Top 150 Contractors and Housebuilders 2023: Optimism is there if you look for it but familiar worries dog year ahead

There was a period in early autumn when being a contractor seemed akin to having signed a death-wish.

Buckingham had imploded, a few weeks later MJ Lonsdale went down – a shock to many – and then whispers spread that ISG might also be facing financial problems. Those rumours were later dismissed by ISG as just that. But while the febrile atmosphere of early autumn quietened down for a bit, the ominous mood within the industry did not go away.

Then the end of last month, Laing O’Rourke posted its worst set of results since being set up in 2001: a pre-tax loss of £288m on turnover of £3.6bn.

The firm has promised that things are looking up for this year, but there is no doubt the numbers are dreadful. That it has happened to the county’s biggest private contractor by some distance makes it even worse. Bad for them, bad for the industry.

At the time of the announcement, it was a legitimate question to ask the unthinkable. Was O’Rourke, not just the biggest private contractor but one of the UK’s biggest full stop, about to go bust? The firm’s finance director, Rowan Baker, said no but the scale of the losses was summed up by one message from a rival firm. “LOR losses – wow!!”

Of course some firms did sink this year, and Morgan Sindall chief executive John Morgan, who has been in the industry since 1977, says of high-profile collapses like Lonsdale: “It shows good companies can disappear.”

Plenty are concerned by the resilience of the supply chain

Dan Fryer, Exigere

Morgan’s business has been one of the few out and out success stories of recent years, and earlier this year the firm upgraded its profit forecasts for 2023 on the back of a fit-out boom.

But Morgan remains cautious about what to expect next year. “There’s still a lot of work around,” he says but adds: “Next year is looking OK but not great.”

“Next year will be challenging,” agrees Mace’s construction chief executive, Gareth Lewis. He is fond of saying his business is the biggest builder in the capital and in order to remain that way needs the supply chain to be healthy.

>> Top 150 Contractors & Housebuilders 2023: The full table

Firms like Lonsdale going under throw that into doubt, and Lewis admits: “It shows how fragile the supply chain is.” Morgan adds: “The risk of subcontractor failure is the biggest risk we have.”

Undoubtedly, the strength of the supply chain is one of contractors’ biggest worries right now, but it’s an issue that is not just limited to builders.

It’s become the norm now to talk about balance sheets. Suppliers and clients want to know you’ve got the money

John Morgan, Morgan Sindall

“Plenty are concerned by the resilience of the supply chain,” Dan Fryer, a partner at London cost consultant Exigere, says. And James Clark, a founding partner of Core Five, admits: “The number of firms able and capable of doing certain work in London is quite tight. There aren’t many.”

It does no one any good to see the supply chain hollowed out further – because everyone suffers.

Suppliers, then, are, increasingly, looking at balance sheets up the chain before signing on the dotted line.

“It’s become the norm now to talk about balance sheets,” says Morgan. “Suppliers and clients want to know you’ve got the money. It’s become a trend over the last five years for balance sheets to get stronger.”

There’s one thing worse than no work, and that’s bad work

Darren James, Keltbray

Morgan Sindall is expecting its average daily net cash for this year to be £270m, which Morgan also says allows the firm flexibility to pick and choose jobs.

“There’s one thing worse than no work,” says Keltbray chief executive Darren James, “and that’s bad work.”

There are increasing signs, though, that as contracts come to an end and the pipeline of work struggles to get going – delayed or even pulled by spooked clients in the face of rising costs – firms will be left with a choice of winning work at the wrong price or having to walk away.

“Participants in the construction supply chain are facing rapidly changing circumstances as existing workloads complete and competition to win new orders intensifies,” Roger Hogg, the head of Rider Levett Bucknall’s global research committee, recently said.

And the threat of firms bidding jobs at rock-bottom prices to fill gaps in order books was raised last month after a bellwether index said subcontractor prices had fallen for the first time in over three years.

The S&P Global/CIPS UK construction Purchasing Managers’ Index said prices that subcontractors were charging had headed south for the first time since July 2020.

CIPS chief economist John Glen said: “More subcontractors are available for work and some are reducing their prices in reaction to the falling demand.”

Labour availability is the biggest challenge

Heather Holbrook, Thomas & Adamson

But there is another familiar problem dogging firms’ ability to win work. “Labour availability is the biggest challenge,” says Heather Holbrook, a partner at consultant Thomas & Adamson. “Material pricing and rates have largely settled but availability issues lead to longer programmes, which attract a cost.”

Keltbray’s James says the effect of Brexit continues to be felt on labour supply, but despite this headache he adds that the firm is on for a record turnover this year, beating the £563m from 2019, and that its current order book is over £1bn, also a record.

“We’ve not spent a lot of time worrying what’s happening elsewhere,” he says. But he admits: “You can’t operate in a bubble.”

Which brings us back to the events of the autumn and, more recently, O’Rourke’s results. “There’s always a consequence,” James says, when a firm fails. “It impacts the credit markets, the bond providers.” He adds: “Are margins easy to make? You’ve got to earn your margins and there’s been plenty of noise that things are tough, but we’ve seen enough to keep us going.”

Still, T&A’s Holbrook says cash flows are coming under pressure as subcontractors, jittery from high-profile collapses, look to stay steer clear of anything remotely risky.

“Subcontractors are being risk averse and more selective about procurement route and parties involved. Some are looking for staged payment and vesting agreements for example, all of which will have an impact on the main contractor’s cash flow,” she says.

Mace’s Lewis says some clients aren’t doing enough to play their part in tough times. “Sometimes the terms and conditions we get are unreasonable; it’s damaging for clients. Liquidated damages, for example, are too onerous.”

I think it will go mad again in 2025. There is a massive shortage of grade A office space in London

Gareth Lewis, Mace

He reckons some markets – such as London offices – will stay flat next year, despite recent positive noises from developers such as British Land and Landsec.

But he adds: “I think it will go mad again in 2025. There is a massive shortage of grade A office space in London. If firms haven’t got a fantastic office, they’re not going to attract staff.”

Instead, the boom areas for next year will include life sciences, aviation and data centres – where one of Mace’s jobs in this sector is worth north of £400m.

Underlying the strength of data centre and technology work in general, listed M&E contractor T Clarke recently said its order book had topped £1bn for the first time, in part helped by a 220% jump in work at its technology division, which includes data centres, to £355m in the 10 months to October.

We’ve been calling the downturn for 12 months, but the industry seems to have survived it and the wider economy too 

James Clark, Core Five 

Core Five’s Clark admits he has been surprised at how much work has been about – and continues to come in.

“We’ve been calling the downturn for 12 months, but the industry seems to have survived it and the wider economy too,” he says. “Construction costs are high, the cost of debt is high – but as we sit here right now, schemes are looking to go.” But he cautions: “A lot of instructions are coming in at the moment for the year ahead, but the big question is how many getting ready to go on to site will end up on site.”

Exigere’s Fryer remains bullish about next year. “Interest rates coming off has helped stabilise things. The view is that they’ve topped out and people have more confidence and certainty.”

Still, there are worries contractors will be cutting costs to replenish reduced order books, and the last few months of the year have seen a fair amount of blood-letting among bigger contractors – Wates, Mace and Skanska are among those that have all let senior people go as firms look to refresh leadership teams.

And the news about Laing O’Rourke has undoubtedly been a gloomy ending to a difficult year. Its problem jobs are believed to centre on three schemes – one in Australia and two in London. “If they can be brought to the brink by just three schemes, that’s worrying for everyone,” says one rival.

The industry has been here before and got through it, but whether it’s Lonsdale going under, Buckingham sinking or Laing O’Rourke posting frankly horrendous numbers, there is an uneasiness, a nervousness among firms ahead of next year. “Profit and cash is so important,” says Mace’s Lewis. “If it’s too skinny, then you’re not able to deal with any issues that come along.”