Late last year NCE asked 43 civil engineering consultants and contractors for their view on the likely state of the infrastructure market in 2011. It made grim reading; margins were being hammered, and tender prices were plummeting.
Compared with December 2010, 54% said margins for new public work were lower. Alarmingly, 31% said margins for work being done within existing frameworks were down also. No firms surveyed said margins for public sector work were up.
Tender prices were also being slashed, with 63% of firms admitting to cutting prices for new work and 52% making cuts for repair and maintenance work. None had put prices up.
Three months on, and with results season in full swing, it is becoming screamingly obvious that the situation has not improved. Speaking after his firm announced a modest 2% dip in turnover to £707M for the year ending 31 December 2011, WSP chief executive Chris Cole admitted margins were being “crippled”.
“There are some good markets, and there are some bloody tough markets. The UK is the toughest,” he said. “The work is slow to come through, volumes are down and margins are crippled,” he said, explaining the pressure on margins was a “direct correlation” to the state of the market. “When everybody is chasing one job, margins are sure to be down,” he said.
Fierce competition for scarce work is having inevitable consequences on tender prices.
The Civil Engineering Contractors Association’s most recent workload trends survey covering the last three months of 2010 is grim.
It reports that tender prices for both new work and repair & maintenance continued to decline in the year to January. On balance, 45% of firms working on a new construction project and 38% involved in maintenance work reported a decrease in tender prices. Tender prices for both new work and maintenance have now been falling since October 2008.
As cost pressures intensify, profit margins are reduced further – putting a further burden on profitability and increasing the risk of insolvency, says CECA external affairs director Alasdair Reisner.
“In the short term, we remain extremely worried that tender prices continue to fall while our members’ costs are rising,” he says. “This is an unhealthy situation for the industry.”
The effect of falling tender prices is being fiercely compounded by rising materials costs. The Construction Products Association’s Construction Trade Survey for the last quarter of 2010 highlighted sharp rises in costs, such as a 46% price increase in copper and a 80% in iron ore.
“Firms across the whole industry are pessimistic looking forward,” says CPA economics director Noble Francis. “We have not yet seen the full impact of the public sector spending cuts and without a considerable improvement in private sector construction, a recovery in the industry as a whole will be delayed.”
Last week engineering institutions and trade bodies including the ICE, CECA and the Association of Consultancy and Engineering put in their submissions to the Treasury ahead of the Budget. All pleaded for certainty and clarity on infrastructure spending. Such clarity cannot come soon enough.