It is wonderful to hear so many people say how much they enjoy working in the construction industry.
For many it’s the satisfaction of being part of a team that creates a new building that is appreciated by the customer, or restoring an old building to its former glory.
We are a well paid industry too, with the vast majority of craftsmen and managers earning significantly above the national average. Our construction sites are also safer places for people to work than they’ve ever been before.
But what is often overlooked is how profitable parts of the industry are and potentially how profitable our whole industry could be.
The price is right
There are very few others that have such low start-up costs and benefit from monthly valuations. These two factors facilitate companies achieving returns of 25 per cent or more on shareholders’ funds when making net profit margins as low as 2 per cent.
“Positive cashflow often enables rapid growth without resorting to outside funding”
This positive cashflow often enables rapid growth without resorting to outside funding.
It’s one reason why construction companies often feature prominently in the Sunday Times fast-track growth companies league table.
Low-entry barriers inevitably lead to higher levels of competition, particularly during recessions when supply exceeds demand, major companies are lost and others struggle to break even.
But surely with a relentless focus on delivering a good service to our customers and the implementation of good business practice, there is no reason why these companies cannot improve their net margin by 1 per cent per year.
“Government and wider society is increasingly recognising the need to invest in high quality infrastructure”
In doing so they join the band of successful companies achieving 2 per cent net margins, and return on shareholders’ funds of 25 per cent within as short a period as two years.
Maintaining profitability then requires an ongoing focus on people, delivery and best practice, which can of course often prove challenging.
Nevertheless, I am very positive about our industry’s long-term prospects for three simple reasons:
- Government and wider society is increasingly recognising the need to invest in high-quality infrastructure from houses and schools, to power stations and transport systems.
- The loading of more risk onto contractors is forcing us to play the central role in the delivery of projects; moving us from being a commodity supplier to a provider of a value-adding service, with procurement routes reflecting this new pivotal role.
- The relatively high salaries we now pay will allow the industry to compete with other industries and professions for the best talent available.
Companies that grasp these new challenges have every chance of achieving significantly more than 25 per cent return on shareholder funds on a regular basis, provided of course that they remember the importance of identifying and avoiding loss-making projects.
But if making money is not the prime driver, we can all fall back on the satisfaction of creating something new and special for our customers.
Mark Beard is chief executive of Beard