Despite increased production and easing of materials costs, profit margins have taken a hit among the CN100 from the top down as problem contracts take their toll.
Widespread evidence of industry recovery over the past 12 months, coupled with a 10 per cent increase in combined turnover for the top 100 contractors, might prompt the assumption that everything is looking rosy for UK construction.
Yet this year’s CN100 suggests that when it comes to margins, the recessionary hangover has continued to linger.
The average operating profit margin across the top 100 contractors has fallen to just 1.9 per cent, down from 2.4 per cent last year.
For the top 25 firms, the situation is even more challenging: these companies recorded an average operating profit margin of just 1.2 per cent,
down from 2.5 per cent in last year’s CN100.
Part of this decline can be attributed to much-publicised problem contracts and major losses that have affected the majority of top contractors over the course of 2014 and 2015.
Vinci’s operating loss of £187m this year was primarily due to problem jobs, including its £570m Nottingham Tram contract, while Balfour Beatty’s UK construction arm posted a loss of £317m as it continues to grapple with problem contracts.
Competition fierce as ever
PwC partner Chris Temple says the market remains highly competitive for companies across the board. “I think it’s still incredibly competitive out there - we’re all talking about the fact that the market will become easier over time, but we’re not necessarily seeing the effect of that yet,” he says.
Smaller firms have actually performed better in terms of profit margins over the course of the past 12 months, with the average profit margin among firms placed between 76 and 100 in this year’s CN100 remaining at 2.8 per cent, unchanged from a year earlier.
The 10 highest profit margins in the CN100, headed by Henry Boot with an impressive 19 per cent, primarily feature firms with a turnover of less than £200m.
Only two of the top 10 contractors by turnover – Galliford Try and Amey – are among the 10 highest by profit margin, with margins of 6.3 per cent and 6 per cent respectively.
Across much of the rest of the CN100, companies have seen a decline in their profit margins.
Mr Temple says this is due to smaller firms’ more cyclical nature and their lower costs.
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“Generally smaller firms have better cyclicality and a smaller overhead base - so when things start to go really well, a lot of that gets passed through to their bottom line,” he says.
“But for larger firms, the opposite happens: big firms tend to be more resilient in a downturn, but have found themselves entering into sectors they perhaps might not have done historically, for example, because they need to cover their overheads.”
Contractors ranked 26 to 50 by turnover saw average profit margin dip to 1.6 per cent this year, compared with 1.8 per cent last year, while firms ranked 51 to 75 saw their average margin drop to 2.1 per cent, down from 2.5 per cent over the same period.
Full impact still to come
Aside from problem contracts, where is pressure on profits coming from?
Compared with last year, materials costs have eased significantly - capacity has risen and materials shortages are no longer making the headlines.
Brick production has been ramped up, with major product manufacturers bringing more production facilities back into commission, while low inflation has contributed to relatively stable prices.
Despite this, Mr Temple warns that while increased production would suggest prices should begin to fall, the industry is yet to feel the impact of these changes in full.
“There’s no doubt we’re in an upturn in terms of the sector’s outlook - but the big question is labour rates”
Chris Temple, PwC
Materials costs may have eased, butlabour costs continue to put major pressure on contractors’ profit margins.
“Labour is still incredibly costly at all levels, and if anything that situation may be getting worse before it gets better,” he says. “For me, that’s the key input here that’s causing pressures on profit margins.”
Over the course of the past 12 months, availability of skilled trades, particularly bricklayers and carpenters, has been frequently highlighted by industry surveys as one of the increasingly crucial pressures that contractors are having to contend with.
Labour rates pile on pressure
Data produced by EC Harris suggests that a scarcity of available workers is driving a pattern of steadily escalating wage demands.
In the first half of the year, rates for carpenters rose by nearly 4 per cent, while rates for bricklayers were up by more than 3 per cent.
This data suggests labour rates are showing few signs of easing, meaning costs will continue to put pressure on contractors’ margins over the remainder of the year.
Looking forward to the 12 months ahead, it is these labour pressures that will be the big question mark hanging over contractors’ profit margins.
“There’s no doubt we’re in an upturn in terms of the sector’s outlook - but the big question is labour rates,” Mr Temple says.
“Will they continue to be tough, or will they ease? It’s a difficult question to answer.”
Combined with continued pressure on profits from problem contracts, this year’s CN100 offers proof that larger firms in particular are not out of the woods yet.