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Top 25 construction contractors see profit margins halve

Profit margins among the UK’s biggest contractors have declined markedly, with the overall margin for the top 25 firms dipping below 1.5 per cent.

According to Construction News, profit margins among the UK’s biggest contractors have more than halved in 12 months, with the average operating margin across the top 25 firms down to 1.2 per cent.

Falling profitability came as the overall turnover of the leading 100 companies broke through the £60bn barrier for the first time in five years.

Exclusive data analysis from Construction News annual CN100 shows that the profitability of the UK’s largest 100 contractors also fell based on their latest published sets of accounts.

Last year the top 25 firms by turnover posted an average operating margin of 2.5 per cent - more than double this year’s mean figure.

CN100 2015_Average operating margin vs 2014

The top 100 fared only slightly better overall than the top 25, with firms seeing their average operating margins fall from 2.4 per cent to 1.9 per cent.

While the sizable losses on problem legacy contracts incurred by several major players - Balfour Beatty, Sir Robert McAlpine and Vinci UK - may have skewed the average margin figures, the trend across the board pointed to a squeeze in profitability.

Of the top 25 contractors, only eight improved their margins, despite 80 per cent recording revenue growth, as a returning market and sector consolidation began to be felt.

The profitability picture in the top 10 was even bleaker, with only two contractors - Amey and Galliford Try - seeing margins rise.

CN100 infographic screenshot

Your CN100: Check out our interactive infographic showing which contractors are the ones to watch and which are struggling

At the same time, the Construction News Barometer for Q2 2015 has revealed a degree of pessimism among construction executives.

Only 20 per cent of respondents to our poll of senior managers at the top 100 firms said they thought profit margins would increase before the end of 2015.

Just over a third thought margins would improve during the first half of next year, leaving more than 40 per cent who believed the low-margin environment would persist for at least the next 12 months.

The findings come just weeks after consultancy giant EY published a report predicting that margins among the top tier firms would top 5 per cent by 2020 as companies diversified their portfolio of businesses.

Tellingly, of the current top 15 CN100 contractors, only Amey and Galliford Try - both companies with significant revenue streams outside of traditional construction - boasted margins of 5 per cent or more in 2015.

The skills shortage remains the most pressing concern for the sector in the latest Barometer, and a major contributory factor to lower margins.

Almost 94 per cent of those replying to the survey rated it as one of the top three challenges facing their business.

PwC partner Chris Temple said: “Labour is still incredibly costly at all levels, and if anything that situation may be getting worse before it gets better.

“For me, that’s the key input here that’s causing pressure on profit margins.”

One respondent to the Barometer also highlighted the cost of labour as a major stumbling block to recovery: “Developers are stalling due to inflationary labour cost pressure testing the viability of their business case.”

The poll also showed that the threat of problem contracts hurting companies’ bottom lines was not yet over, with 69 per cent reporting they could cost their business up to £25m in the coming year.

One manager said that such legacy contracts would cost their company more than £100m.

Only a quarter of respondents claimed their businesses did not have any problem contracts.

In a further indication of the fragile state of the market, two-thirds of construction industry managers revealed that a supplier had stopped trading on a project they were involved in on more than one occasion over the past 12 months.

Another anonymous respondent said the industry was “seriously broken and needs a joined-up commercially sustainable model”.

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