Hanson chief Andrew Dougal says contractors could learn a lot from materials firms. So, where are they going wrong?
Hanson, construction's only representative in the FTSE 100, believes contractors can learn some lessons from the way materials producers run their businesses.

Chief executive Andrew Dougal, speaking as the £1.8bn-a-year company launched its sponsorship of National Construction Week, picked out mergers as one of the areas where contractors can learn.

Now demerged from the 1980s conglomerate built up by Lords Hanson and White, the bricks, cement and aggregates group has retained many of its former parent's deal-making skills. Indeed, Dougal describes the prospect of consolidation in the USA, where the group does most of its business, as "almost mouthwatering". But, without naming names, he says some of the consolidation needed in contracting is being held up by executives protecting their own interests. "If you remain focused on shareholder value, other problems should fall to one side," he argues.

It is in Hanson's interests for at least one big player in UK contracting to embark on corporate activity this year. Having raised £800m from disposals after the Hanson Group demerger, Dougal is looking for acquisitions.

He says Tarmac's decision to demerge was the right one, and could indirectly benefit Hanson. If Tarmac's aggregates arm decides to merge with, for example, Pioneer or Aggregate Industries, Hanson would be waiting to see if any possibilities for acquisitions arise.

These would come about if the Monopolies and Mergers Commission ruled that a Tarmac/Aggregate or Tarmac/Pioneer merged company had an unfair advantage in one area of Britain. The MMC would force the newly merged company to sell off part of its business, and Hanson would be ready to swoop. Dougal is particularly keen to boost Hanson's business in Scotland, northern England and parts of the South-west.

How contractors can lift margins

Although Dougal accepts that contractors are more dependent on orders than materials producers, he still believes there is scope for them to lift margins by copying producers' methods. In 1998, Hanson made £265m before tax on turnover of £1.8bn. A contractor with a similar turnover would be happy with a profit around the £100m mark. And to achieve even this would require strong involvement in high margin work such as rail maintenance contracts.

"I would love to see more construction businesses in the FTSE 100," says Dougal, "but contractors need to improve their operations to get there. My message would be to focus on and identify where you make your money. On contracts, it's important to monitor your performance on a regular basis by comparing what is happening with your original tender, and to not rely on hope."

Dougal believes contractors' margins have suffered from a shift in the balance of power between the majors and the materials producers. When the top 10 contractors were more powerful, they could hold materials producers to ransom, but companies such as Hanson made a stand in the 1990s, refusing to undercut rivals.

"We now have good relationships with contractors, but not exclusive relationships," he says. And by producing to meet demand rather than to keep plants open, materials producers are regulating supply to suit their own margins.

I would love to see more construction businesses in the FTSE 100 but contractors need to improve their operation to get there

Andrew Dougal, chief executive, Hanson

Government pressures

Materials firms operate under some of the same pressures as contractors, however – not least the influence of the economy and government policy. Dougal is not fazed by the collapse in orders in the first few months of this year, and believes his firm will still be able to achieve 5-7% price rises for aggregates.

"We are not seeing any deterioration from the end of last year to the beginning of this," he says. "But we are prepared for the market to be generally flat.

"Even so, with falling interest rates, we will see an improved housing market, which will support sentiment in the commercial market."

Dougal is particularly optimistic about the USA, where a government drive to increase infrastructure spending by 44% promises a boom for materials suppliers. Hanson also wants to expand in Malaysia, Singapore and the Philippines, as well as in eastern Europe, where Dougal has high hopes for Poland.

The former Hanson Group was aggressively Thatcherite, but Dougal is noncommittal on government economic policy. He has his own doubts on whether Britain should join the euro, but says that, with Hanson exporting very little, the firm would be unaffected.

But environmental clampdowns such as the proposed energy and aggregates tax do worry him. "I understand what the government is trying to do, but it has to be careful not to lower any more burdens on the construction industry," he says.

Like many contractors, Hanson is now attempting to become a more "focused" business, throwing off the ragbag of companies that made up the 1980s conglomerate. Its shares have performed as well as any in the FTSE index, defying fears that it would follow the old Hanson conglomerate practices that dragged down the value of spun-off companies in the immediate demerger period.

Dougal says spreading best commercial practice within a materials business was particularly hard, with other competing operations distracting executives.