Finances of major contractors are “unsustainable”

Grant Prior 10 years ago
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Accountants have described the finances of the country’s biggest contractors as “unsustainable” as they face declining margins and cash balances.

Experts at KPMG analysed the books of 14 Tier one contractors from 2007 through to 2013.

The subsequent report Construction Barometer: Recovery in Sight? revealed:

Net cash balances declined in 2013 and are now close to half their 2010 peak

As cash generated from operations have all but dried up since 2010, cash balances have been increasingly supported by significant sale of assets.

Operating margins in construction continue to be squeezed. From a high of 2.8% across the industry in 2010, operating margins have fallen to an average of just 1.2% in 2013

Persistent inflation in subcontractor markets suggests that the negative pressure on margins is unlikely to ease off any time soon. This position is further highlighted by the several profit warnings issued in the first half of 2014

Order books tell a slightly more optimistic story from margins and cash, however, reporting growth from 2012 to 2013

Richard Threlfall, KPMG’s UK Head of Infrastructure, Building and Construction said: “Construction contractors have been struggling with some of the most difficult market conditions ever encountered and even now – with all evidence pointing to sustained recovery – the industry faces real profitability challenges.

“Current margin and cash levels are unsustainable. With subcontractor rate increases and labour market shortages largely outside of contractors’ control, it is critical they continue to focus on improving their own efficiency.

“The industry can though take heart from the first signs of a recovery in order books.

“Ultimately, we believe contractors need to hang on until supply and demand for subcontractors and labour come back into balance, which we predict is still a year off.

“With good forward planning, strong businesses should be investing now in their supply chain and technology to take advantage of the £45 billion a year tidal wave of future work.”

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