It’s Not As Bad As It Could Be

The construction industry has now endured five long years of an economic downturn, and every month new figures come along which suggest we are still not out of the woods yet. Last week’s figures from the ONS, showing that UK construction output stayed flat in May, were no exception.

Given such a protacted situation, you would expect the icy winds of recession to be having an impact on even the mightiest companies in the sector, never mind the many hundreds of smaller SMEs that have already given up the ghost and called in the administrators.

A report released at the same time as the ONS figures last week by market research company Plimsoll Publishing suggests they just might be.

The company, which has been running reports on the financial health of various UK sectors since 1987, has studied the current financial prospects of the 500 largest construction companies, and decided that 68, or 14% of them, are in what it calls ‘danger’.

This goes beyond companies that are seeing sales or profits fall relative to investment, or are seeing an increase in total debts. Such companies would be described by Plimsoll as ‘failing’. To be described as being in ‘danger’, which is the bottom of five different category descriptions the company uses, construction companies must not be making any profit – 28 of the 68 are actually making a loss – and have high debts. To be a ‘strong’ company, in contrast, and so come in the top category of the five, you have to be making profit margins of at least 2% a year, have to be sitting on what Plimsoll describes as “healthy cash piles”, and should really be debt free – as most of the 311 construction companies who have made it into this category this time are.

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For commercially sensitive reasons, Plimsoll does not make public who the 68 who are in ‘danger’ are. But this is not a survey that whips up a frenzy on the evidence of just a few stray crumbs, as Plimsoll’s senior analyst David Pattison explains. Judging by past track record, he says, a Plimsoll study is one that should be paid some attention.

He says: “We tested this method of analysis on a study of 351 previously failed companies, including all the latest retail failures, and this showed 320 had a ‘caution’ or ‘danger’ rating up to two years prior to their demise. This proves our method of analysis can identify the key characteristics of a failing company.”

But what is perhaps less expected about this construction survey, considering all the bad news there is about the industry, is not how bleak it is. In fact, when compared with other industries Plimsoll has surveyed in recent years, the 68 or 14% figure is relatively benign.

Plimsoll studies into the 500 largest freight forwarding companies, IT resellers and marketing agencies found that, respectively, 123, 178, and a staggering 232 were in ‘danger’. So a figure of 68, in contrast, could even look quite promising.

Pattison says the main reason for such a sharp difference is really the size of the market, and in particular the size of the companies that make up the top 500. “Most of the top 500 in construction are large, vast companies,” he says. “In comparison, the top 500 recruitment companies, which we also surveyed, are still very, very small companies, so it is perhaps less surprising that 155 of them are in ‘danger’.”

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Even still, he says, as a result of trawling through the survey there is evidence to suggest that the result might actually be quite good for the construction industry as a whole.

“We found that a lot of those larger companies have already gone through the pain of recession, and that is probably why they are in a good situation now,” he says. “After all, those 311 companies rated as ‘strong’ have a real commercial advantage and they are proof that that fundamental market is healthy.

He is quick to insist that the recession is far from over. “In fact it is taking much longer than was initially envisaged,” he says.

But he says the fate of the ‘strong’ 311 suggest that, while the “horrible decisions” they may have had to make about job cuts, for example, may have been deeply unpopular, they may in the end have been the right decisions.

“Those cuts probably had to be made,” he says. “They were necessary for the survival of the business.”

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