Figures published last month highlight the fact that our major contractors are a spent force – and why they should no longer be permitted to dominate the construction industry and influence government policy.
The statistics reveal that even after the collapse of Carillion, major contractors continue to sweep up the vast majority of publicly-funded projects. Even with local authorities falling over themselves to outsource, small works packages continue to be bundled up into mammoth frameworks, locking out the small and medium sized contractors that have the genuine ability to deliver.
Meanwhile, it’s tough at the top.
On the one hand, the country’s top ten contractors turned over £27bn between them. Reassuring? Not when you dig deeper and discover they actually returned a LOSS of £189m between them.
It gets worse.
On top of the losses, our top ten firms are riddled with a £3.8bn combined debt pile . . . and no realistic prospect of paying it back any time soon, because:
The picture does improve once turnover is reduced, with the optimum figure for a construction firm seeming to be around £500m. Historically, however, this has not satisfied institutional shareholders, so firms in that bracket, unless privately owned, tend either go through rapid expansion or are vulnerable to an aggressive takeover.
Take, for example, my previous employer, Alfred McAlpine. They returned healthy profits, boasted happy employees, valued customers and a full order book . . . and were gobbled up by Carillion who had none of these virtues. And all because Carillion convinced their investors that the merger made perfect sense and that “synergy savings” would increase dividends.
Today, we have the likes of Balfour Beatty, the UK’s No. 1 construction company ranked by turnover and profit alike, saying they are putting margin above turnover. I just hope they really mean it, and will stand firm if their share price starts to dip.
Meanwhile, sitting behind them at No. 2 in the turnover table, Kier have increased their turnover while doubling their debt and reducing their margin, and I fear it won’t be long before – like Carillion before them - Kier’s biggest profit centre will be the CITB grant and levy scheme.
Other eyewatering figures:
Looking to the future, many of our household name construction companies are already caught up in the Crossrail bun fight, with the client getting tough after acceleration costs failed to deliver the scheme on time.
It’s hard to be sure what this is going to cost, not least because the big boys, the fund managers who invest in them, and those who are paid to write about them seem often to over-complicate matters, hiding what is – at least to me – blatantly obvious, behind overly complicated valuation mechanisms and jargon.
Large construction projects used to generate positive cashflow but a low margin at final account, and being owned by those who needed cash, this suited just fine.
However, it doesn’t suit today’s stock market algorithms, which generate an insatiable hunger for growth. And regardless, modern contracts simply don’t generate the same positive cashflow as they used to . . . and FM contracts suck it up.
So looking again at these figures, I believe they reveal a number of hard truths:
Remember, Carillion is just the latest big name to disappear. The big names of twenty years ago included Amec, McAlpine, John Laing, Birse, and Mowlem.
Managing Director, Hudson ContractMore from this expert
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