Growth is stable, order books are bulging and good times are here for contractors. But it’s not enough for the City, which is why Laing, Mowlem and Taywood have axed hundreds of jobs. And there are more to come …
A fresh spate of job cuts is hitting contracting. Mowlem's announcement two weeks ago that it had axed 170 jobs, mainly from its building division, came on the back of Laing's 850 redundancies revealed last autumn.

Amec shed more than 2500 jobs from its capital projects division last year. Most of the jobs are believed to have gone in the oil and gas sector but there have been a large number of cuts in the contracting businesses (see news). Taylor Woodrow’s contracting arm shed 250 jobs in 1999, and there are rumours that it will make further cuts this year. There is also talk of overheads reviews and job losses at Carillion, Amey and Balfour Beatty.

It all adds up to the biggest rationalisation in the industry since the early 1990s. But whereas the hefty culls of the last recession were an overt reaction to dismal orders, today’s cuts are less easily explained. After all, times are good. The RICS reports that construction activity is at its highest level since late 1997. And for the first time in years, growth levels look sustainable – most forecasters are predicting output growth of 2-3% for the next two years.

So, why the cuts? Leading City analysts believe the answer is in Laing’s announcement last year that, as part of its strategy to improve margins, it planned to cut overheads. “At the time of Laing’s shake-up, it set itself an overheads target of 3.5%, and that has set a precedent,” says Mike Betts, analyst with investment bank JP Morgan. “For the past 20 years at least, the industry has been stuck with the attitude that a 5% overhead on turnover is an acceptable level. Laing has now put its head above the parapet and said it’s going for 3.5%, which was previously unheard of.”

Mark Hake of Merrill Lynch agrees: “We are in the days of benchmarking and it is fair to say the benchmark has been redrawn.”

A spokesperson for Taylor Woodrow admitted that the Laing figure had had a major impact on the company. “If our shareholders said to us, ‘I’ve noticed Laing’s set an overheads target of 3.5%’, we’d clearly be shooting ourselves in the foot if we ignored it.”

The chief executive of another top 20 contractor agreed that Laing’s move has played an important part in the current round of downsizing. “But it is hard to see how we can get below 4% or 5%,” he said.

Laing set itself an overheads target of 3.5%, and that has set a precedent

Mike Betts, JP Morgan

But why have overheads become such a hot topic? Despite the industry’s healthy output, the long-awaited improvement in contracting margins has failed to materialise. In the late 1980s and early 1990s, margins averaged 2.5-3%. The downturn knocked margins down as low as 0.5% in the early and mid-1990s. But last year, the top 50 contractors averaged margins of only 1.3%. “Those kinds of levels of return are simply unacceptable for shareholders,” says one City analyst.

Contractors, whose stock market ratings have generally underperformed compared with the rest of the stock exchange, know this all too well. Most of the top 20 have now set targets of 2-3% margins for the next few years. Mowlem, for example, wants 3% margins by 2004. Like most other big players, it wants to do this through more negotiated work. It is also planning to cut overheads by 15%. And for a contractor moving away from competitive tendering, the obvious starting point for a cull is estimating, procurement and finance staff.

Of course, in the medium term, prefabrication threatens the survival of the trades, and job losses can be expected there, too. But at the moment, the professionals are first in line.

Peter Jenkins of Ernst & Young explains why the axe is falling on managers, rather than site workers. “The difficult days of the early 1990s saw sites downsized dramatically. That left the head offices and regional offices relatively unscathed, and this is where you still see excess layers of management that can be stripped out.”

What is an overhead, anyway?

And just to confuse contractors struggling with tough new cost-cutting targets, the definition of an overhead can vary significantly between companies, depending on their accounting techniques. One may count a QS working on several different projects as a site or direct cost, whereas another firm would consider the QS an overhead because they are less directly involved in production than a QS on a single £50m job.

It’s a bit like pruning the roses. If you prune too hard, you don’t get any bloom back

John Armitt, Chief Executive, Costain

However, the City has little patience with such discrepancies. As JP Morgan’s Betts says: “Anyone who tries to fudge the issue of what an overhead is, is simply trying to come up with excuses as to why they shouldn’t cut costs. Frankly, I’m not interested in excuses.”

The fact is the largest part of any definition of overheads is staff costs. “Overheads mean everything from estimating, to marketing, to my job,” says Costain chief executive John Armitt.

So, it is the professionals who are under threat. But several observers believe that firms may hurt themselves in their eagerness to cut out waste. “The question arises, how far to the bone are people going to cut before one of them does irreparable damage?” asks Jenkins.

One analyst points out that the “better contractors” are cutting jobs as part of larger restructuring programmes. “They want to work for fewer clients and spend more time winning repeat work with them,” he says. “But those that are just planning ‘classical downsizing’ will end up being small bad contractors rather than large bad contractors.”

Bankers also point out that cutting turnover and staff could lead to serious cash flow problems. Laing’s restructuring will cost £14m in redundancy payments alone. And there are concerns as to whether there will be enough local managers to deal with problems on site.

Armitt agrees that cutting too far can cause more problems than it solves. He merged Costain’s building and civils arms last year and later made the merged division’s managing director, Stuart Atkinson, redundant because their roles overlapped. He says: “If you haven’t got sufficient resources to work on a tender, you could start winning jobs at too low a price. Similarly, if you have too few people in your accounts department, you won’t be able to pay your subbies properly.

“It’s a bit like pruning the roses. If you prune too hard, you don’t get any bloom back.”