If you care more about making money than turning it over, you ought to consider a career in housebuilding; if you want to be a contractor, maybe you should consider branching out into the services sector. That's the message in the latest survey of who's earning, selling and making what in the construction industry.
Last year was boom time for construction. Overall, the turnover of the top 50 housebuilders and contractors rose 20% to £35bn, and their total pre-tax profit was 30% higher at £1.6bn – the highest level since the late 1980s figure of £2bn.
With profit outpacing turnover, pre-tax margins improved, albeit moderately, from 4.2% in 1997 to an average of almost 4.7%.
This is still way short of the 9% that was par for the course a decade ago.
Housebuilders increased their total turnover to just above £9bn. Contracting turnover rose 25% to about £21bn. Most companies shed their property development businesses in the first half of the 1990s, but property development and investment turnover doubled last year to more than £1bn. However, even at this inflated level, it is half that achieved a decade earlier, when property accounted for 10% of the top 50 companies' total turnover.
Housebuilding profits have risen dramatically. Looking at different sectors' performance in 1998, it is evident that housebuilding continues to deliver the best results, with operating profit increasing almost 25% to £1.1bn. This is the best performance of the 1990s and compares with a figure of just below £1bn in 1988, although taking account of inflation, today's profit is about 30% lower than a decade earlier.
Average housebuilding operating margins rose to almost 12%, compared with 10% in the previous year, although some firms did much better than others. The best performances came from last year's league leaders: Berkeley, Wilson Bowden and Bovis all delivered operating margins in excess of 16%, with Bovis achieving almost 20%. Wimpey, the largest housebuilder, and Countryside Properties both returned margins below 10%.
Contracting profits made relatively good progress, rising more than 40% to £270m. However, margins remain poor at an average 1.3%, which compares with 1.1% in the previous year. Those achieving above-average margins included Alfred McAlpine, Tilbury Douglas and Morrison. Overall, though, the performance was poor, and, what is more, current market conditions look like being as good as it gets.
There is a trend among contractors, led by Jarvis, Amey and Morrison, to bolster their business by taking on associated activities such as facilities management and repair and maintenance (these types of activity are included under "other" in the turnover and margin tables). This category is a fraction of the size of contracting yet far more profitable, with margins of about 8%.
1998 was the best year this decade, with profit the highest for a decade. However, most of the money continues to be made by housebuilders, and it is their improved performance that has largely driven up profit of the top 50 firms. Meanwhile, contracting remains a hard slog – with little scope for improvement.
Margins
Whereas a large number of contractors continued to make piffling margins in 1998, housebuilders raced ahead, chanting a “margins not volumes” mantra. Bovis Homes, Wilson Bowden, Berkeley and Redrow all managed to make margins of more than 15%. By comparison, the highest placed contractor – Jarvis at number 16 – made 7.2%. And that figure has recently come under pressure as Railtrack looks set to tighten the purse-strings on its maintenance contracts. That said, some of the best performing contractors, such as Jarvis, Morrison and Amey, have made inroads into the potentially lucrative fields of facilities management and repair and maintenance. In fact, it seems that everyone wants to buy a services business, but whether the margins in FM and R&M will stay as hot as they are will depend on the size and quality of the competition. For traditional contractors, margins were much tighter. Seven of the worst performers could not even manage 1%, raising questions about the validity of their businesses.Wages
Pay for staff rose in line with 1997 figures – about 4%. This was a shade above inflation but lagged a little behind the rest of the private sector. Housebuilder Berkeley was the most benevolent employer for the second year running, rewarding its employees with average wages of £31 800, an 8% rise. Other fortunates include workers at Wates Construction, who netted a 16% boost, and Taylor Woodrow staff whose pay packets rose an average of 15%, justified by the company’s profit performance. But the heartiest hikes came from Bowmer & Kirkland, which shelled out an extra 26% in average pay, taking the figure to £23 800. Six of the 43 companies providing figures pulled back the reins. Keller staff suffered an average drop of 10%, Mansell 13%, and Bellway 12%. More surprisingly, top five profit-maker Wilson Bowden froze pay. Note: Average figures are calculated from the total wage bill divided by the number of employees.Bosses’ pay
Bosses enjoyed average rises of 8.8% in 1998 – more than twice the average for employees. Top of the league was the highest paid director of the privately owned family firm McNicholas Construction, whose package rose a whopping 88% to a grand total of £896 000, taking him from fifth in the league last year to first this year. And all this despite profit rising only 10.7% and staff taking a 7% wage cut. In second place was Tarmac chief Sir Neville Simms, who collected £667 000. Fat cats on the rise included Amey’s top director, whose 53% salary boost gave him total earnings of £394 000 and shot him up from 25th place to 12th. Despite this, the company rose only one place to 25 in the profit table. And Keith Miller of Miller Group leapt from 32 to 14 in the league with a £161 000 pay rise, even though his company fell back in the profit table. Dropping from first in the league to seventh was Bellway’s highest paid director whose package fell from £582 000 last year to £452 000, even though the business rose one to 10th place in the profit league table.
