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Industry braced for tough times as CPA downgrades output forecasts

Contractors could look to close offices, sell assets and shrink their supply chains to mitigate the effects of worse-than-expected industry contraction.

The warnings came after the Construction Products Association revised down its forecasts for the next two years.

The CPA’s Construction Industry Forecasts anticipate a contraction of 1.1 per cent (down from 0.5 per cent) in 2011, a 3.6 per cent fall next year (down from 2.8 per cent) and a flat 2013.

CPA output growth forecasts Oct 11

The CPA predicted that the value of public sector construction, including PFI projects, is set to fall 24 per cent by 2014 to £30.2 billion, with falls of 41 per cent in Education and 45 per cent in health over the period.

Private sector construction output is expected to rise 18 per cent by 2015, but it will only grow by 2.2 per cent this year and 0.7
per cent next year, it said.

The government’s view that PFI is poor value for money is also stifling activity, the CPA said.

Jonathan Hook, head of construction and house building at Pricewaterhouse Coopers, said contractors have been adjusting their business models in anticipation of the downturn.

He said that firms could look at releasing office space or renegotiating leases on assets, and at reducing corporate or regional overheads that are not directly project focused.

Mr Hook also said companies could cut the volume of suppliers and focus on better deals from a select few. He advised them to concentrate on client relationships but to avoid being tempted into suicide bidding.

He warned that lowering bids is risky for contractors expecting to create savings in their supply chain, especially considering the volatility of raw materials prices, or for those relying on clients changing the scope of the project.

He told CN: “I’m afraid in 18 months’ time we will be talking about some companies that have taken a hit on a couple of projects where the losses have wiped out the profit for the entire year.”

The revised CPA forecasts come just a week after research from PwC found there have been 66,000 construction job losses since the Comprehensive Spending Review one year ago, with employment falling from 2,158,000 in June 2010 to 2,093,000 in June 2011.

A report by Ernst and Young also said there were five profit warnings from construction companies in the last quarter - up from three in the same period a year ago.

Adrian Mulea, executive director for construction at Ernst & Young, said companies would look to challenge their operating cost line, review headcount and further develop shared services.

“Continued focus on servicing the needs of key customers will also be paramount.

“Innovation will be critical. The value of building information modelling in terms of large-scale construction projects is now being realised and the more forward-thinking companies operating in the sector will be putting their thinking caps on.”

EC Harris head of strategic research Simon Rawlinson said firms will need to be alert to how the government expects to make savings, focus on a dependable supply chain and work with clients on “strategic procurement”, which includes cutting waste and administration and may mean working with clients on a number of refurbishments or smaller works, rather than large capital projects.

Jason Farnell of consultancy Construction Risk Management said: “Competitive tendering is too resource-hungry, so many companies may start looking at other ways to procure work, working more with existing customers, taking a partnership approach and maybe even sharing the risk of a project.

“Cash-rich contractors could also help to secure work by offering funding packages for some or all of the work.”

CPA chief executive Michael Ankers urged the government to act. He said: “Recovery finally arrives in 2014, but by then we will have experienced the worst decline in construction activity for more than 30 years.

“It is essential that more is done by government to kickstart the economic recovery.”

His views were echoed by Mike Redican, managing director of capital markets at Deutsche Bank, who said: “You can announce you will invest £20bn in infrastructure tomorrow, but the reality is that we won’t see that for another 18 months because of the procurement process, so what happens in the interim is very tough for these companies.”

 

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