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Cost cutting measures to shake up the industry

Construction Industry Council chairman Keith Clarke has warned 2009 will see a massive shake up in construction and civil engineering as consultants begin to take drastic action to cut costs.

Clarke was speaking to NCE as news emerged that consulants are stepping up efforts to cut costs through redundancies, pay cuts, bonus freezes, four day weeks and cuts in training and recruitment.

"This is a different crisis to all those seen previously," said Clarke. "I don’t think we have seen the half of it. There is going to be a massive shake out in our sector, in engineering and contracting. "There are good companies out there that need banking facilities to get them through to month end or over the next six months, but these banking facilities aren’t there and it means good firms will go under."

Clarke’s view was echoed by city analyst Numis which fears that some Stock Exchange listed consultants will not survive the downturn. "We have a stress test standard exercise which sees profit and earnings per share halving and all the companies emerge soundly except White Young Green and to a lesser extent Waterman," said Numis director Francesca Raleigh.

"Our analysis shows the strongest companies on net debt are Atkins, Hyder Consulting, RPS and Scott Wilson." Mouchel and WSP – the other stock market listed consultants – also fair well in the analysis.

Clarke, also chief executive of Atkins, said his own firm would not be making the mistake many businesses did in the recession of the early 1990s when firms laid off their young trainees, only to struggle with a huge skills shortage when the economy turned around.

"At Atkins we are taking steps to ensure that where we have given commitment to graduates, we will honour that commitment," he said. "But then we have been prudent about our growth. "It would be nice to say that the whole industry will protect its graduates but the reality is that the lack of bank finance means that there are firms in the supply chain that will go bankrupt. "Around 95% of firms are 40 people or less and the idea that they can all afford to keep their graduates on just won’t happen unless they have great clients and great cashflow, and that happens in a very different market to the one we are in."

Numis’ forecast for the year ahead echoes Clarke’s view, with the expectation that consultants will move to trim fat accrued as a result of the recent boom years. "We believe UK Plc contains a number of viable long term players in the engineering consultancy space," concludes the Numis report. "Balance sheets are generally sound, companies are already cutting costs and prepared to be as rigorous as is required and many of the companies have attractive market positions in the UK and/or internationally making them very well placed in the upturn.

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Cost reduction measures are believed to be taking the following forms:

  • Redundancies Labour is the largest cost for consultants, representing 50% to 60% of turnover, and redundancy costs have a 4 to 6 times payback. Numis cites WSP’s decision to cull 5% of its workforce at a cost of £2.5M to release an annualised cost saving of £15M. Similarly Scott Wilson’s move to cut 60 jobs in its commercial private sector is a £500,000 redundancy cost that releases £2M.

  • Pay cuts In some cases these are group wide, on average in the order of 10%.

  • Bonuses These account for 1% of turnover or 5% to 15% of profit before tax.

  • Moving to a 4 day week

  • Cutting training, travel and recruitment spend Recruitment spend had been as high as 1% of sales in some companies.

  • Reducing back office costs For example IT and human resources.

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