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City Site - Tougher life for smaller contractors

FINANCE

THE MAJOR contractors' order books might be bulging but a series of ominous signals suggest life is getting tougher at the smaller end of the industry.

A report from credit insurer Euler Hermes UK says the first quarter saw the steepest decline in cash f low at construction firms since it began monitoring three and a half years ago.

Late payments, rising energy and labour costs and lower activity levels all aggravated the situation and the reduction in cash flow is linked to falls in turnover and profitability. Margins, it says, are being squeezed by price cutting in the face of tough competition, although more firms are confident cash flow will improve over the coming year.

Even firms trading overseas saw increased late payments with longer waits for payments in particular from the Middle East and Spain. The recent turbulence in financial markets is unlikely to make international contracting markets any easier.

Construction, says the report, was one of the worst hit for business and personal bankruptcies with the industry accounting for 16 per cent of the total.

A separate report from information firm Equifax says construction business failures rose by 8 per cent in the first quarter, compared to the period last year.

The larger contractors will face higher costs. But the strength of the public sector/PFI market ? highlighted last week by Kier's financial close on Oldham Schools PFI worth £97 million overall and Balfour Beatty's contract to build a ticket hall at King's Cross ? means they will be insulated from the worst of the competition.

But house builders are coming under pressure. The strong interest in the various MJ Gleeson businesses that have been put up for sale meant last week's housingrelated profit warning at the group was largely overlooked by the City.

But some of the factors Gleeson pointed to, notably patchy market conditions and a reduction in margin on some sites, will apply to many others across the industry.