黑洞社区

This year鈥檚 top 100 is illustrative of the very different environment that the construction industry operates in today compared with a decade ago, when the economy was crawling out of recession.

Many of the roaring ogres of the construction world in the mid-1990s are now extinct, evolution having replaced them with leaner, meaner creatures. For example, 10 years ago 黑洞社区鈥檚 top contractors by turnover were Trafalgar House and Tarmac. They are now but a dim memory. Tarmac demerged its construction and materials divisions way back in the summer of 1999, the former becoming Carillion, seventh in this year鈥檚 table.

The then near-拢4bn-turnover Trafalgar House was eaten up by Norwegian engineering group Kvaerner in 1996, the construction division of which was in turn bought out by its Swedish neighbour, Skanska, just four years later. Indications of Trafalgar House鈥檚 future demise could be seen in 1993 when, despite being ranked number one by turnover, it made a loss of nearly 拢350m.

While these companies have fallen on leaner times, the growing beasts that were breathing down their necks in 1993 鈥� Amec and Balfour Beatty 鈥� top the chart for 2003, posting turnovers of 拢4.7bn and 拢3.7bn respectively.

Mike Foster wrote 黑洞社区鈥檚 article accompanying the contractors鈥� league tables in 1994. At the time he was with stockbroker Greig Middleton & Co; today he is an analyst at KBC Peel Hunt. Foster explains that today鈥檚 contractor is a far more efficient one than its mid-90s counterpart. An example of this is improved margins. Aggregate pre-tax margin was 6.2% in 2003 compared with just 2.9% in 1995. Over the same period, contracting margin has increased 1.3% to 2.1% and housing has more than doubled to 17.6%.

Contractors have been forced to make efficiency gains in the current low-inflation economy. Foster says: 鈥淚n the mid-1990s there was still the perception of high inflation 鈥� there was less need to squeeze all the efficiency out because prices and wages would keep growing.鈥�

Foster says that when he penned his article there was the very first inkling that contractors could plan ahead more, having ridden the Crest of the boom years and then suffered the bust that followed.

A steadying economy brought with it a very different type of client. Whereas in previous years the needs of the commercial developer, such as British Land, dominated the needs of the contractor, the mix on the client list has slowly diversified.

The commercial client was no longer just the developer that would sell the speculative building on at a high price. Foster points out that the likes of Morrison and Tesco emerged as commercial giants and were owner鈥搊ccupiers. They wanted their builders to consider whole-life costs more carefully, including factors such as improved sewage and fit-out.

Some contractors could see the changes coming 鈥� changes that were also to include a move towards greater public sector infrastructure spending and the outsourcing of utilities. The likes of Amec embraced it; some were forced into it (Costain becoming a disastrous loss-making business before re-emerging as a smaller, but more successful, firm focusing on infrastructure and oil); and others chose to exit the market altogether. In 1993, Costain was 34th in the pre-tax profit league, with 拢0.7m; in 2003 it made 拢16.1m.

What has surprised Foster is the survival of many companies that have both a contracting and housing arm. The boom and bust of the late 1980s and early 1990s had debunked the theory that the two sectors operated in different, but complementary, cycles 鈥� when housing was in a downturn, so construction revenue would hold that side of the business up and vice versa. In the early 1990s, both were in recession.

Foster says: 鈥淭he 1980s showed that the theory didn鈥檛 work in practice. As a result, in 1994, a lot of contractor-housebuilders were not happy. Although Wimpey sold off its contracting business, the surprise is that many that didn鈥檛 have survived.鈥�

Foster argues that a fairly benign economy has meant that the likes of Kierhave been able to stick with the housebuilder鈥揷ontractor model. Kier has certainly been something of a continuing success story. In the 1994 league it stood 13th by turnover and 20th by pre-tax profit. In 2004, it is 9th by turnover and 22nd by profit. Its housing arm alone also makes it a top 20 housebuilder.

In retrospect, Wimpey鈥檚 decision also proved to be a wise one. It decided to focus on the housebuilding market, and in 1996 made a 拢600m asset swap with Tarmac. Wimpey took Tarmac鈥檚 housebuilding business, while it handed over its construction and mineral divisions. In 2003, Wimpey was the UK鈥檚 top housebuilder by turnover, making nearly 拢2.9bn and knocking on the door of the FTSE 100. In 1993 it earned less than 拢1.6bn and sat at sixth in the contractors table.

The benign economy has not just been the saviour of the contractor鈥揾ousebuilder business model. More importantly, it has added stability to what was a tempestuous environment for most contractors in the 1990s. Trawling through the list of top 50 companies by pre-tax profit in the 1994 list reveals that 11 were in fact making losses and one, HBG, was simply breaking even. This year, the top 89 are all in profit. And contractors are happy to reward this success, in the boardroom at least, with the average pay of the best remunerated director up 123% from 1995 to 拢472,000. Evolution has spoken: today鈥檚 beasts are tougher 鈥� and richer 鈥� versions of their predecessors.