Top 150 Contractors and Housebuilders 2010

The news that broke on Monday 5 July was typical of what’s happening in the industry right now. The government announced that it was lopping 700 schools off the Building Schools for the Future programme. The Homes and Communities Agency’s budget was cut as well - though not as badly as initially feared. And Experian said in July that activity would contract over the next three months, albeit at a slower rate.

Gloomy stuff indeed, but there were shafts of light elsewhere. The Office for National Statistics revealed on Friday that construction output had jumped 6.6% from Q1 to Q2, the biggest rise since 1963. Although this was in part due to firms catching up on projects affected by the winter’s bad weather, it’s a positive sign.

And while last week the Ministry of Justice withdrew its application for a 1,500-capacity prison in Essex, Skanska was closing in on a £100m prison deal, order books at Morgan Sindall and electrical contractor T Clarke were up, construction activity was on the rise for the fourth month in a row, ISG was trading strongly and results at Travis Perkins, the builders’ merchant and a bellwether firm, were above expectations.

The week before, Taylor Wimpey said the average selling price of its houses had risen £14,000 in the first half of 2010, a jump of 9% compared to the same period in 2009.

The messages are certainly mixed, but despite the BSF blow - and a big blow it was - something resembling confidence is returning to parts of the industry. It’s still early days, of course, but for the first time in a long time the mood is not quite so bleak.

This is the backdrop to Building’s annual ranking of the top 150 contractors and housebuilders this year.

“A lot has happened this year,” says Andrew Wyllie, Costain’s chief executive.

“The general consensus is that the economy has turned a corner after a pretty challenging couple of years. There is more optimism than pessimism. As an industry, we went a long way down.”

Tony Williams, who runs specialist advice firm Building Value, is also feeling a bit more chipper. “The gloomiest period was last spring when world stock markets were on their knees. It was terrible.”

Now the UK has crawled out of recession, Williams says the industry can look forward with some genuine hope. “The building industry is naturally optimistic,” he says. “But modest economic growth is forecast this year and next. I’ll take that. It’s a hell of a lot better than this time last year. I’m not saying we’re out of the woods yet, but we’re further out than a year ago.”

Last year’s turnover figures have held up well for the top 20 firms. The biggest, Balfour Beatty, now has nearly £1bn more in revenues than it did in 2008, while the company in 20th place, ISG, has a turnover of £1.05bn compared with the £1.09bn recorded by Enterprise in the same spot a year before. In a billion-turnover business, in a recession, being off by £40,000 is by no means a slump.

But before we get carried away, let’s remember that according to the Construction Products Association, output fell by 12% last year, the sharpest drop since 1974, and there is plenty of evidence of the effect it has had on much of the industry. So any returning confidence must be labelled “fragile”.

“Last year was catastrophic in the sense of declining volume,” says Williams. “A few things, like BSF, were ticking along but otherwise it was a desperate year. This year’s figures should be worse because there is always a lag. But even though activity will go down again, it won’t feel as bad because there is a less of an edge-of-a-cliff feel.”

Housebuilders are the most noticeable sufferers. In 2008, the highest ranked was Barratt with turnover of £3.6bn; a year later the figure was £2.3bn.

Housebuilders have also been affected by the fact that many contractors have tried to anticipate the threat of falling turnover by bidding for smaller contracts, particularly in the housing sector. One main side effect of the recession is that bigger and bigger firms are chasing smaller and smaller contracts: one small firm told Building it was amazed to find that one of its recent rivals for a £1m house in west London was a contractor whose turnover last year was far above £1bn.

This trend, says Kevin Cammack, an analyst with Cenkos Securities, has benefits for both contractors and clients. “The big boys are looking at £4m or £5m contracts to generate turnover,” he says. “They are more attractive to clients because they believe they are safer dealing with a Balfour Beatty than a local builder. One underlying issue for clients is the financial strength of the builder and ability to attract the supply chain.”

Cammack believes tender opportunities and orders will pick up next year but won’t turn into contracts until 2012. In the meantime there are signs, he says, that private sector work and big commercial projects in London are starting to come back - the sort of stuff that could plug the hole left by BSF. “There are elements of infrastructure that are still good and there is waste water, water and energy,” he adds. “Work driven by regulation is difficult to end.”

Consolidation in the marketplace is probably inevitable as firms are bought out of receivership or taken over by rivals that have been less affected by the recession. Costain’s Wyllie says: “As projects become increasingly large you need horsepower to deliver them, both human and financial.”

Others predict a more radical shake-up. Alastair Stewart, an analyst with Investec Securities, says the recession will affect those firms that don’t really have much to distinguish them from the competition, apart from the fact that they’ve always existed. “Undoubtedly there will be more consolidation,” he says. “Smaller guys will fizzle out and the guys who will stay will be the specialists, those with the technical ability. There are a number out there like this who are really good at what they do.”

Cammack says savvy contractors have made the failings of others work for them. “One of the best ways to give yourself a growth boost is to inherit contracts from failed firms. Clients are usually desperate to get someone to finish the job off and firms can renegotiate the profit margin.”

McLaren Construction, a business that has thrived in the recession, is a good example.

It picked up the £68m City of Westminster college project from failed Hertfordshire contractor William Verry last year, and Kevin Taylor, its chairman, said in February that he had an £18m war chest to buy businesses that were struggling in the recession.

Philip Pringle, McLaren’s group managing director, says 2010 turnover will be up 11% to £145m and the aim is to hit £180m next year. This will be helped, he says, by a gradual easing in the downturn. “I think there’s more improvement this year. I’d give it five out of 10 last year, now it’s more like 6.5.”

There will be more cuts in this autumn’s Comprehensive Spending Review but Noble Francis, economics director at the Construction Products Association, predicts that activity will rise 1% next year and in 2012. He admits, though, that this could be revised “if the government puts in sharper cuts than anticipated”.

Still, perhaps UK construction is finding its true level. Peak activity in the boom hit £111bn in 2007 and this year it is forecast to be £95bn. “We’ve had a very good run for the past seven years,” says Williams. “Maybe around £100bn is a more normal figure.”

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