Construction News Read UK Construction Industry News, Analysis, Opinion and data For the UK’s largest contractors, the story coming out of our CN100 analysis has been rather repetitive over the past four years: lower margins, lower margins, much lower margins and last year... lower margins again.
Thankfully for the industry, and for those who like a bit of variety in life, this year the story is different; the average margin for the top 10 contractors, which account for almost the turnover of the entire CN100, has actually gone up.
You can read the full analysis of the CN100 here to find exactly where the improvements have been made and who has made the biggest gains.
But a key factor in these higher margins is how several in the top 10 have slimmed down their operations.
The top 10 cut a net 3,800 people in total from their businesses, which slashed their combined wage bill by almost £50m.
For Balfour Beatty, Interserve and Laing O’Rourke, who cut almost 7,000 jobs between them, they reduced their wage bill by almost a quarter of a billion pounds combined.
A smaller workforce means less work needs to be brought in, which can put a firm in a less precarious position if demand starts to dry up, something that this week’s PMI data appears to confirm is happening.
Cutting fixed overhead costs is usually a path to higher margins, as well, at least in the short term assuming key operational people are retained.
Getting the cost base down and margins up has become an absolute necessity for those who rely on bank finance, which is most of the top 10.
“A lot of contractors have got debt renewal points coming up in the next 12 to 36 months, and at the moment, it's not a sector that's making the bankers very excited to put more money in,” EY’s head of construction transaction advisory Ian Marson told me.
Cutting overheads can help address this challenge in two ways.
First, the higher margins that cost-cutting should deliver will make it easier to meet lending covenants, which often include measures such as operating profit to net debt and similar ratios.
Second, a smaller cost base should mean less debt is needed overall, especially if it is being relied on to help fund general operations as opposed to say specific development ventures.
Ultimately, it all adds up to firms becoming financially stronger and more resilient.
With last year’s CN100 the data told us the age of expansion had reached its end.
This year’s numbers tell us the biggest firms are now racing to get lean as they adapt to a world with less finance available and, potentially, less work.
