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City Site - Quest for margins drives strategies

FINANCE

BULGING order books across the industry show that many of the larger contractors seem to have little problem winning work in the present climate. But the key issue driving strategy at many firms today is finding ways of improving margins on a growing turnover, both in their existing businesses and acquisitions.

This week Pochin's reported a steady turnover but lower prof its at its contracting business. Yet it is taking remedial action, which is bearing fruit with a focus on partnerships, risk management and more at tent ion to detail at the end of the job.

The healthy 3.9 per cent margin being generated at Tulloch Construction was one of the attractions that drew Rok to the Scottish company. Tulloch appears to be a model example of a well-run regional contractor, from which Rok itself may draw lessons.

But many privately owned contractors will have taken heart from the price paid for Tulloch - equal to 9.4 times post-tax earnings - even though Rok says the deal will be earnings-enhancing from year one.

Coming after Balfour Beatty's recent acquisition of Birse and Galliford Try's of Morrison Construction, it suggests the pace of consolidation, driven by a need to raise margins, is continuing to quicken.

The country's largest privately owned contractor, Laing O'Rourke, has lifted its operating margins from 1.34 per cent to 1.81 per cent on a £2.62 billion turnover in the year to March.

The group's annual review highlights a vertically integrated in-house supply chain - with direct management over plant, labour and materials - which its says gives greater control and certainty in projects.

Superior returns are sought through innovations in projects and processes.

With tender prices forecast to rise faster than input prices over the next two years, market forces should help contractors in their quest to raise margins. But there will be scope for plenty of initiatives and deals to hasten the process along.