors find themselves bouyed by the work they win over the next year – or fall hostage to it.  

Sarah Richardson, editor