Further decline in construction sector’s fortunes with suppressed sales, turnover and profits

Further decline in construction sector’s fortunes with suppressed sales, turnover and profits

Tuesday, 08 October 2019

The UK construction industry has experienced a further year of slowdown in sales, turnover and profits, pointing to a sustained downward trend, according to the latest UK Construction Sector Report from MHA, the UK-wide group of accountancy and business advisory firms of which MHA Larking Gowen is a member.

  • Turnover growth continues to slow with larger firms hit hardest
  • Year-on-year decline puts squeeze on profit margins
  • Sales cool as depressed demand and Brexit uncertainty bites
  • Stalling profits highlight potential labour costs exposure

Turnover in the last year grew 5.3% but was in marked contrast to the 14.1% increase recorded over the past two years, revealing a slowdown in the industry’s growth. Larger businesses, those with turnover of £200m and over, continue to experience a decline in turnover levels, with the average dropping by 13.8% this year.

In the face of this decrease, larger firms have reduced their workforce numbers from last year, with the average number of employees reducing from 878 to 777. Elsewhere, staffing levels remain static. The extension of the IR35 legislation ‘off-payroll’ rules for the private sector, which comes into force in April 2020, is likely to see employment numbers rise and with it, the potential impact on prices or further squeeze on margins. However, there appears to be no apparent material increase in employment numbers at this stage.

While the average gross profit margins are in double figures across the board, it is the smaller companies (under £25m turnover) that have seen the highest margins of between 20-25%. For mid-tier firms (£100-150m) the margins drop to just over 14% (14.4%) and larger firms have seen a decline to 11.2%

Overall, average margins are declining year on year and for the larger firms the fall in turnover and the desire to maintain workforce continuity, as well as general competitive pressures, are behind the squeeze. In a post Carillion world, the report seems to indicate these firms are looking to improve profitability rather than chase turnover.

A slowdown in the sector is further emphasised by the biggest fall in new work for a decade, according to the IHS Markit/Cips UK construction PMI survey. This together with a lack of new infrastructure projects and major developments and a depressed demand created by Brexit uncertainty, are also contributing to the slowdown. All these factors contributed to a decline in sales growth across all turnover brackets with the largest companies actually contracting over the past two years.

Whilst there is a general upward trend in dividends, the levels have fluctuated across the different sizes of firms. The smaller firms have either remained static or seen a decline. Most notably, those in the £5-10m turnover bracket saw a significant decrease in pay-outs of 85.6%; this is in marked contrast to a leap of nearly 250% the previous year. For the largest businesses, there was a 60% decrease in dividends from last year compared to a 17.1% rise over a three-year period.

The overall construction industry’s profit before tax performance showed a decline in 2019, with only small firms experiencing increases, although these were lower than two years ago. For the larger companies, who saw the biggest declines – the largest drop being from £46m last year to £26.3m in the current year – lower profit before tax is the inevitable result of reduced turnover and margins. Companies in this group will undoubtedly try to reduce overheads, but this tends to be difficult in the short term as certain costs are fixed. This does raise the prospect of future labour cost-cutting.

Robert Dowling, Head of Construction and Real Estate at MHA, said:

“It remains a challenging time for the UK’s construction industry. Nationally, firms have managed to maintain similar levels of profitability with slightly lower gross profit margins than last year. But the indications of a downward trend are there. Declining workloads and the potential impact these may have on profits could mean tougher times ahead for some firms. At such times it is important that firms adopt and maintain disciplined and strong management, whether that is remaining focused on your core specialisms or strengthening the balance sheet by retaining higher levels of profit.

“Firms should look at technology investment and the implementation of strategies to reduce tiers of management whilst retaining key personnel and the adoption of robust project risk management; all of which can enable firms to ride the downturn and even prosper.”

Robert Dowling continued: “It is impossible to talk about the future prospects of the industry without mentioning Brexit. Beyond the impact of the current uncertainty, the industry could even stand to gain from a post-Brexit boost and any UK government commitments and plans for infrastructure investment will be warmly welcomed.”

MHA’s national outlook on the UK construction sector used company accounts information published by credit reporting agency Experian, for construction firms in England, Scotland and Wales with an annual turnover of between £5 and £200m+.

 Click here to view the UK Construction Sector Report 2019

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