UK contractor finances ‘unsustainable’ as margins fall

The finances of the UK’s main contractors are “unsustainable” at current levels, with firms suffering plummeting profit margins, declining cash balances and increasing supply chain pressures, a major new analysis has warned.

The analysis by KPMG of more than a dozen of the UK’s largest contractors, shared exclusively with Building, revealed the financial position of many firms remains weak, despite the industry’s return to sustained growth following the recession, with operating margins in construction falling nearly 60% from a high of 2.8% across the industry in 2010 to an average of just 1.2% in 2013.

The report, which analysed the operating margins, cash balances and order books of 14 Tier 1 contractors from 2007 through to 2013, also concluded that persistent inflation in subcontractor markets meant the negative pressure on margins was unlikely to ease off any time soon.

KPMG said this was highlighted by the several profit warnings issued by major contractors, such as Balfour Beatty, in the first half of 2014.

The report also found that net cash balances declined in 2013 and are now close to half their 2010 peak, while cash generated from operations has all but dried up since 2010, with cash balances increasingly supported by significant sale of assets.

This week, Galliford Try reported bumper results, but its growth was largely driven by its housing business, with its construction business reporting flat revenue, a 38% fall in profit, and a construction margin of 1%, in line with many other firms.

Last week, Wates chief executive Andrew Davies warned that sluggish growth in contractors’ bottom line profit was “the real issue” for the industry at the moment and it would “take time for margins to return to previous levels”.

Richard Threlfall, KPMG’s UK head of infrastructure, building and construction said: “Contractors have been struggling with some of the most difficult market conditions ever encountered and even now - with all evidence pointing to sustained recovery - the industry faces real profitability challenges.

“Current margin and cash levels are unsustainable. With subcontractor rate increases and labour market shortages largely outside of contractors’ control, it is critical they continue to focus on improving their own efficiency.

“Ultimately, we believe contractors need to hang on until supply and demand for subcontractors and labour come back into balance, which we predict is still a year off.”