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Profit warnings point to the hazards


WITH bid speculation, strong results and healthy workloads continuing to buoy up share prices across the sector, it is easy to overlook some of the hazards which contractors continue to face.

The latest analysis from Ernst & Young (see above) shows the number of prof it warnings across quoted firms in the third quarter rose fractionally, although it was still down by almost a fifth on last year.

But while only three warnings came from the 42 quoted construction and materials companies, the support services sector - where many firms in the industry are now listed - was responsible for 17 warnings, the largest number of any sector. Most warnings came from smaller companies with a turnover under £200 million. As E&Y points out, the level of warnings remains relatively high, particularly given current levels of profitability.

Oil prices may have slipped and contractors are largely spared another key threat to UK company profitability - cheap overseas competition. The outlook for tender prices is also fairly positive and recent surveys suggests manufacturing and general business confidence remain strong.

But contractors inevitably face economic uncertainty; a factor E&Y believes will maintain the level of prof it warnings.

The big unknown is interest rates.

Bellway this week said the housing market remained challenging and incentives were still needed to sell houses across much of the country. But the Royal Institution of Chartered Surveyors believes a quarter point increase in interest rates is firmly on the cards in November.

Higher rates will bring more contract delays or cancellations, an area where contractors are vulnerable and the source of around a fifth of the profit warnings by quoted companies.

Against this background, E&Y says it is important for companies to control costs, manage risk and invest to maintain their competitive edge. And indeed, these features all loomed large in many of the larger contractors' recent results statements.