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Tier twos: Hitting the sweet spot

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While the biggest prime contractors struggle to make any margin at all, this year’s CN100 analysis shows that firms coming between £300m and £500m are trading with far bigger margins. 

This year’s CN100 report reveals that, on average, the UK’s top 25 contractors by turnover made a 0.2 per cent pre-tax margin in their most recent accounts.

Taking on projects with a high risk profile, without the built-in margin to cover cost increases and changes in scope, can lead to catastrophic consequences, as we saw earlier this year with Carillion.

What was the UK’s second largest contractor sank into liquidation in January. Since then, the depths of the company’s financial woes have been laid bare as a postmortem inquiry by MPs interrogated the failings among Carillion’s management.

The contractor’s deteriorating health was no secret, but the extent to which Carillion was running itself into the ground certainly was. The extent of its problems were so expertly hidden that it has left public bodies and clients alike publicly questioning whether any of Carillion’s competitors could also be at risk of teetering over the same cliff edge.

While this troubling scene has unfolded and major tier ones’ business models have come in for scrutiny, there is one pool of construction companies that is quietly thriving away from the headlines.

Companies turning over between £300m and £500m are making a median pre-tax margin of 4 per cent, according to this year’s CN100 analysis.

Only seven of these 16 firms are making margins below 4 per cent, with Watkin Jones posting the highest figure: a massive 14.3 per cent.

Although each company has individual characteristics and is exposed to different sectors, there nevertheless appears to be a sweet spot in which certain companies are making a healthy profit.

Why is it that the £300m-£500m band of contractors are hitting (and, in many cases, exceeding) the 5 per cent margin so publicly coveted by the UK’s biggest tier ones?

The vicious circle

Size could be one reason why some companies are comfortably reaching healthy margins while others struggle, says Applied Value analyst Stephen Rawlinson.

A large number of the contractors with turnover above £500m are plcs, and these companies “seem to believe they have an obligation to grow”, he says, chasing revenue in the pursuit of becoming even bigger.

Chasing cash often means taking on riskier projects. But when these projects go wrong, they go horribly wrong, Mr Rawlinson says – with serious consequences for the contractors involved.

He cites Carillion as an example of how this business strategy can damage a company. “There was a pressure to grow, so they [Carillion] went out to get more business,” he says. “They were making a loss and started to chase cash, taking on more projects.”

This meant Carillion took on risky projects such as the Aberdeen Western Peripheral Route, with its JV partners Balfour Beatty and Galliford Try left counting the additional cost of the AWPR since the firm’s collapse.

As the Aberdeen bypass and other major projects ran into difficulty, both here and abroad, it caused Carillion to haemorrhage precious cash, and was cited by the board as a major factor behind its liquidation.


CN100 2018 rank (by turnover)ContractorPre-tax margin – latestPre-tax margin – previousLatest accounts end-date
1 Balfour Beatty 1.7% 0.1% 31/12/2017
2 Kier 0.6% -0.9% 30/06/2017
3 Interserve -7.5% -2.9% 31/12/2107
4 Laing O’Rourke -2.3% -10.4% 31/03/2017
5 Morgan Sindall 2.3% 1.7% 31/12/2017
6 Galliford Try 2.2% 5.4% 30/06/2017
7 Amey -8.6% -2.0% 31/12/2017
8 Mace 1.2% 0.5% 31/12/2017
9 Skanska UK 0.7% 1.4% 31/12/2017
10 ISG 0.5% 0.4% 31/12/2017
11 Costain 2.3% 2.0% 31/12/2017
12 Wates 2.1% 2.3% 31/12/2017
13 Bouygues UK -3.9% 0.3% 2016-2017
14 Willmott Dixon 2.6% 2.3% 31/12/2017
15 Multiplex 0.4% 1.5% 31/12/2017
16 Bam Construct 2.0% 2.4% 31/12/2017
17 Sir Robert McAlpine -2.1% -5.0% 31/10/2017
18 Bowmer and Kirkland 6.9% 6.6% 31/08/2017
19 Vinci 2.6% 0.5% 31/12/2017
20 VolkerWessels UK 2.7% 2.6% 31/12/2017
21 Graham 1.7% 2.8% 31/03/2018
22 Robertson 4.1% 4.6% 31/03/2018
23 Murphy Group 1.7% 3.8% 31/12/2017
24 Bam Nuttall 1.9% 2.2% 31/12/2017
25 Engie Regeneration -10.9% 0.8% 30/09/2017
26 Morrison Utility Services 3.6% 3.9% 31/03/2017
27 Lendlease 2.4% -0.1% 30/06/2017
28 McLaren 0.5% 0.9% 31/07/2017
29 Renew 2.9% 3.7% 30/09/2017
30 Carey Group 3.5% 4.0% 31/03/2017
31 Eurovia Group 4.6% 3.2% 31/12/2017
32 NG Bailey 4.1% 3.7% 02/03/2018
33 Winvic 6.2% 5.2% 31/01/2017
34 Buckingham Group 3.9% 3.4% 31/12/2017
35 Keltbray 5.6% 6.4% 31/10/2017
36 Hill Partnerships 11.4% 10.1% 31/12/2017
37 JRL Group 7.0% 5.6% 31/12/2017
38 Northstone (NI) 1.2% 1.7% 31/12/2016
39 Ardmore 4.1% 1.0% 30/09/2017
40 Imtech 0.2% 0.0% 31/12/2017
41 Osborne 1.0% 0.9% 31/03/2017
42 McAleer & Rushe 4.0% 4.1% 31/12/2017
43 SSE Contracting -1.5% 4.2% 31/03/2017
44 Byrne Group 0.5% -3.6% 31/05/2017
45 T Clarke 2.3% 1.3% 31/12/2017
46 Watkin Jones 14.3% 5.0% 30/09/2017
47 Lakehouse -1.0% -10.9% 30/09/2017
48 North Midland Construction 0.3% 0.8% 31/12/2017
49 Higgins Group 2.3% 2.2% 31/07/2017
50 RG Carter 2.9% 2.8% 31/12/2016
51 Severfield 8.1% 6.9% 31/03/2018
52 Clancy 0.3% 1.3% 31/03/2017
53 Ogilvie 2.0% 2.1% 30/06/2017
54 Cape Industrial Services -26.8% 6.9% 31/12/2016
55 McLaughlin & Harvey 1.5% 1.1% 31/12/2017
56 Midas Group 0.3% 0.8% 30/04/2018
57 Spie -9.4% -4.7% 31/12/2016
58 FM Conway 9.3% 7.2% 31/03/2017
59 McNicholas Construction -14.7% 0.2% 30/06/2017
60 United Living Group 3.3% 3.5% 31/03/2018
61 John Sisk & Son -4.6% -4.2% 31/12/2016
62 Esh 1.6% 3.1% 31/12/2016
63 MV Kelly 5.2% 4.5% 31/05/2017
64 Rydon Group 4.1% 3.2% 30/09/2017
65 City Building (Glasgow) -2.6% -5.4% 31/03/2017
66 William Hare 1.1% 1.0% 31/12/2016
67 Michael J Lonsdale 3.3% 2.6% 30/09/2017
68 Morrisroe Group 7.5% 8.8% 31/10/2017
69 Seddon 2.6% 2.5% 31/12/2017
70 Forth Holdings 6.0% 3.6% 31/08/2017
71 Bechtel 9.5% -7.0% 31/12/2017
72 Eric Wright Group 3.0% 4.7% 31/12/2016
73 Cruden Holdings 5.2% 4.9% 31/03/2017
74 Dawnus Group 1.8% -4.8% 31/12/2016
75 Briggs & Forrester 3.1% 2.5% 31/10/2017
76 Tolent 2.1% 0.6% 31/12/2017
77 Clugston -0.3% 0.9% 31/01/2018
78 Babcock Rail 1.1% 4.9% 31/03/2018
79 SDC 0.9% 0.8% 30/09/2017
80 One Group Construction 3.9% 5.6% 31/12/2017
81 Hochtief UK -2.1% 0.7% 31/12/2016
82 Alun Griffiths 1.5% 1.2% 31/12/2016
83 Erith 6.7% 6.6% 30/09/2017
84 Lindum 4.8% 3.9% 30/11/2017
85 Novus 3.7% 3.3% 31/12/2017
86 Gilbert Ash 1.0% 0.2% 31/12/2016
87 RGCM 1.0% 1.0% 31/12/2016
88 Caddick Group 5.4% 12.8% 31/08/2017
89 Gratte Brothers 1.0% -0.9% 31/12/2017
90 Dodd Group 2.7% 2.7% 31/03/2017
91 E W Beard 2.7% 3.0% 31/12/2017
92 Shaylor Group 4.8% 4.7% 30/09/2017
93 Durkan Holdings 6.6% 7.2% 30/11/2017
94 Lorne Stewart -6.1% 1.0% 31/12/2017
95 Actavo -3.4% 2.5% 31/12/2016
96 GF Tomlinson 1.0% 3.7% 31/12/2017
97 Mulalley & Company 3.3% 4.2% 31/03/2018
98 Wood Group 10.3% 9.0% 31/12/2016
99 R J McLeod 16.2% 10.8% 29/10/2017
100 CJ O’Shea 15.1% 4.2% 31/03/2017

However, for companies in the lower turnover bands of under £500m, the business model is very different.

Tier two contractors tend to be privately owned and, being free of shareholder demands, can make more independent decisions on how to run the business, Mr Rawlinson suggests.

“They [privately owned tier twos] don’t need to take the work on or grow,” he says. “They can afford to focus on margin at the expense of revenue. There’s a size issue here: once you get above £500m and become a tier one contractor, the types and level of risk change.”

Handling risk

As well as the size of company, the type of work being carried out by companies sitting in the £300m-£500m band comes with a price tag.

Keltbray, for example, aims for a 5-10 per cent margin when tendering for work, according to its deputy chief executive John Keehan – much higher than the 2-3 per cent many main contractors target when bidding.

“Whereas main contractors are mainly subcontracting out risk, subcontractors have the skills and therefore need to invest in training and people”

John Keehan, Keltbray

The highly specialised work (and the investment this requires) is a primary reason why specialist contractors are hitting these higher margins, Mr Keehan believes.

“Whereas main contractors are mainly subcontracting out risk, subcontractors have the skills and therefore need to invest in training, people, plant, designers, engineers, scientists and guys on site,” he says.

In addition, main contractors tendering on 2 per cent cannot afford to take on a significant amount of risk, so instead they distribute it to the subcontractors delivering the work. This is another reason why subcontractor margins are therefore higher, Mr Keehan argues – because they are handling more risk.

However, Mr Rawlinson suggests specialist contractors can handle this risk more easily than main contractors.

“As a main contractor, you’re taking the primary risk,” he says. “You may be trying to aim for a 2 per cent margin and organising companies who are also trying to reach a [higher] margin. But as a subcontractor, you’re taking on a far smaller package of work and can therefore get your arms around [the risk] more easily.”

For JRL Group, its specialist contracting division was a primary reason the group achieved a 7 per cent margin in its latest accounts, according to chief executive Kevin Keegan. “A large proportion of our turnover is specialist subcontractor and supplier work, where margins are better,” he says.

Mr Keegan adds that the group’s in-house contracting and supply divisions allow it to handle risk better, helping deliver work on time and therefore avoiding the costs of over-running programmes. “There is more risk but also more opportunity when you’re doing the work yourself,” he says.

The art of being selective

As the government continues to pick over the carcass of Carillion, it has become clear that the failed contractor was taking on whatever projects it could get in an attempt to pursue cash and prop up the crumbling business.

“If you redirect wasted bidding costs into bids you have a higher chance of winning, that time is being invested in developing critical success factors” 

Philip Collard, MyConsole

However, selectivity is a key part of doing good business and boosting the bottom line, argues MyConsole chief executive Philip Collard.

MyConsole is a digital platform through which contractors can input data in order to compose and monitor bids. Mr Collard, who in 2015 published research with the University of Reading into bid costs, says companies are wasting money and resources on bids they have a lower chance of winning than others.

The 2015 research found that of the 179 firms surveyed (60 of whom were main contractors), those firms with a tender success rate of one in five were spending as much as 22 per cent of operational turnover on winning work.

CN100 2018 top bottom 5 margins graphic 2

CN100 2018 top bottom 5 margins graphic 2

Mr Collard estimates that main contractors could make margins of up to 8 per cent if they became more selective, choosing to work with the right clients and being truly collaborative with the supply chain.

“Selectivity is an issue here,” he says. “If you redirect wasted bidding costs and resources and put them into bids that you have a higher chance of winning, you’re not only saving time but that time is being invested on developing critical success factors, such as early client engagement, developing innovative solutions, visiting the site and client.

“Your proposal will be much better and stand out more, as you have more time to put into that bid and win it.”

For Keltbray, choosing which projects to take on and who to work for is a vital part of hitting a 5 per cent margin, Mr Keehan says.

In terms of selection criteria, he says Keltbray tends not to work with tier two contractors, and that the firm’s skillset lends itself to more complex projects. Choosing the right people to lead the business and oversee projects is another crucial factor, he adds.

“You have to have experienced people,” he says. “You need people down the line, not just up at the top, who are properly trained and know what they’re doing.”

Follow the lead?

All the signs suggest this band of contractors turning over £300m-£500m occupies a lucrative position in the industry.

Many are in demand by main contractors for their specialist skills, which are needed for delivering a variety of projects.

Though risk is passed down to their work by the main contractor, many of these firms can handle the risk effectively due to a combination of expertise, training and management. In addition, they can select which clients to work for and what projects they want more freely than larger plc main contractors.

The virtue of selectivity means these privately owned specialists can target work they are more likely to win. As a result, many are enjoying the spoils and making strong margins.

It begs the question: to what degree can the rest of the industry emulate their approach?

Setting the pace on margins

Eurovia: 4.6 per cent

Eurovia is the infrastructure and transport subsidiary of French parent company Vinci, working on major civils projects across the country.

Last year the group bagged a place on the two YORcivil 2 frameworks, worth a total of more than £1bn and covering civils work in Yorkshire and the Humber. This year the contractor has secured a spot on Highways England’s national road resurfacing framework, estimated to be worth up to £3.3bn.

Eurovia recorded a pre-tax profit of £22.2m on turnover of £486.2m in its most recent accounts, up from £16m in 2017.

NG Bailey: 4.1 per cent

Although NG Bailey saw a number of its schemes cancelled in 2017, the specialist contractor posted a pre-tax profit of £19.6m on revenue of £481m in its latest full-year.

This marked a 5.4 per cent increase on the previous year’s profit, with the company’s margin standing at 4.1 per cent.

The company attributed the boost to its bottom line to being more selective in bidding for work. “A lot of the reason we’ve been quite successful is because we have walked away from projects, which on the face of it may hurt you in the short term, but the reality is better [in] the long term,” NG Bailey chief executive David Hurcomb told CN in August.

Winvic: 6.2 per cent

Although this company delivers design-and-build, fit-out and civils work, Winvic is more widely known as a ‘shed’ specialist.

The company has worked for clients including Amazon, Marks & Spencers, Sports Direct and Lidl, delivering super-sized industrial and distribution spaces.

Its latest pre-tax profit came to £28.5m, up from £21.9m in its previous year and pushing its margin from 5.2 to 6.2 per cent.

Keltbray: 5.6 per cent

The demolition specialist has seen its pre-tax margin decline to a still respectable 5.6 per cent in its most recent results, down from 6.4 per cent the previous year.

Deputy CEO John Keehan attributes its margin to selecting the right clients to work with, the right projects to work on and the right people to deliver its contracts.

In April this year, the company bought Spie’s distribution and transmission business in a bid to expand its electrification capabilities. 

In the same month, it announced it would be expanding into Canada, signing a memorandum of understanding with Canadian construction giant Aecon, with a view to forming a JV when rail electrification opportunities become available in the country. A CAD$11bn pipeline of rail electrification schemes are planned across Canada over the next decade.

JRL Group: 7 per cent

Its latest full-year saw JRL Group, which includes concrete specialist J Reddington, make a £27.1m pre-tax profit on turnover of £388.3m.

Its specialist contracting division is a primary reason why the group made a 7 per cent margin, according to chief executive Kevin Keegan, who says margins are better in this area of work.

JRL’s main contractor business, Midgard, is now looking at jobs up to £200m and is currently working on two contracts valued at around £180m each.

Midgard took over on the S2 office in King’s Cross earlier this year, which will be occupied by Google, after original contractor Carillion collapsed in January.

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