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Specialist margins on the rise as clients bypass tier ones

Specialist contractor margins are growing as they take on more risk and contract directly with clients, the 2018 CN Specialists Index has revealed.

The 70 subcontractors analysed by CN for its annual review of the specialist market recorded an overall increase in median pre-tax margin, rising from 5.5 per cent in their previous accounts to 6.7 per cent in their latest financials.

The top 10s of six out of the seven specialisms covered posted increases in their median margin in their latest results.

Ground engineering proved the stand-out performer, with median margin increasing 3 percentage points from 5.5 per cent to 8.5 per cent.

Concrete and building envelope specialists also saw significant increases in median margins of around 1.2 percentage points.

Margins for demolition and steel specialists were broadly flat on last year, but remained around 7 per cent.

The M&E sector was an outlier with significantly lower median margin of 0.6 per cent. However, this was an improvement from 0 per cent in the top 10’s previous results, and the number of firms making a loss fell from five to three.

The one sector to see profitability fall was scaffolding, where the top 10 firms’ median margin dropped 0.4 points compared with their previous results to 6.7 per cent.

Firms appear to have pumped their improved margins back into their balance sheets, with cash reserves up and the median working capital ratio increasing from 1.36 to 1.43.

Subcontractors said the growth in margins was in part driven by an increase in direct work and in the popularity of construction management model.

“Probably half our work is direct with clients now or construction management,” said Jason Knights, managing director of Wates subsidiary SES Engineering Services.

“We’re seeing contractually there’s a lot more construction management about.”

The sentiment was echoed by demolition contractor Erith’s director David Darsey, who said the firm did relatively little work for tier ones in the traditional sense and worked directly for clients much more.

Swift Brickwork managing director Mike Walsh said the shift in the contracting approach was due to the high skillset specialists had built up.

“What we’ve seen in the tier ones is their skill to build complex projects has become less, so their reliance on tier twos is ever increasing,” he said.

The boost in profit margin was attributed to a risk premium on the jobs for specialists, according to the firms CN spoke to for the report.

Erith reported a 6.7 per cent margin last year, and Mr Darsey said the investment in the firm’s capabilities allowed it to manage risk better and capture higher margins.

“They were high-risk projects [in 2017], but they’ve gone very well,” he said.

NG Bailey chief executive David Hurcomb also said a focus on risk had been central to an improved 2018 performance.

Concrete specialist P J Carey’s chief executive Steve Regan told CN his firm had also structured itself to understand the engineering needed on projects, which had helped it to understand the risk “a lot better”.

CN Specialists Index 2018

How are the industry’s specialist firms faring? Find out in this year’s index.

Readers' comments (2)

  • For clients removing the tier one contractor is like removing a ‘middle man’. It reduces costs to them for what they must perceive as little value - or they’d pay.

    Tiers 2’s / Specialists getting more profitable simply reflects the difference the Tier 1 put on for me.

    For ALL parties to ‘reduce risk’ we should be looking to Modern Methods or Offsite. Manufacturing is BETTER controlled than construction and thus LESS RISKY. Less risk, more efficient, faster thus improved cash flow. Heaven forbid standardised components (as UK Govt have called for).

    The model IS changing and we’re all looking around asking why, rather than embracing and getting on with! Refer to article on non smart phones and Mobile industry and taxis v Uber. We’re not looking to good in these comparisons!

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  • its no wonder the M&E median profits are so low at 0.6%, the main contractors see the package that's typically 20% on most projects and upwards on complex jobs as a target for their commercial teams,


    PM

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