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How to compete in new era of consolidation

The UK economy continues its expansion and the construction industry has now grown for two consecutive years, with the majority of businesses seeing a return to growth and enhanced profitability.

However, in the last quarter industry growth appears to have stalled and the forecast is generally flat.

As a result, whereas some businesses have recovered solidly from the recession and are well positioned to weather future storms, other companies are struggling with this new market reality and show limited or no signs of recovery. 

M&A activity, such as the takeover of Mouchel by Kier and Carillion’s unsuccessful approach to Balfour Beatty, signals a shift taking place in the sector.

In addition, we are seeing exploratory interest from overseas investors who sense an opportunity for consolidation and potential acquisitions of UK companies at lower values. 

What makes a winner?

Signals from the market suggest this trend will accelerate and we expect the industry to consolidate further. The winners will be those businesses with specific characteristics:

  • £5bn-plus in revenue
  • Around 5 per cent profit before tax
  • Five services lines or business units

However, some businesses in the industry continue to struggle, with loss-making contracts offsetting profitable jobs and depressing margins. 

“Increasing consolidation sees leading players building scale to effectively protect themselves from the market”

Furthermore, there are signs that contracts priced at low margins at the height of the recession are now flowing through into reported results.

While some in the sector have already taken steps in the right direction implementing flexible, robust operating models that equip them to deal with this changing landscape, there are still those that need to catch up to compete.

How to compete

In an industry where skills are in short supply and scale advantages are becoming increasingly important, businesses need to:

  • Manage risks across the contract lifecycle and avoid contract contagion;
  • Balance the portfolio of businesses generating both profit and investment returns;
  • Focus on top-line growth while maintaining control of working capital;
  • Deliver effective and recurring cost reductions throughout the value chain;
  • Invest in efficient back-office processes and underlying IT that provides for low-cost delivery and transparent reporting.

These are interesting times for the UK construction sector.

Increasing consolidation sees leading players building scale to effectively protect themselves from the market, while other companies have struggled to return to growth and are facing an uncertain future from a challenging start.

This uncertain outlook will have both winners and losers.

Michel Driessen is a partner at EY; Tim Wainwright is a director at EY

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