Top 150 contractors and housebuilders – a game of two halves

You do not have to search your memory for long to come up with big contractor names that have hit the headlines for all the wrong reasons over the past few months: Interserve, Galliford Try, Kier, Costain, Laing O’Rourke have all had their fair share of project and financial woes reported in these pages. So, it would be reasonable to assume Building’s Top 150 Contractors & Housebuilders league tables this year would reflect all this turmoil with some dramatic shifts in the rankings as established firms drop down to be replaced at the top by those nimble enough to seize opportunities in a shrinking market. But no, in fact you could sum this year’s results thus: not much change from last year – housebuilders still making a ton of money, contractors not so much. This is obviously over simplistic, but you get the drift.

On average, the 10 biggest housebuilders’ pre-tax margins are over 18%, which is more than 10 times higher than their equivalent contractors

The big news of course is that Laing O’Rourke is out of the top 10 for the first time since the early 2000s, slipping from 7th to 11th position. This is in part due to its own problems – its turnover is down 8% to £2.9bn while it posted a £44m loss last year – but it also points to an underlying trend of housebuilders’ increasing dominance, with Bellway muscling the contractor out of the group of elite performers. As an aside, if you are just looking at contractor turnover, Laing O’Rourke has actually risen up the rankings from 7th to 2nd place, behind Balfour Beatty which remains in pole position.

More generally the rankings show marginal growth for contractors, which should put a spring in their step in what has been a pretty grim year. Turnover for all the contractors in the league hit £63bn, up 3% on the previous year. But more important are profit margins, which for the top 10 contractors is 1.6%, up fractionally on the 1.3% average last year. What is interesting is that the bigger the firm, the less profitable it appears to be: average margins for those ranked 50 and below are well up at nearly 4%.

Top Contractors and Housebuilders 2019: Treading a tightrope

But this pales into insignificance against the bumper profits made by housebuilders. If you take the most profitable housebuilder, Persimmon, for example, it made a whopping £1.1bn profit compared with £1.4bn made by the top 90 contractors between them. On average, the 10 biggest housebuilders’ pre-tax margins are over 18%, which is more than 10 times higher than their equivalent contractors.

Having said all this, housebuilders’ margins – which for at least five years have been boosted by Help-to-Buy – stopped growing this year. If you look at all 45 housebuilders in the rankings, margins have actually dropped slightly to an average of 14% from 14.7%. Looking ahead, housebuilders face a period of uncertainty with the curtailing of Help-to-Buy in 2021 and its winding up in 2023. And with this £11.7bn package of government support for housebuilding coming to an end in the near future, it looks like the housing market may have peaked: government data shows that starts are down, while Persimmon recently announced a fall in completions. Housebuilders will perhaps be in a more cautious frame of mind.

But if a slowdown is coming, housebuilders are certainly well insulated. After a period when they have been making on average up to £65k per house sale, they have built up reserves in stark contrast to the debt piles of some contractors. Indeed, debt has become such a preoccupation in the contracting world that those more fortunate debt-free firms are actively boasting about their cash positions. Willmott Dixon and Morgan Sindall certainly are, with the latter now declaring its daily cash position, clearly seeing it as a differentiator for investors, clients and the supply chain.

It is unlikely next year’s rankings will reveal that the business of contracting has become any easier, but as we approach the precipice of a no-deal Brexit, it could get a whole lot harder for those that remain cash poor.

Chloë McCulloch, editor, Building