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Sales and marketing outlooks cool as cost inflation poses challenge for contractors

Forecast sales performance and marketing spend among contractors continue to be positive despite a cooling in expectations and costs rise in line with recovery.

The findings of latest survey from consultancy Leading Edge neatly sum up the different problems businesses face in a nascent economic recovery compared with a downturn.

Recruitment and retention of staff has now replaced winning work as the top strategic concern of the 61 firms surveyed for the Construction Market Barometer in the first quarter of 2014.

It has also increased in importance since last year, with 98 per cent more firms now citing it as a key issue. Winning new work, which was the most important issue in previous surveys, dropped into second place.

The number of firms citing managing cost rises as a concern more than tripled in this survey compared with a year ago.

On the other hand, there was an 88 per cent fall in the number of respondents that said adapting the business to falling demand was a concern.

Market inflation poses challenge

Leading Edge director Mel Budd says: “Prices, wages and materials cost are increasing but they [contractors] cannot necessarily increase prices to the market by the same amount.

“People are reasonably positive but margins being squeezed is becoming a bit of an issue.” He said at some point in future contractors will raise their tender prices and so margins will recover.

“Those at the end of the construction cycle like M&E probably won’t see a difference until next year”

Mel Budd, Leading Edge

But the barometer’s findings also reflect the fact that the recovery is still in its early stages – firms are still fighting for work and some are feeling the effects of cutbacks in the recession.

For example, half of respondents said the main thing that would prevent them winning work over the next 12 months was aggressive tendering from competitors, while 39 per cent cited not having enough resources to meet demand from their clients.

Mr Budd says the newness of the recovery means companies that work at the start of a project are seeing a much larger increase in activity than those involved at the end of it.

“Consultants are seeing bigger increases in wages and demand for their services,” he says.

“Those at the end of the construction cycle like M&E probably have not changed that much because they are working on buildings that were started a year ago. They probably won’t see a difference until next year.”

Sales and marketing stay positive

The barometer’s findings on current and predicted sales and marketing spend were generally positive.

While the proportion of companies reporting an increase in sales in the year did dip slightly to 73 per cent in Q1 2014 from 79 per cent three months earlier, Mr Budd said the change was not statistically significant.

On average the firms surveyed saw a 5.5 per cent rise in sales in the year to Q1 2014, which was down from the 7.4 per cent reported three months earlier, though the previous figure was the highest since the survey began in Q1 2008.

There was also a drop in the number who thought sales would grow in the next six months from 79 per cent in Q4 2013 to 49 per cent in Q1 2014, and there was also a small rise in the number who were not confident of a rise in sales from 16 per cent to 31 per cent.

Similarly, the majority – 58 per cent – still expect to increase their spending on marketing over the next 12 months, but this represents a slight decrease on the previous quarter. There was a rise in those expecting to spend less from 4 per cent in Q4 to 16 per cent in Q1.

Optimism cools

This easing in expected rises in current and forecast sales and expected marketing spend are an inevitable adjustment after the big rises seen in previous quarters.

But Mr Budd points out that the figures are still rising – albeit less steeply than in the previous quarter – and current sales and future marketing spend are at some of the highest levels since the survey started in 2008.

“I think maybe people have become more realistic four to five months into the year”

Mel Budd, Leading Edge

Some of the 73 per cent rise in sales in the year to Q1 could be because the first quarter was affected by severe weather.

However, Mr Budd points out that the effects will vary by region as builders on some sites, particularly in the South-west, would have been affected by the flooding more than those elsewhere.

The recovery has been driven by steep growth in the value of housebuilding. In Q1 2014’s construction output figures, the Office for National Statistics found that without housebuilding the industry’s output would have fallen 2.2 per cent from the previous quarter.

Housing’s influence continues

Leading Edge’s barometer confirms housing’s dominance, with respondents expecting a 6.4 per cent rise in new housing work over the next six months on average and a 5.7 per cent rise in housing repairs work. Both figures were up on the previous quarter.

One contractor commented that extra funding for social housing was giving them confidence.

The housing boom and the signs of economic recovery have also been most prominent in London. Unsurprisingly, Leading Edge found companies expected the highest level of sales growth over the next six months in London at an average of 7.4 per cent, although this was slightly down on the previous quarter.

“It is good that respondents are looking at sales increases in the regions, but maybe they won’t be as big as they first thought”

Mel Budd, Leading Edge

Firms expected sales in the Midlands, the North and Scotland to grow by an average of 2.3 per cent in that time, but they had lowered their growth expectations in those regions since the previous quarter’s survey by between 1 and 1.6 percentage points, which was a sharper fall than in London.

“I think maybe people have become more realistic four to five months into the year,” Mr Budd says. “It is good that they are looking at sales increases in the regions, but maybe they won’t be as big as they first thought.”

Sixty-one per cent of those surveyed worked predominantly in housing, and 20 per cent worked across all major construction sectors. Sixty per cent worked in both the public and private sectors.

Contractors made up 28 per cent of respondents, second to manufacturers, which comprised 38 per cent of those surveyed.

Overall, while the industry’s sales continue to grow, expectations are now tempered with a little realism after the initial giddy high at the start of recovery.

Furthermore, new challenges brought about by the climb out of the downturn have come to the fore.

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