Contractors still struggling to hike margins over the 2% mark

Margins at the top 50 contractors have increased significantly but are still below the 2% mark, according to Building’s latest Top 150 contractors and housebuilders survey.

Average margins among the group rose from 1.05% to 1.78% since last year’s survey - an increase of two-thirds - but still some way short of the figures a number of contractors have set themselves in years to come.

Earlier this year, Leo Quinn, the boss of UK’s biggest builder Balfour Beatty, said he wanted the business to make operating margins of 5% from 2020.

And Paul Cossell, the chief executive of ISG - now delisted from the stock exchange after its takeover by US private equity firm Cathexis last year - said at the start of this year that 5% margins are achievable in the long run.

Others have set lower margin targets in the next few years but still significantly higher than the current average of 1.78%.

Galliford Try boss Peter Truscott said at the firm’s interims earlier this year he wants its construction business, which has been hit by £98m of costs on problem contracts, to be making a margin of 2% by 2021 while Bam chief executive Graham Cash told Building last month he is eyeing margins of 3% from 2020.

But the survey paints a gloomy picture for top contractors’ hopes of reaching margins even approaching the numbers talked about, with the average margin for the country’s 10 biggest builders below 1%.

In contrast, the firms ranked 50-100 posted an average margin of 4%.

Turnover of the top 150 contractors and housebuilders rose nearly 9% to £100.2bn with smaller firms seeing average turnover increase by 13%.

But contractors are being hit by a slowdown following last summer’s EU referendum while uncertainty has been increased by last month’s hung parliament.

Steve Beechey, group strategy director at contractor Wates, said: “Uncertainty is the big issue, politically and economically. Clients are very uncertain about the future, it’s very hard to know what’s going to happen in policy direction too. It’s making it a very difficult time for contractors.”

Chief executive of Osborne, Andy Steele, added: “It’s a strange market. Using a football analogy, it’s like a tough away game … you’re pleased to come away with 1-0.”

Some other contractors questioned those with a strategy of growth through acquisition. Rick Willmott, group chief executive of £1.2bn firm Willmott Dixon, said: “When we’ve grown fast in the past it’s almost impossible to tell if the people you’re recruiting are good people for at least a year.”

The country’s second-biggest contractor, Carillion, has been hit with a £845m writedown against underperforming contracts. The firm has spent more than £1bn buying rival contractors Mowlem and Alfred McAlpine and solar panel firm Eaga in the past 11 years.

Carillion will announce the outcome of a strategic review at the business when it publishes its half-year results this September.