Contractors in the fiercely competitive construction open market are likely to be facing a bias towards cheapest price on half of tenders, Kier chief executive Paul Sheffield suggested today.
Mr Sheffield gave Construction News a flavour of the challenges facing contractors outside of frameworks and the infrastructure sector.
It comes after the company posted a nine per cent rise in profits for the half year to 31 December 2011, but warned of 18 months of construction margin pressures and a two-year wait for outsourcing rewards to come through as local authorities wrestle with their budgets.
A strong presence in frameworks – including the health Procure 21+ and exclusive £1bn four-year Scape capital works deal – will ease the pressure for Kier, said Mr Sheffield.
He highlighted successes in infrastructure - particularly Crossrail and Hinkley Point – and said the firm is determined to be very selective in the tougher open market, which makes up a third of its work.
“The only thing we can do there is be quite choosy about what we bid and not get caught up in a race for cheapest price on difficult projects that are going to cause problems,” he said.
Mr Sheffield said firms are sometimes never quite sure what the customer is looking for until the tender documents arrive. He said if they are calling on six companies to bid predominantly on cheapest price, Kier is not interested.
“For other people who don’t have the infrastructure and frameworks, I think that it could well be 50 per cent (of tenders). I should think we are down at the 10 per cent level.”
The contractor continues to reduce its presence in education, heading from 32 per cent now to 20 per cent. Mr Sheffield said “every Tom, Dick and Harry” are waiting on the £2bn Priority Schools programme, with continued uncertainty over how it will be packaged.
Kier is expecting its share of public sector work to drop to 40 per cent in the coming year as it continues to refocus on regulated and commercial work.
The other 60 per cent will be focused largely on regulated markets and commercial in and around the south east.
It has already reduced the public sector share from 63 per cent in 2010 to 48 per cent this year.
With £131m in the bank, Kier is also primed for acquisitions. It is looking in the FM and waste markets, but has not found the right deal yet, said Mr Sheffield.
The contractor was recently linked to organic waste management, in-vessel composting firm TEG Group. Mr Sheffield cleared that up by telling CN: “I think anaerobic digestion is a much better bet than in-vessel composting”.
£34m of pre tax profits, up from £31.3m last time, on revenue of £1.046 billion, down four per cent on £1.097m.
Construction margin 2.5 per cent, down slightly on 2.7 per cent last year, with £720m revenue (2010: £728) and £17.8m of profits (2010:£19.8m).
Service margin was flat at 4.5 per cent, with revenue down from £243m to £218m and profits dropping from £10.9m to £9.8m.
Property - including development, PFI and homes - profits trebled, from £3.4m to £10m, on revenue of £108m (2010: £126m)