Future Gazing The Next 12 Months
The general consensus and stated policy of the major construction companies is to improve margins. They talk optimistically of a net profit of between 2% and 5% of turnover.
To do this they say they will be more selective on the work they undertake. However, if their workload declines as a result of lack of investment by government, local authorities and investors, will this be achievable in the short term? Indeed, the industry could be in for a tough time where good management must prevail.
• Companies that ‘stick to their knitting’ by working in markets they are familiar with, with clients they know and in areas they have worked in the past, should survive and may even prosper if Brexit is resolved sooner rather than later.
• The demise of Carillion indicates that it is not easy to evaluate the status of contractors and their viability. This must put in doubt mergers of any significance. Indeed, why would anyone buy a construction company unless there were strategic merits (expertise, land bank client base) that outweighed the inherent risk of taking over existing contracts. This would really apply to any company in the industry irrespective of size. Any growth is likely to come from internally generated opportunities and, unfortunately, the demise of competitors.
• Those contractors working in housebuilding, student accommodation and the private rental sector (PRS) should still see continuing demand but volumes may decrease.
• Housebuilders may get acquisitive if they do not have the land banks of oven-ready sites in areas where there is demand. Up to now there has been plenty for everyone but areas are tightening up in demand so national housebuilders may look at regional players or expand their geographical spread to move into areas of demand.
• Government funding of infrastructure projects should increase once Brexit is resolved, giving a boost to those involved. However, there is always a time lag which could affect viability. • Will Brexit cause contractors to have less labour and therefore capacity leading to a reduction in turnover? There is unlikely to be an immediate restriction on labour coming into the UK post-Brexit. However, if the value of sterling continues to fall, will the UK still be attractive to overseas workers?
• Offsite manufacturing will continue to gain traction but is unlikely to make the margin impact or improve quantities that many are expecting.
April 2020 sees the implementation of legislation designed to counteract disguised remuneration. This should mean employment numbers will rise. However, it could bring with it a significant increase in costs. Will the end users adjust their prices upwards or will margins come under attack? Construction News has just published its annual survey of the top 100 construction companies by turnover.
Please read the full report here: 2019 MHA UK Construction Sector Report
If you would like to discuss any of the issues raised in more detail or if you would like to speak with a member of our Construction & Real Estate team about how we can help, please contact Hannah Farmborough or call on 0207 429 4147 to be put in contact with your local representative.