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Top 14 contractors 'set for more restructuring and cuts'

The UK’s top 14 contractors are facing further restructuring and cost-cutting as they try to offset a sustained erosion of their margins, a report by KPMG claims.

The advisory firm says there has been ongoing pressure on margins since 2010 and warns that current cost reduction measures “may prove insufficient to offset acute reduction in volume of work”.

Many contractors have already undergone or are undergoing restructures, including Balfour Beatty, Morgan Sindall and Kier, while Carillionhas shrunk its UK construction business.

The report says since 2010 there has been a scramble in the industry to stem the collapse of forward order books, underpinned by deliberate profit-sacrifice.

This has resulted in a steady fall in the average construction margin. It says early indications are that 2012 results have not bucked this trend.

Richard Threlfall, KPMG’s head of infrastructure, building and construction, said contractors did well to anticipate the downturn and take out cost in the early years of recession, even managing to drive up margins in the short term.

He said: “However, those measures are now proving insufficient to offset the acute reduction in volumes of new work.

“Just a quick look at the development of margins in the last two years confirms the urgent need for further cost efficiency and restructuring across the industry.

“Unless action is taken now the thin margins of 2007 will seem generous by comparison to what the industry may be facing.”

KPMG’s Construction Barometer “Margins under pressure” shows that between 2007 and 2010 construction margins were on the rise, offsetting tightening margins in other activities, such as support services and house building.

The analysis suggests this could be due to construction divisions successfully removing cost faster than revenues were falling, as well as the impact of the lag between contract tender and profit realisation.

It says the real crunch came in 2010 when most of the remaining contracts bid pre-recession reached completion.

The right client mix and involvement in large-scale infrastructure projects are two ways to protect margins, KPMG says.

The report says:

Listed entities appear to have focused on maintaining or growing revenue, which has translated well for group margins but offers a more mixed picture for construction margins
Private and foreign owned businesses have shown a clearer inverse correlation between revenue and margin growth
Diversified companies have seen the most consistent revenue and margin growth.
larger companies have more consistently shown growth, particularly in revenue terms.

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