Since 1993, the nature of the construction industry’s big beasts has changed markedly. We report on the effects of 10 years of stabilisation and increasing prosperity
This year’s top 100 is illustrative of the very different environment that the construction industry operates in today compared with a decade ago, when the economy was crawling out of recession.
Many of the roaring ogres of the construction world in the mid-1990s are now extinct, evolution having replaced them with leaner, meaner creatures. For example, 10 years ago Building’s top contractors by turnover were Trafalgar House and Tarmac. They are now but a dim memory. Tarmac demerged its construction and materials divisions way back in the summer of 1999, the former becoming Carillion, seventh in this year’s table.
The then near-£4bn-turnover Trafalgar House was eaten up by Norwegian engineering group Kvaerner in 1996, the construction division of which was in turn bought out by its Swedish neighbour, Skanska, just four years later. Indications of Trafalgar House’s future demise could be seen in 1993 when, despite being ranked number one by turnover, it made a loss of nearly £350m.
While these companies have fallen on leaner times, the growing beasts that were breathing down their necks in 1993 – Amec and Balfour Beatty – top the chart for 2003, posting turnovers of £4.7bn and £3.7bn respectively.
Mike Foster wrote Building’s article accompanying the contractors’ league tables in 1994. At the time he was with stockbroker Greig Middleton & Co; today he is an analyst at KBC Peel Hunt. Foster explains that today’s contractor is a far more efficient one than its mid-90s counterpart. An example of this is improved margins. Aggregate pre-tax margin was 6.2% in 2003 compared with just 2.9% in 1995. Over the same period, contracting margin has increased 1.3% to 2.1% and housing has more than doubled to 17.6%.
Contractors have been forced to make efficiency gains in the current low-inflation economy. Foster says: “In the mid-1990s there was still the perception of high inflation – there was less need to squeeze all the efficiency out because prices and wages would keep growing.”
Foster says that when he penned his article there was the very first inkling that contractors could plan ahead more, having ridden the Crest of the boom years and then suffered the bust that followed.
A steadying economy brought with it a very different type of client. Whereas in previous years the needs of the commercial developer, such as British Land, dominated the needs of the contractor, the mix on the client list has slowly diversified.
The commercial client was no longer just the developer that would sell the speculative building on at a high price. Foster points out that the likes of Morrison and Tesco emerged as commercial giants and were owner–occupiers. They wanted their builders to consider whole-life costs more carefully, including factors such as improved sewage and fit-out.
Some contractors could see the changes coming – changes that were also to include a move towards greater public sector infrastructure spending and the outsourcing of utilities. The likes of Amec embraced it; some were forced into it (Costain becoming a disastrous loss-making business before re-emerging as a smaller, but more successful, firm focusing on infrastructure and oil); and others chose to exit the market altogether. In 1993, Costain was 34th in the pre-tax profit league, with £0.7m; in 2003 it made £16.1m.
What has surprised Foster is the survival of many companies that have both a contracting and housing arm. The boom and bust of the late 1980s and early 1990s had debunked the theory that the two sectors operated in different, but complementary, cycles – when housing was in a downturn, so construction revenue would hold that side of the business up and vice versa. In the early 1990s, both were in recession.
Foster says: “The 1980s showed that the theory didn’t work in practice. As a result, in 1994, a lot of contractor-housebuilders were not happy. Although Wimpey sold off its contracting business, the surprise is that many that didn’t have survived.”
Foster argues that a fairly benign economy has meant that the likes of Kierhave been able to stick with the housebuilder–contractor model. Kier has certainly been something of a continuing success story. In the 1994 league it stood 13th by turnover and 20th by pre-tax profit. In 2004, it is 9th by turnover and 22nd by profit. Its housing arm alone also makes it a top 20 housebuilder.
In retrospect, Wimpey’s decision also proved to be a wise one. It decided to focus on the housebuilding market, and in 1996 made a £600m asset swap with Tarmac. Wimpey took Tarmac’s housebuilding business, while it handed over its construction and mineral divisions. In 2003, Wimpey was the UK’s top housebuilder by turnover, making nearly £2.9bn and knocking on the door of the FTSE 100. In 1993 it earned less than £1.6bn and sat at sixth in the contractors table.
The benign economy has not just been the saviour of the contractor–housebuilder business model. More importantly, it has added stability to what was a tempestuous environment for most contractors in the 1990s. Trawling through the list of top 50 companies by pre-tax profit in the 1994 list reveals that 11 were in fact making losses and one, HBG, was simply breaking even. This year, the top 89 are all in profit. And contractors are happy to reward this success, in the boardroom at least, with the average pay of the best remunerated director up 123% from 1995 to £472,000. Evolution has spoken: today’s beasts are tougher – and richer – versions of their predecessors.
Thriving in the wilderness
After all the doom and gloom of recent months, finally the league tables offer some cheer for housebuilders. The leading 25 in the field saw their average margins increase to 17.6% in 2003 from 14.8% the previous year.
This indicates that the slight margin stumble of 0.2% in 2002 was perhaps a glitch and the general upward trend from 11.7% in 1998 remains the norm. As ever, retirement homes specialist McCarthy & Stone is the dominant force in this table, with the average margin up 3.9% to 44.3%.
All but one of the top 10 housebuilders by sales price saw the price of their average unit increase on 2002, hinting that it might not be time to call the top of the market just yet.
For contractors, it seems it might have been a year of reflection and focusing on stabilising their core businesses. The top 10 contractors generated a combined contracting turnover of £13.6bn, up less than £500m on 2002. Pre-tax profit on contracting activities among the big 10 was up less than £10m to nearly £347m.
Pay was one of the big issues in last year’s tables, with the highest-earning director having made 144 times more than the average employee’s pay in 2002. This year that figure was down to 89 times. The average pay was £28,600, a 4.7% increase on 2002, while the best-paid director, from Bowmer & Kirkland, was remunerated to the tune of £2.54m. Since the highest-paid director of 2003 got paid more than £1m less than the previous year – a staggering £3.6m for a director at Liverpool-based housebuilder David McLean – employees may think that they got a good deal relative to executives last year. Perhaps, but since 1995 the pay of the best-remunerated director at the top firms has increased by 123%, while employees’ pay has risen by just 55%.
The figures may change, but the players remain the same – Amec, Balfour Beatty, Wimpey and Taylor Woodrow make up the top four contractors and housebuilders for the second year running. The leading four by pre-tax profit have also retained possession, with Wimpey, Persimmon, Taylor Woodrow and Barratt continuing to dominate.
It has not been a great year for overseas-owned contractors. Last year’s best foreign performer in the UK market, Skanska, fell from 10th to 16th in the turnover league recording less than £1.1bn for 2003. Worse still, it slipped 61 places in pre-tax profit to 91st, after posting a loss of more than £1m.
Australian-owned Bovis Lend Lease was also disappointing. It crept into the top 20 in 2002 with a creditable turnover of £761m, but fell away to 30th this year with less than £580m. On a brighter note, pre-tax profit rose from £12.8m to £14.1m.
Still, these relatively disappointing performances are nothing compared to the ignominious exit that Ballast has made from our charts this year. A stalwart of the Building Top 100, it fell from grace last year when Dutch parent Ballast Nedam pulled the financial plug. Technically in administration, but to all intents and purposes no longer in existence, a quick look at last year’s leagues suggested that the writing was on the wall for Ballast: in the pre-tax league it was 97th with a loss of nearly £13m.
The story is even sadder if compared with the situation 10 years ago when Ballast Nedam stood a mighty third in the pre-tax league and Wiltshier, which was to become part of the same business, was 41st.
Facts and Figures
1 Number of 1993’s top five companies by turnover that are still in the top 100
2.8 Annual percentage increase in average operating margins for housebuilders
21 Number of 1993’s top 50 companies by pre-tax profit that are still in the top 50
25 Number of 1993’s top 50 companies by turnover that are still in the top 50
146 Annual percentage salary increase for the highest-paid director at Bowmer & Kirkland
3600 Increase in pounds since last year of employees’ average pay in the top 25 companies
92.3m Year-on-year increase of pre-tax profit at Wimpey, top company by pre-tax profit
331.6m Increase in total turnover since last year at top company by turnover Amec