黑洞社区

The top line figures from 黑洞社区鈥檚 annual listing of the UK鈥檚 150 biggest contractors and housebuilders make for encouraging reading for the firms involved, if not the industry as a whole. While overall construction output fell 8% in 2012, revenues among the 150 biggest firms in the sector rose by 2.9%, from 拢79.97bn in 2011 to 拢82.29bn, following an increase of 3% between 2010 and 2011.

It may be of little comfort to small and medium-sized companies, but this disparity between how the industry鈥檚 biggest players perform and construction as a whole is to be expected. 鈥淲hen the market is buoyant, every man and his dog gets a piece of the action, but when the market shrinks or gets tighter the majors take a bigger share,鈥� says Tony Williams, an analyst at 黑洞社区 Value.

What is also evident from this year鈥檚 listing is that performance varies significantly between sectors. So who have been the winners and losers?

Revenues from traditional contracting work among the 150 were down a further 1.7% in 2012 - to 拢44.04bn from 拢44.79bn in 2011 - having recorded declines every year since the financial crisis began in 2008. And it should be remembered that these big firms are almost certainly doing better than the smaller ones.

Conversely, the last year saw a significant comeback by the UK鈥檚 biggest housebuilders, which partly explains why revenues among the top 150 are up overall. Between 2011 and 2012, housing revenues among the top 150 increased 16.8%, from 拢12.56bn to 拢14.67bn, although housing turnover is still some way off the pre-crash peak of 拢24.40bn recorded in 2006.

The big companies have been switching more towards services. There are higher margins, longer-term revenue streams and less risk

Stephen Rawlinson, Whitman Howard

What鈥檚 more, it is already pretty clear that the big housebuilders鈥� 2012 success was no flash in the pan. Earlier this month a clutch of volume housebuilders reported strong results and trading conditions boosted by government efforts to stimulate the market.

For instance, Barratt said it beat market expectations during the first six months of 2013, with its sales rate up 17.9% on the previous year, and Taylor Wimpey said it would report increasing profit for the first half of 2013. Similarly, Bovis Homes reported a 40% increase in private reservations in the first half of 2013 compared with the same period in 2012.

Once again, however, the experience of the big firms differs significantly from the private housing sector as a whole. 鈥淒espite all the government policies to stimulate housebuilding, private starts fell by 7% last year,鈥� says Noble Francis, economics director at the Construction Products Association (CPA). 鈥淗owever there is a big difference between what鈥檚 happening at major housebuilders and SMEs. The major housebuilders all reported that they鈥檇 increased units and had margins around 10%-12% last year. The majority of those are focusing their work around Greater London and the South-east, where you鈥檝e got higher prices as well.鈥�

This year鈥檚 top 150 also shows that revenues for services and facilities management (FM) work were up significantly in 2012, following strong growth in 2011.

The combined revenues for services and FM came to 拢19.61bn in 2012, compared with 拢18.41bn in 2011 and 拢16.84bn in 2010. What鈥檚 more, services and FM work increasingly constitutes a greater proportion of the top 150鈥檚 overall revenue. Back in 2007, the sector accounted for just 15% of the total compared with 24% last year.

According to Stephen Rawlinson, an analyst at Whitman Howard, the move towards greater reliance on services and FM revenues makes good business sense, particularly at a time when contracting work is less plentiful and less profitable. 鈥淥bviously these companies have been switching more towards services,鈥� he says. 鈥淭here are higher margins to be had, longer-term revenue streams and less risk.鈥�

The CPA鈥檚 Francis notes that Carillion really led the way in terms of major contractors bidding for and winning more services and FM work. 鈥淔ollowing Carillion鈥檚 lead, it鈥檚 an area that a lot of companies want to get into, if only because it鈥檚 more stable than general construction because it鈥檚 long-term framework contracts and steady work,鈥� he says. 鈥淪o, when a recession happens it鈥檚 not going to collapse.鈥�

It鈥檚 always easier to chop an overhead internally and have an expenditure on a monthly or quarterly basis

Tony Williams, 黑洞社区 Value

黑洞社区 Value鈥檚 Williams adds that it is likely that there has been an increase in the volume of services and FM contracts up for grabs in recent years, mainly as a result of the recession and public and private sector clients looking to cut their overheads by outsourcing. 鈥淏oth the government and the private sector would be looking at their own overheads and it鈥檚 always easier to chop an overhead internally and to have a revenue expenditure on a monthly basis or a quarterly basis,鈥� he says.

Williams adds that contractors such as Laing O鈥橰ourke, Interserve and Mears have all increased their focus on services and FM. Kier鈥檚 拢221m acquisition of May Gurney earlier this month, which pushed the contractor from sixth to fourth in the table, designed to give the contractor a much bigger FM offering, and is perhaps the most tangible example of the trend.

However, the higher number of companies bidding for services and FM work has inevitably increased competition in the sector, the results of which are already evident. Back in 2008, the average operating margin that top 150 firms achieved for services and FM contracts was 5.6%. In 2012, the equivalent figure was 4.9%. 鈥淚鈥檓 not at all surprised that there has been some margin attrition there,鈥� says Williams.

Clients are also less likely to get locked into long-term contracts with high margins than they once were, according to Whitman Howard鈥檚 Rawlinson. 鈥淚 think that the customers are getting a bit smarter, particularly government,鈥� he says. 鈥淎fter 10-15 years of increasing outsourcing it鈥檚 now learning to do it better.鈥�

So, while the overall picture for this year鈥檚 top 150 is one of solid, if not massively exciting, growth, it鈥檚 clear that this positive trend is propped up by an increasingly strong housing market and an ever greater reliance on picking up services and FM contracts. The industry will only feel that it has turned a corner once contracting revenues finally begin to grow.

YEAR-ON-YEAR REVENUE INCREASE/DECREASE 2006-12 BY SECTOR

Year	Contracting	Housing	Property	Services/FM	Other	Total
2012	-1.7	16.8	-7.5	6.5	-5.5	2.9
2011	-0.1	-1.9	15.9	9.4	34.9	3.0
2010	-6.2	1.0	-13.3	-10.3	-17.9	-6.5
2009	-5.8	-30.4	-49.5	25.0	9.9	-5.5
2008	18.5	-16.6	-37.6	21.1	19.5	8.5
2007	16.5	-10.9	48.1	12.0	-50.8	3.2
2006	4.5	10.3	-7.8	-16.3	101.9	5.8

 

AGGREGATE % OPERATING MARGINS 2006-12 BY SECTOR

Year	Contracting	Housing	Property	Services/FM	Other
2012	2.1	10.8	10.2	4.9	6.5
2011	2.8	8.3	6.8	5.5	5.7
2010	3.3	6.1	1.2	5.5	5.1
2009	3.0	2.4	-4.9	5.4	6.2
2008	2.9	10.4	12.1	5.6	6.2
2007	3.0	16.1	14.5	4.9	7.5
2006	2.4	15.9	22.7	4.5	4.7

Directors鈥� pay: A 鈥榟ealthy鈥� fall?

Over the course of the recession the remuneration of company directors at the top 150 firms has, in relative terms, fallen further than average wages. The overall pay of the firms鈥� highest paid director on average increased by 7% between 2008 and 2012, which when general inflation is taken into account means that real wages fell 9.1%. This is compared with a 9.3% dip in average wages. 鈥淭heir bonus incentives have obviously taken the hit,鈥� says Tony Willams, an analyst at 黑洞社区 Value. 鈥淚鈥檓 sure that their basic salaries are still intact, if not better than they were.鈥�

Williams argues that the fact that directors鈥� remuneration has performed worse than average salaries shows that performance-related schemes are, to some extent, working as intended. 鈥淚 think that鈥檚 healthy. It shows that they are putting their hands up,鈥� he says. 鈥淚t鈥檚 good that if you鈥檙e not creating the earnings then you鈥檙e not getting the incentives. I would applaud that - I think that鈥檚 very positive news.鈥�

Not everybody is quite so positive, which is perhaps unsurprising given that the average wage of a top 150 boss remains almost 15 times higher than that of the average employee - 拢560,000 compared with 拢38,800. Stephen Rawlinson, an analyst with Whitman Howard, says: 鈥淭hey鈥檙e already massively overpaid anyway and given what those chimps have produced over the last few years they don鈥檛 deserve to get more money for it. I think that they are already massively well paid and it鈥檚 hard to justify.鈥�

HIGHEST-PAID DIRECTORS 2012* (拢000)

Company	2011	2012	% change
Bowmer & Kirkland	4,797	3,152	-34.3
Fairview Holdings	426	2,660	524.4
Interserve	900	1,739	93.2
Persimmon	1,658	1,729	4.3
Taylor Wimpey	1,502	1,661	10.6
Barratt	1,028	1,637	59.2
Bellway	1,240	1,382	11.5
MITIE	1,266	1,359	7.3
Higgins Group	1,159	1,287	11.0
Morgan Sindall	976	1,170	19.9

* Excludes pensions

DIRECTORS WITH THE GREATEST PAY INCREASE 2011-12* (拢000)

Company	2011	2012	% change
Ardmore Construction	60	489	715.0
Fairview Holdings	426	2,660	524.4
Morrison Utility Services	250	530	112.0
Clugston	263	541	105.7
Interserve	900	1,739	93.2
Keller	436	821	88.3
John Sisk & Sons	425	797	87.8
Miller	624	1,164	86.5
Imtech Technical Services	352	637	81.0
Keepmoat	584	1,053	80.3

* Figures include salary and bonuses, excluding pensions, of the highest paid directors in each firm

Wages: That sinking feeling

Changes to average wages in this year鈥檚 top 150 follow a similar pattern to that seen in the rest of the economy. In other words, remuneration has failed to keep pace with inflation, leading to an overall fall in living standards.

In the last four years - between 2008 and 2012 - average wages at the 150 biggest contractors and housebuilders increased by 8.4%. However, the same period saw general inflation of 17.7%, meaning that real wages fell by 8.9%. Taken by itself that is a sobering statistic, but it is particularly so when one considers that before the 2008 crash, construction professionals had been used to strong year-on-year increases in real wages. Between 2004 and 2008, average wages in the top 150 firms increased by 26% which, with general inflation of 12.3%, means that real wages increased by 12.2% in the same period.

*The average wage is calculated by dividing a firm鈥檚 total wage bill by the average number of salaried staff it has over the course of a year. Note that average wages may change for a variety of reasons and that an increase or decrease does not necessarily mean that individuals鈥� remuneration has changed for better or for worse.