黑洞社区

黑洞社区鈥檚 list of the UK鈥檚 Top 150 contractors and housebuilders paints a picture of an industry in probably its best shape for some years. Turnover for both contractors and housebuilders is up sharply, topping 拢100bn for the first time in the industry鈥檚 history, while contractors saw their profit margins finally start to rise 鈥� slightly 鈥� after near constant decline since 2010.

However, while housebuilders are largely debt free and look in good shape to face whatever crazy political and economic mud is thrown at them in the year ahead (see Housebuilders 鈥� Strong and Stable, overleaf), for contractors it is only in comparison to the dire performance of the recent past that the picture seems positive. Carillion is still in place as the UK鈥檚 second-biggest construction firm by total turnover, but the firm鈥檚 profit warning 鈥� issued earlier this month, after this data was compiled 鈥� casts a long shadow over tables topped by a distinctly unhealthy first tier. Laing O鈥橰ourke too, still the UK鈥檚 second-biggest contractor by contracting turnover, remains on the sick bed, joined also this year by fellow top 10 players Kier and Interserve, while Balfour Beatty, reporting a profit margin of just 0.09%, is only slowly convalescing after four years on the operating table.

If these problems can beset the UK鈥檚 biggest and strongest firms, then how much more perilous is the market for the smaller players with seemingly less balance sheet strength? And what do these figures say about the capacity for contractors to navigate the inevitable political and economic uncertainties of Brexit and the hung parliament?

Strong growth

First, then, the relatively good news. The turnover of the Top 150 housebuilders and contractors rose overall by 8.8%, from 拢92.1bn to 拢100.2bn. With many of the smaller firms outpacing their larger rivals, the average turnover growth for individual businesses was a very rapid 13%. And the growth was not centred just on housebuilders: contracting-led businesses grew at very nearly the same rate. That average also hides stellar performances from individual firms like Winvic Construction, which near doubled in size to a 拢417m turnover, and Multiplex Construction, which broke the 拢1bn barrier with 67% growth in turnover.

With many smaller firms outpacing their larger rivals, the average turnover growth for individual businesses was a very rapid 13%

More importantly for the health of the sector, contracting firms saw growth in pre-tax margins. The Top 50 contracting-led businesses reported an average margin of 1.78%, as against the 1.05% reported last year. While this is hardly much to write home about 鈥� it only returns margins to where they were in 2014 鈥� it at least shows a sector pointing in the right direction. As last year, it is often the smaller firms that are performing better - where losses from the likes of Interserve and Laing O鈥橰ourke give the top 10 an average margin of below 1%; for those ranked 50-100, the average is nearly 4%.

So, despite all the turmoil and delay of the year since Brexit, it is clear that, for some at least, market conditions have been relatively benign. Rick Willmott, group chief executive of 拢1.2bn-turnover family firm Willmott Dixon, says his company, which nearly tripled its margin in the last year, has benefited both from its position on frameworks and tighter management of risk. He says: 鈥淎s a construction sector we haven鈥檛 really seen a slowdown in capital projects that we might have expected, and we鈥檝e set a very clear strategic instruction not to bid on anything that doesn鈥檛 give us a margin.鈥�

Cooling off

But for many others market conditions, particularly since the Brexit vote and the slowdown in the London housing market, are not seen as so positive. A slight cooling off in demand has meant the clear whip hand held by contractors in negotiations with clients over the last couple of years has in many cases disappeared. Andy Steele, chief executive at 拢342m-turnover London and South-east contractor Osborne, says: 鈥淟ife carried on after the referendum, but it noticeably slowed, and took longer to get projects over the line. And some people have started to say now is the opportunity to turn the tables back on the contractors. But overall it鈥檚 in limbo 鈥� it鈥檚 neither a bear nor a bull market.鈥�

One example of how this subtle weakening has affected contractors鈥� day-to-day business is in procurement. Whereas the rising construction market of the past three years saw a proliferation of two-stage tendering, with clients needing to reassure contractors a job was theirs before being able to get detailed engagement, Steele says the last few months have seen a suggestion of a return to single-stage tendering. 鈥淪uddenly single stage is a question again, which could put us in a dangerous place as an industry,鈥� he says, citing the proliferation of below-cost bids on single-stage jobs during the recession.

Uncertainty is the big issue, politically and economically. clients are very uncertain about the future

Steve Beechey, Wates

However, Julian Daniel, managing director at construction management firm Blue Sky 黑洞社区, says the reality is that it shows a market levelling out, with a resurgence, too, in construction management when appropriate. 鈥淲here in the recession most of what you got for a few years was single stage, and for the last two years all you鈥檝e had is two-stage, now there鈥檚 a market for each 鈥� single stage tendering, two-stage tendering and construction management where it makes sense,鈥� he says, saying the experience of rising prices in the last two years has left a lot of clients 鈥渧ery negative鈥� about two-stage procurement.

It might be tempting to see this overall 鈥渓evelling鈥� in the market as a welcome respite from the soaring price rises of the last two years and the spiralling declines before that. But it shouldn鈥檛 be mistaken for stability: uncertainty about the future and potential volatility is great as it鈥檚 ever been. It鈥檚 more that big negatives risks 鈥� Brexit, labour shortages, potential interest rate rises, materials prices 鈥� seem temporarily balanced out by positive indications on infrastructure investment and underlying commercial and residential demand. Steve Beechey, group strategy director at contractor Wates, says: 鈥淯ncertainty is the big issue, politically and economically. Clients are very uncertain about the future, it鈥檚 very hard to know what鈥檚 going to happen in policy direction too. It鈥檚 making it a very difficult time for contractors.鈥�

Risky business

Nothing exemplifies the potential risks in the current contracting market as much as 拢5.2bn-turnover Carillion, which earlier this month announced it was writing down 拢845m against underperforming contracts, of which 拢375m related to the UK, sparking a 70% collapse in its share price in the week of the announcement. Kevin Cammack, analyst at Cenkos, estimates its financial difficulties could see it having to halve the size of its construction business in the next two years.

While few firms, with the exception of Balfour Beatty, have the same scale of overseas business as Carillion, domestically many will have suffered similar pressures. Cammack says: 鈥淭he Carillion news tells you that those firms that were doing fixed-price work when the market was recovering in 2014/15 have been increasingly exposed by cost inflation in the supply chain which has been catching them out.鈥�

Cammack believes that increasingly ruthless claims management by clients has left contractors that have indicated they are exiting or reducing workload in a sector finding it very hard to get paid. 鈥淭he client is often so commercial that when they can see the weakness of your hand, getting paid is very difficult,鈥� he says.

It鈥檚 like a tough away game. You have to put in a gutsy performance and not mind if it鈥檚 a bit messy 鈥� but you鈥檙e pleased to come away with 1-0

Andy Steele, Osborne

Carillion鈥檚 experience also demonstrates the perils of chasing turnover by acquisition, Cammack says 鈥� with Carillion spending hundreds of millions of pounds over the last 15 years buying businesses such as Mowlem, Alfred McAlpine and Eaga, contributing to its now problematic debt mountain. Kier, for example, has concluded three years of rapid growth with a 拢15m loss. While not all currently fast-growing contractors have got there through acquisition, targeting turnover growth can lead to a loss of focus on maintaining margins. Osborne鈥檚 Steele says the combination of businesses on a targeted growth path with the current market 鈥渃ould be a very very dangerous moment. It becomes quite a risky time,鈥� though he adds he doesn鈥檛 see any rivals 鈥渂uying鈥� work at very low prices yet.

Willmott Dixon鈥檚 Willmott, whose firm saw turnover fall back in 2016, agrees there are big risks to growing too quickly. 鈥淲hen we鈥檝e grown fast in the past, it鈥檚 almost impossible to tell if the people you鈥檙e recruiting are good people for at least a year. And if they鈥檙e starting on new contracts, you haven鈥檛 got a cat in hell鈥檚 chance of knowing how that鈥檚 performing. Growth through acquisition is even more risky,鈥� he says.

One business that has been on a rapid growth trajectory is Mace, which came close to hitting its 拢2bn 2020 turnover target three years early in 2016. While its construction chief operating officer Gareth Lewis utterly rejects the idea it has been chasing turnover, its 2016 year-end results did see its first fall in pre-tax profit in its 26-year history 鈥� falling from 拢36.2m in last year鈥檚 results to 拢10.7m this year 鈥� and he says the firm has since evolved its approach. 鈥淭he question is now how do we get margin improvement. Now we鈥檙e able to be a little more selective, and we鈥檙e much more cautious on high-risk projects,鈥� he says. This changing approach has seen the firm introduce monthly 鈥済ateway reviews鈥� on major projects, and reduce its exposure to high-rise residential work.

But overall, says Lewis, the market is positive and the firm now has its largest ever pipeline of work, at 拢6bn 鈥� clearly for some, life is still good. The key for most contractors in this curate鈥檚 egg of a market is staying confident enough to avoid taking on projects which will be their problem jobs two years down the line. Osborne鈥檚 Steele says: 鈥淚t鈥檚 a strange market. Using a football analogy it鈥檚 like a tough away game. You have to put in a gutsy performance and not mind if it鈥檚 a bit messy 鈥� but you鈥檙e pleased to come away with 1-0.鈥� Right now, many contractors would be happy enough with that.