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An era of dominance is coming to an end. This will almost certainly be the last year that Amec will lead 黑洞社区鈥檚 Top 150 contractors (in previous years, Top 100) for a long, long time.

Amec, the Goliath of the industry, is taking note of the successes of some of the Davids out there and has learned an important lesson: big doesn鈥檛 always mean best. Although it has narrowly edged out Balfour Beatty yet again to be the biggest contractor by turnover 鈥� 拢4.943bn to 拢4.938bn 鈥� the company has not performed well of late, having made a pre-tax writedown of 拢78m in June.

So the company is to split, chief executive Sir Peter Mason having decided that the business had grown unwieldy. Although it has yet to be signed off, the demerger will result in an oil and process business that will retain the Amec name, and a UK infrastructure firm. This should result in higher margins for both new companies 鈥� the current Amec has an operating margin of just 1.1%, meaning that the big beast of British construction gets a return on all those billions of pounds that is far lower than the likes of Huddersfield-based contractor Marshall Holdings, which has an operating profit of 11% on a relatively puny 拢137m turnover.

Indeed, only Keller is in the top 10 by both contracting turnover and operating margin, which suggests that smaller firms, like David with his leather slingshot, can be more effective than Goliath-like major contractors.

Unlike Goliath, though, big contractors get another chance, and many are clearly looking to drive up their margins. This would afford them greater financial security if there was a big hit on a contract in delays or cost overruns, which, if large, could virtually wipe out a whole year鈥檚 profit.

For a start, there has obviously been pressure by contractors on clients as the average contracting margin has increased from 0.8% in 1995 to 2.25% last year. And contractors are becoming cuter in their ways of boosting the margin.

Mike Foster, construction sector analyst at KBC Peel Hunt, points to Galliford Try, which sits at 28th with a turnover of 拢726m in the main table. A growing company that is likely to hit more than 拢1bn in turnover this year because of its recent acquisition of Morrison, its pre-tax margin is currently 2.2%, but is expected to grow by 0.5% 鈥� 鈥渋t doesn鈥檛 sound much, but that鈥檚 a lot in construction terms,鈥� says Foster.

Credit: Miles Cole

The company will be able to do this because it is holding 8% of its turnover in cash 鈥� a sign that clients respect the company as it means it is being paid upfront 鈥� which is earning interest in the bank. Although interest rates are fairly low at the moment, Foster believes that this will still result in the company鈥檚 margin increasing to 2.7% by 2007, and therefore above the industry average.

The importance of margins is perhaps even better demonstrated by the housebuilding sector. With only 1983 homes sold last year, McCarthy & Stone is ranked just 12th by sales volume. But with a staggering 38.6%, it tops the operating margin league of housebuilders.

McCarthy & Stone has a virtual monopoly over the retirement homes market, with barriers to entry high for people who wish to set up shop in the sector, so it is nigh-on impossible for others to replicate this kind of margin. But it does still demonstrate the advantages of high margins. Although not the biggest housebuilder, it is highly rated by the City as a result of its profit, which is the reason why the company is the object of desire in a bidding war.

Prior to the board鈥檚 disclosure that a third party was interested in buying it, the company was valued around the 拢780m mark 鈥� already a premium given its 拢326m turnover 鈥� but will fetch about 拢1bn, should one of the property entrepreneurs, including the Reuben Brothers or Vincent Tchenguiz, or one of the investment houses, that are pursuing it finally snap McCarthy & Stone up. In short, a high margin attracts big bids and a fantastic return for the shareholder.

This does not mean that size is of no importance. Balfour Beatty boss Ian Tyler insists that he is not worried about whether his firm is the biggest beast in the jungle. Yet this nonchalant attitude is not reflected in the company鈥檚 aggressive growth strategy, with acquisition being followed by acquisition 鈥� it bought regional contractor Birse last month for 拢32m and is known to have approached others with a view to a similar deal.

There is a certain cache and glamour to being the biggest, and it does mean that they can bid for the major jobs, be it PFI contracts or the 2012 Olympics. But it is not the only way to judge a contractor, and the companies we鈥檝e picked out here are evidence of this 鈥�