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Exclusive surveys show industry declining to 2004 levels

Civil engineering contractors say they are facing an “increasingly bleak” future as the lack of opportunities for new work and the impact of government spending cuts bite.

Results from NCE’s annual Contractors File, along with the latest findings from the Civil Engineering Contractors Association’s (Ceca’s) quarterly Workload Trends Survey and the government’s construction output figures, all show the industry to be in a state of severe decline.

This year’s Contractors File, published in this week’s NCE, confirms the industry is now operating at 2004 levels of revenue. Analysis of the last eight Contractors Files clearly shows how four years of consistent, steady turnover growth from £10.4bn in 2004 to £16.4bn in 2008 has been followed since by an equally consistent, equally steady decline in turnover back down to £10.6bn today.

  • Click here to access the full Contractors File database

The biggest hit this year has been felt by those operating in the roads sector – traditionally the largest sector for civils contractors – where the combined turnover of £2.9bn is down more than a third on the £4.5bn earned just two years ago.

Those in the middle ground are having to slash margins. In extreme cases, some firms are pitching for work at below cost.

While income from the regulated sectors of rail and water has filled the gap to an extent, Britain’s contractors continue to battle adverse market conditions. Rail revenues were back up to £2.3bn after a decline of £600M to £1.7bn the previous year, and water revenues were also up by £400M to £1.5bn.

And there are big concerns that the state of the market in 2012 is even worse than NCE’s figures show – figures supplied to the File are in the main for financial years ending 31 December 2011.

More up-to-date assessments of the poor state of the market come from the government’s quarterly construction output statistics and Ceca’s Workload Trends Survey.

The most recent construction output statistics, published earlier this month, blamed poor weather and the Queen’s Diamond Jubilee weekend for another big drop in construction output during the second quarter of 2012. The total volume of construction output was £24.4bn for the quarter, a 3.9% fall compared with the first quarter of the year and 9.5% down against the second quarter of 2011.

Infrastructure suffering

The worst performing sector was infrastructure, which was down 8.6% on the previous quarter. Ceca’s latest survey, published last month, also made for grim reading. Results from the survey showed workloads heading into negative territory once more after two previous quarters of growth, with 20% more Ceca members reporting declining activity than reporting gains.

It also highlighted the roads sector as the one facing the biggest problems, with what it called a “precipitous” drop in activity. Ceca called on government to act now to avoid the industry collapsing.

“Without targeted investment the outlook for the infrastructure sector in the next 18 months looks, in the words of one contractor, ‘increasingly bleak’,” said Ceca external affairs director Alasdair Reisner.

“Which is why we at Ceca are urging the government to make targeted investment its priority – in shovel-ready infrastructure maintenance and minor works. “It is time to pull the infrastructure sector back from the brink,” he said.

SMEs appear to be most vulnerable, with the Contractors File showing that, despite the overall decline, the combined turnover of the Top 20 firms, by revenue, is actually up £700M to £9.4bn this year.

Below cost

“The pressure is causing a schism between the sector’s limited number of big players, who have a strong balance sheet and the capability to deliver the big projects, and the small- and medium-sized firms who are being squeezed by ever-greater competition,” said cost consultant Turner & Townsend managing director Steve McGuckin.

“As a result those in the middle ground are having to slash margins to negligible levels – and in the most extreme cases, some firms are pitching for work at below cost, simply to keep cashflow coming in,” he said.

This activity – known as “suicide bidding” – is highlighted in Ceca’s survey as the joint biggest specific issue of concern to contractors beyond the overall shortage of work.

Poor client practice is said to be of equal concern to contractors, with a high number of Ceca members reporting that their businesses are being directly affected by it.

Quality squeezed

“A significant number of contractors reported that clients are using market conditions to drive down prices,” said Reisner. “In the words of one Ceca member, ‘clients are playing one contractor off the other to drive prices down, often at the expense of quality or health and safety commitments’,” he said.

Contractors also reported that clients were increasingly demanding unreasonable payment terms, and that the increased risk of contractors not being paid on time is threatening the very survival of a significant number of smaller firms.

“As one respondent put it, ‘unless something is done, and done quickly, the number of SMEs who won’t survive is frightening’,” said Reisner.

  • Click here to access the full Contractors File market report

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