Opinion: Time for change as majors suffer £850m loss

Aaron Morby 9 years ago
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There can be little doubt that big name contractors suffered more pain than expected coming out of the last recession.

Seven major contractor businesses have emerged like walking wounded after jointly running up a staggering £850m loss.

Much of this may be down to Balfour Beatty and Vinci, but the extent of the malaise calls in to question the quality of management and risk control processes during the downturn.

Such staggering losses contrast starkly with the volume house builders who are now enjoying a bumper crop of record profits and the help of a Government under intense political pressure to coax them into building more.

Not so magnificent seven Seven of the best house builders
Firm Loss Turnover % loss
on sales
Firm Profit Turnover Profit
margin
Balfour Beatty Constn £391m £6.6bn 6% Barratt £565m £3.8bn 15%
Vinci UK £217m £1bn 22% Berkeley £540m £2.12bn 25%
Sir Robert McAlpine £108m £862m 12.5% Persimmon £475m £2.6bn 18%
Laing O’Rourke Europe £58m £1.7bn 3% Taylor Wimpey £450m £2.7bn 17%
ISG £28m £1.6bn 1.7% Redrow £213m £1.15bn 19%
Morgan Sindall* £27m £1.1bn 2.4% Bellway* £159m £831m 19%
BAM Nuttall £20m £774m 2.6% Bovis £133m £809m 16%
*half-year

The industry is now in a two-speed recovery.

At the front are the country’s leading house builders who have shrugged off their land legacy and debt problems since the 2008/09 housing crash. Two of the best are each serving up stunning pre-tax profits of over £500m a year.

The few publicly-listed volume contractors that doggedly stuck to the traditional and once unfashionable model of running contracting alongside housing businesses are also in good shape to ride the recovery.

And those that can, like Willmott Dixon and Wates, are rolling out more development-led business as a strategy to improve the quality of profits.

In the slower lane, the phrase legacy project is often used to explain away present problems, but this is disguising something more troubling about the past and the future.

Already tight for cash, the recovery is asking big questions of the majors.

They see clients loathe to front-load project payment, Government tightening up on supply chain payment and the rising use of project bank accounts which are all leaving little opportunity to make a living holding onto others cash.

At the same time subcontractor cost inflation shows little sign of abating.

It means the cash flow squeeze is here to stay and it is hard to see better times ahead unless the majors ring the changes.

The brutal fact is the UK business model that sees main contractors take on high project risk for a 1-2% margin is simply not viable any longer.

It must be abandoned for sanity to prevail.

Clients may be moaning about outturn costs on projects now, but they simply are too used to projects being subsidised by loss-making supply chains.

Despite anecdotes that clients are considering stalling the odd marginal scheme, there is still plenty of headroom for a decent profit as a glance at most developers’ accounts testifies.

It would be smart for clients to work much more closely with contractors to understand cash and risk profiles as a starting point.

It would be even smarter for clients to allow main contractors to start pricing building work at a 4% margin.

Then everybody would have a chance to invest in building better and faster.

 

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