Contractors hope to see more work get off the ground, but familiar problems provide a nervous backdrop, writes Dave Rogers as Building publishes its Top 150 Contractors & Housebuilders list
Is this year just a carbon copy of last year – and will next year be a carbon copy of this year? Last year, several high-profile names went under – Lonsdale and Buckingham, to name but two. This year’s big name has been ISG.
The fallout of that firm’s implosion in September will take time to impact. And the message it sends is not great. Once again, a construction firm has collapsed, leaving people out of work and jobs half built.
Talk to some people, though, and they’ll say ISG was an outlier; that its problems were a specific firm’s problems rather than a comment on the state of the sector.
That construction is fraught with challenges and risk is a given. A case in point: last month steelwork contractor Severfield, which has been diligently rebuilding its business and share price in the wake of problems on the Cheesegrater, shocked the market when it said it was having to spend at least £20m fixing defects caused by welding issues on 12 bridges, including nine on HS2. The amount it spent on the Cheesegrater, by way of comparison, was £6m.
Its shares dropped a third in the wake of the news – not a problem for most contractors, given they are not listed – but having to own up to carrying out repairs on the country’s most high-profile project will have hurt.
All this says is that all contractors, even ones as well-run as Severfield has been, can come a cropper – and out of nowhere too.
And with margins still below where they should be, it does not take too much for the bottom line to be sent into a spin when things unravel.
Capacity among tier-one firms
There is serious talk about the importance of growing margins for contractors – Scape’s Mark Robinson has met two Labour MPs to push the issue higher up the government’s agenda – but will clients and funders agree to stump up more?
Well, they just might have to. In the autumn, cost consultant Core Five said there is a “reduced pool of willing and able main and subcontractors” to carry out work on building schemes worth £250m or more.
>> Top 150 Housebuilders and Contractors 2024: the full table
>> Top 150 Contractors & Housebuilders 2024: Crunching the data
It said developers looking to turn on the taps for stalled schemes may find themselves with no one to build their jobs if a glut of projects come onto the market at the same time.
Currently it seems only Mace and Multiplex are prepared to bid on the really big City schemes – whereas a few years ago there was a shortlist of four or five.
One of those that might have appeared on such shortlists would have been Lendlease, but its sale by its Australian parent has put a question mark over its future. The mood music, though, is optimistic and there is growing speculation that a deal of some sort will be done, probably in the first few weeks of the new year.
But gone are the days when contractors in the UK could command big sale prices. Lendlease paid £285m for the then Bovis a quarter of a century ago, and a few years later Carillion bought Mowlem for nearly £300m. Nowadays it’s the consultants that are in takeover mood.
Sentiment indicators
Sentiment remains key to the hopes of construction. London QS Exigere recently said there were reasons to be positive about next year – developers, it said, were looking to build so that is a start. But at the same time T&T Alinea warned that the government’s gloomy talk in the run-up to the Budget had pretty much put the kibosh on any hoped-for post-election bounce.
The recent London Office Crane Survey from Deloitte, another bellwether survey, said there had been a decrease in delivered projects, while refurbishment starts had fallen below the level of new-builds for the first time in more than four years.
Activity in the life science sector may reinvigorate quieter markets in the short term, but demand for this space is less certain
Caroline Waldock, Deloitte
It said the 3.7 million ft² of new office construction starts in the six months from April to September this year, across 29 schemes, represented a 12% decrease in volume compared with the previous survey. However, this figure remains above the 10-year average of 3.4 million ft². What view you take depends on how you analyse the numbers.
There are some interesting nuggets, most notably that life science schemes, which contain both laboratory and office workspaces, were responsible for 35% of new construction starts, representing 1.3 million ft².
Caroline Waldock, partner and real estate lead at Deloitte, said: “It has been a challenging year for London’s office market. Not only has it had to grapple with continued geopolitical and economic uncertainty, but construction contractor insolvencies have placed additional pressures on an already distressed construction sector.
“Activity in the life science sector may reinvigorate quieter markets in the short term, but demand for this space is less certain. Looking further ahead, the recent cut in interest rates and the easing of construction cost inflation could be crucial in boosting new scheme numbers. Our survey has recorded a renewed sense of positivity among developers that suggest the decreases we’ve noted may be short-lived.”
>> See also: Laing O’Rourke edges back into black as new boss says margins have to improve
>> See also: Downfall of a contractor: How high-profile collapses and fixed-price jobs helped send Readie under
>> See also: ‘This industry is absolutely fine…’ Andrew Davies on the naysayers, rescuing Kier and what the firm plans to do next
Decisions on big schemes
Investors and developers are still taking their time with schemes, and jobs such as 1 Undershaft and the British Library are making some sort of progress to a denouement, albeit slowly. Another major scheme, the deal to overhaul Liverpool Street station, is being redrawn completely although Network Rail is pushing for revised plans to be in by Christmas.
It still feels, though, like jam tomorrow – and the country’s glacial planning system does not help, either.
All these projects have taken a long time to get to where they are today. Eric Parry’s £1bn 1 Undershaft, for instance, was first given planning approval in 2016. It has since been redrawn.
The scheme to extend the £400m British Library was granted planning approval in January last year, while initial proposals for the £1.5bn Liverpool Street redevelopment were revealed in October 2022.
The job to overhaul the ITV Studios complex on London’s South Bank has been held up for two-and-a-half years by a series of planning wrangles. During that time, Lendlease has been replaced by Multiplex as main contractor.
A decision on the winner of a £480m HS2 contract to build a maintenance facility at Washwood Heath near Birmingham will not be made until next spring – more than five years after it was first advertised. And on it goes.
Glimmers of optimism
Not everyone is down in the mouth. Kier’s chief executive, Andrew Davies, says it has never been a better time to be a tier-one contractor.
With his firm, alongside Balfour Beatty and Morgan Sindall, he suggests that Whitehall has never been in a better position to call upon trusted, competent firms to build its schools, hospitals, prisons and so on.
Davies speaks from a position of strength, having masterminded the firm’s recovery from the doldrums he inherited in 2019. He wants the industry to be more positive about its achievements and dismisses as “dismal” talk that it is forever in crisis or cannot do the big projects well.
He has a point, and his firm’s upward trajectory – and the recent news that Morgan Sindall has raised its 2024 profit expectations – are testament to that.
Profit margins continue to disappoint
But it would be wrong to say that there is not more to improve and that everything is hunky-dory.
As our Top 150 Contractors & Housebuilders table shows, the country’s biggest private contractor Laing O’Rourke posted a turnover of £4.3bn and a pre-tax profit of £18m. A return to profit from last year’s annus horribilis – when it lost £288m – is welcome for sure, but £18m is underwhelming.
At the end of July, Sir Robert McAlpine said it had lost more than £100m in its last financial year.
More and more, the issue of margins and risk has come to the forefront of firms’ thinking. There is no doubt that more contractors are pausing before taking on some jobs because of the risk involved. Core Five’s analysis seems to prove this.
Fixed-price contracts combined with inflationary shocks form a toxic mix in a low-margin industry
Exigere
There are things that can be done better by contractors: productivity, greater use of offsite, more innovation, cutting waste and duplication, less war-war and more jaw-jaw.
Still, in his first chief executive’s notes accompanying his firm’s latest accounts, O’Rourke boss Cathal O’Rourke said this: historically low margins were “not sustainable and act as a significant handbrake on the sector’s ability to invest in the transformative technologies that will create a step-change”.
Firms like ISG and Essex contractor Readie are no longer on this year’s list because they no longer exist. In its last set of accounts, Readie turned in a pre-tax profit margin of just 0.4% – and that was down from a parsimonious 1.6% the previous time. Frankly, why bother contracting with those margins?
As 2024 prepares to tick into 2025, contractors might do well to heed the comments in Exigere’s latest quarterly report. “Fixed-price contracts combined with inflationary shocks form a toxic mix in a low-margin industry where cash flow is king,” it said.
But this is only part of the problem, it added. “Legal disputes over substandard workmanship and misguided strategic decisions to enter new sectors without appropriate expertise have also affected profitability.”
Kier’s Davies is right to champion the sector. But it would be good if it made a bit more money to help pay for those inevitable rainy days. Here’s hoping 2025 might be when things start to change.
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