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Contractor confidence defies official downturn

The news that construction output fell by 2.2 per cent in the third quarter of the year came as something of a surprise to many economists and forecasters. Contractors, however, remain in a bullish mood in spite of the official downturn.

August marked the first month since May 2013 that construction output fell year on year, dropping 1.3 per cent according to the Office for National Statistics.

Output was also down month on month in August by 4.3 per cent, following hot on the heels of a 1 per cent monthly fall in July.

This represented the first consecutive month-on-month declines since December 2013.

Two successive months of decline would ordinarily set alarm bells ringing with economists. But this time, the official data is at odds with what many contractors are seeing on the ground.

“Contractors aren’t desperate anymore, whereas a year or two ago they were”

Mel Budd, Leading Edge

The Leading Edge industry barometer for October 2015, shared exclusively with Construction News, suggests that contractors are still positive when it comes to their business outlook, but that adjusting strategies to meet the changing construction landscape is becoming one of the industry’s biggest challenges.

October’s barometer shows that sales among construction firms grew by an average of 5.8 per cent over the previous six months.

This level of growth is down from the 7.2 per cent recorded in April’s barometer, and lower than the 9.9 per cent posted a year earlier, but is still the third highest since Leading Edge records began in April 2008.

Election cited for sales blip

Looking at a breakdown of the growth rates, more than a quarter of companies - 27 per cent - saw sales rise by 1-5 per cent, while a further 22 per cent saw sales increase by 6-10 per cent.

However, the pre-election slowdown and indecision in the immediate aftermath has affected some firms, according to Leading Edge director Mel Budd.

Change in sales in past six months_Leading Edge

Source: Leading Edge

October’s barometer shows that 7 per cent of respondents recorded a fall in sales of 6-10 per cent, while 2 per cent said sales had dipped by 1-5 per cent.

In total, 13 per cent of firms reported some degree of decline in sales in the six months to October. This was up significantly from 6 per cent in the previous barometer back in April.

Some respondents blamed this weakening in sales on delays to public sector projects in the run-up to the election.

However, the latest results are positive overall: in total, 73 per cent of firms saw sales grow in the six months to October, in spite of the election slowdown.

More encouraging still, the latest barometer’s outlook index is at its highest level on record.

The index, which measures the difference between the number of companies with a positive sales outlook and those that are negative, stands at 50.0 - nearly double the 25.5 recorded in October 2014.

It also far surpasses the previous record high of 41.4 in October 2013’s barometer.

Confidence sales performance growth next six months_Leading Edge

Source: Leading Edge

Mr Budd says this change has been primarily due to more respondents expecting their sales to be flat, rather than a surge in those expecting sales to actually increase.

Broken down, 62 per cent of firms are confident that sales will grow and 25 per cent expect them to be flat, while only 13 per cent are either ‘fairly unconfident’ or ‘very unconfident’ regarding their company’s prospects.

This is in clear contrast to April’s barometer, which showed 30 per cent of firms were fairly or very unconfident about their sales outlook, as opposed to 58 per cent that were confident and just 12 per cent whose forecasts were flat.

Biggest issues for construction firms

The changing shape of the market during the recovery has also led to contractors reviewing their strategies to cope with the glut of work and the ensuing
skills shortage.

“Over the last couple of years, firms have been fire-fighting, cost-cutting and wondering how they can save money, but now it’s more about five-year growth strategies”

Mel Budd, Leading Edge

Asked to point out the key strategic issues facing their firm over the next 12 months, recruiting staff, training and staff retention proves to be the biggest focus, with 44 per cent of respondents citing these areas in October’s barometer.

This is 10 percentage points lower than in April 2015’s barometer, and 6 points lower than in October 2014, yet these challenges are still top of the agenda for construction firms.

Back in October 2014, winning new work was the top strategic issue for companies, but this challenge slipped to a relatively distant second in October 2015, with 36 per cent of firms citing it as their most critical strategic issue, compared with 52 per cent a year earlier.

Core market growth expectations next six months_Leading Edge

Source: Leading Edge

Similarly, the number of firms focusing on increasing their marketing efforts to win new work over the next 12 months has more than halved: only 16 per cent of respondents cited this as a key strategy in October 2015, compared with 35 per cent in October 2014.

“Strategic issues are a reaction to market conditions,” Mr Budd says. “Contractors aren’t desperate anymore, whereas a year or two ago they were.

“Over the last couple of years, firms have been fire-fighting, cost-cutting and wondering how they can save money, but now it’s more about five-year growth strategies.”

This is reflected in the fact that more than twice as many respondents said that reviewing company strategy was a key issue in October 2015 compared with 12 months earlier.

In the latest barometer, 36 per cent of firms picked it as a major business focus, propelling it into second place. A year earlier, only 15 per cent of companies cited it as a strategic issue.

Resources pose the biggest obstacle

Looking at barriers to work over the next 12 months, the results are similar.

The leading barrier according to the October barometer is a lack of resource to respond to market demand, which was cited by 45 per cent of respondents. This is similar to April 2015’s barometer, in which this issue was again ranked highest with 43 per cent.

Sales expectations next six months by region_Leading Edge

Source: Leading Edge

Decline in core markets has also emerged as a major factor: 24 per cent of firms cited this as a barrier to work in October 2015, compared with only 8 per cent in April’s barometer.

Mr Budd says this is a reflection of a “flat public sector market”, adding that firms working primarily with public sector clients are those most at risk
from any cuts in November’s spending review.

“It’s fair to say that schools, health and other public sector work is flat or falling, so any firm that has the bulk of its business in the public sector is a little more under pressure,” he says.

Sub-price tendering continues to be an issue for contractors, with 45 per cent citing it as a barrier to work, up from 40 per cent in April’s barometer; it is now level with a lack of resources as the top barrier for construction firms.

Nevertheless, 17 per cent of firms report that they have no barriers to work over the next 12 months; this tallies with the positive sales outlook from contractors.

While optimism remains relatively cautious, the overall impression is that market remains buoyant, in spite of the apparent slowdown in output. “What we’re seeing is a more positive outlook than the official figures suggest,” Mr Budd concludes.

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