Alastair Stewart looks at Building’s assessment of which major contractors has won and lost through the recession - and why
The construction sector is only just recovering from five years of recession, whereas any housebuilding divisions of the large contractors have seen increasing margins for most of that time. Therefore, it is no surprise to see Galliford Try’s published results showing an overall increase in margin, whereas most “pure” contractors have seen falls. Carillion - which deliberately cut its UK construction work - saw margins supported by its Support Services and more lucrative Middle East Construction work.
Looking at turnover, there are some big swings since 2008. Balfour Beatty, the overall leader in turnover, at £10.1bn, is up by 35%, but that is largely the result of the soon-to-be-reversed acquisition of Parsons Brinckerhoff. Strip out the £1.6bn contribution from Professional Services (which is mainly PB) and the resulting rise is 13%. However, some observers will question whether any of that extra workload was profitable: the group has made a succession of profit warnings over the past two years, largely based around UK construction due to “significant operational issues”, most recently in the Mechanical & Electrical division, according to the group’s 6 May trading statement.
Although contracting has wafer thin margins at the best of times, it provides positive cash flow. This can tempt companies to take on work with zero margins
This highlights two issues affecting the wider construction sector: to what extent are contractors tempted to “buy work” during a downturn and what type of work are they taking on. Although contracting has wafer thin margins at the best of times, it provides positive cash flow when volumes are increasing. This can tempt companies to take on work with what looks like zero margins, in order to pay creditors, but, with any false assumptions, these can turn negative. This is particularly the case the further you go down construction’s “feeding chain”.
Subcontractors also have generally less bargaining power than main contractors, which have less than clients. The fact that Balfour explained much of its travails down to the M&E division acting mainly as a subcontractor. Mace, which acts in a more managerial role, not only saw its revenue double, but its margin increased by a third to 2.6%.
Alastair Stewart is a construction analyst at Progressive Research. Follow him at www.BuildInsight.co.uk and on Twitter @BuildInsight
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