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Slowing down

NCE's unique analysis of civil engineering contracting reveals signs that - the rail sector apart - the market is beginning to flatten out. Alastair McLellan reports.

The top 10

Bovis continues its climb up the civil engineering premier league by taking third place away from Tarmac. Its rise was inspired by a particularly strong performance overseas, while Tarmac's workload dropped by a fifth both home and abroad.

The lower reaches of the top 10 are slightly confused by the failure of Jarvis, Costain and Amec to provide all or any of the relevant turnover figures, but one notable absentee is Taylor Woodrow. Last year Taywood had a combined civil engineering turnover of £278. This has fallen 36% to £178M.

The top three contractors all saw civil engineering become a smaller proportion of their overall business. The greatest shift was at Kvaerner, which saw its civil engineering contribution drop from 55% to 48%. Balfour Beatty's contribution slid from 48% to 45% and Bovis from 30% to 27%. Bovis now claims an overall turnover larger than any contractor save Amec.

Tarmac, despite seeing workload plummet, actually saw civils contracting represent a greater proportion of overall turnover as the rest of the business fared even worse.

UK civil engineering

The market leaders

1998-99 proved a decent year for UK civil engineering contractors. Turnover increased on average by just 11%, but operating profits were around a quarter higher. Average margins inched up from 3.3% to 3.7%. However, workload growth does not appear to have produced a similar increase in staff numbers.

In terms of individual performance, last year was not particularly succesful for the two largest contractors with Balfour Beatty and Tarmac shedding over £250M of turnover between them. In 1998 there was a £300M gap between the turnover of second placed Tarmac and number three Kvaerner. This year the gap has narrowed to just £90M.

Kvaerner's figures underline the rude health of its civils business, despite the forced sale of Cleveland Bridge, with particularly strong growth in design and build work. The fact that the turnaround has been achieved without the major presence in the booming rail market possessed by many of its competitors makes the performance all that more commendable.

However, the star performer of the year must be May Gurney. A 78% increase in civil engineering turnover saw it leap eight places to grab a place in the top 20. At the other end of the table, Amec and Amey had as good years as Balfour Beatty and Tarmac had poor ones.

Among the highly competitive middle-ranking national contractors, Morrison, Robert McAlpine and Kier stand out as having turned in the strongest performances.

Apart from the top two contractors, the year's biggest loser was Costain. The long-troubled contractor now has a significant presence in just two UK civils markets, unfortunately both the roads and the coastal sectors proved weak in 1998-99.

Outside the top 20 the fastest climbers were Henry Boot, jumping from 48th to 34th with a civils turnover up 150%, and Cornwall-based TJ Brent, up to 30th from 51st as civils turnover climbed 72%. Other firms on the rise included Gleeson up from 30th to 25th, Jackson, up from 32nd to 26th, and Dew, up from 46th to 40th.

By far the biggest fall was at Allen, which last year occupied 23rd place in the civils turnover table with an £82M turnover. This has dropped more than half to £39.5M, pushing Allen down to 42nd. Others on the slide included Osbourne, down from 39th to 45th and Harbour and General, down to 46th from 43rd.

Areas of work

The most buoyant civils contracting markets during 98-99 were (in order): the water sector, ground engineering and energy. Coastal work, airport construction and the long-suffering roads sector were the places not to be.

But as far as the next two years go - there is only one game in town as far civils contractors are concerned. Some 84% of the firms working in the rail sector identified it as one of the two markets likely to show the greatest growth over the next two years. Just under half of the firms in the water sector see this as one of the key markets, while for airports the proportion was 33%, and 29% for energy.

Contracting roles

There is no doubt over what type of contracting is showing the greatest growth. For the second year running design and build and maintenance/facilities management displayed the sharpest rise in their share of contractors workload. Main contracting, specialist contracting and construction/ project management, again as with last year, almost stood still.

DBFO turnover was very disappointing, but with the privately financed hospital building programme now well under way and the modernisation of London Underground finally becoming a reality, contractors appear to be confident that the next two years will produce real growth.

Of the leading players, Kvaerner, Alfred McAlpine, Tilbury Douglas and, particularly, Tarmac and Amey seem to be best positioned to match procurement style trends.

It is also worth noting that the definition of civil engineering contracting is becoming increasingly stretched. Amey executives, for example, claim that (pre Comax takeover) 63% of its turnover is 'civil engineering', while at the same time declaring that only 49% is 'construction'.

The future

One in five civil engineering contractors are rubbing the hands together in glee at the prospect of the next two years, predicting a 30% increase in turnover (see chart 5). However, the majority see gentle growth as more likely. A 5% annual increase in turnover, half this year's rate, appears to be the average expectation.

However, a further analysis of the data suggests that it is the smaller or niche firms which are most optimistic about the next two years. Five of the 10 largest contractors predict their civils turnover will not increase by more than 5% between now and 2001, with two of them expecting no increase at all.

The work in hand of the top 20 contractors is slightly lower than it was last year. Among those with significantly less work in hand than a year ago are Nuttall, which has seen it decline by 46%, Birse (down 35%) and Mowlem (25%). However, Tarmac's work in hand is 30% higher than a year ago, while Kvaerner's is up 17%.

Overseas

The market leaders

For the first time this decade, the overseas market was quieter than the UK. Again, the only significant movement among the major players was the collapse of Tarmac's turnover.

Kvaerner trod water, an increase in design and build turnover making up for a decline in Cleveland Bridge's workload. Bovis' solid performance marks a interesting shift in the pattern of its work. While fee management work shrunk by 3%, it saw main contracting turnover more than double.

Contracting roles

Bovis' experience, however, appears to run counter to the general trend in the procurement of contracting services. Very few firms see main contracting as a growth area. But none - including Bovis - suggest that the fee management route has great potential.

This is in stark contrast to the firms with the financial muscle or connections to be involved in DBFO work. All four companies rate the sector as one with significant growth potential.

The UK's number one international contractor, Kvaerner, is able to demonstrate significant experience in all the main procurement styles. Its £555M overseas civils turnover breaks down as 27% joint venture work, 27% specialist contracting, 26% traditional contracting and 20% design & build work.

Areas of work

If rail is the UK market which every civils contractor wants a piece of, then water occupies the same place in their affections overseas.

Water has overtaken roads as the most active overseas market and rail as the one with the greatest potential. The companies best placed to exploit this market appear to be (in order) Kvaerner, Mowlem and Tarmac. The airport market has suffered the greatest reverse over the last year. The slowing of world trade in the wake of Asian currency crisis has significantly reduced demand for new terminals and runways. This will worry Bovis more than any other contractor as one tenth of its overseas turnover comes from this market.

The absence of any perceived potential in the ground engineering market, will also obviously concern foundations specialist Keller.

One final, defining statistic from the analysis of this data is that Kvaerner derives 62% of its overseas turnover and 38% of its overall civils turnover from roads and bridges constructed abroad. No wonder a senior executive claimed recently that 'real civil engineering only takes place abroad these days'.

Countries

Two giant countries appear to occupy the thoughts of UK civils contractors - and China isn't one of them. The People's Republic may be widely regarded as the construction market with the greatest potential on the planet, but only three UK civils firms have so far managed to win work there - although of course eight are operating out of Hong Kong.

Of more immediate interest are India and, particularly, the US. Although India falls in the same 'potential' category as China, colonial links make it easier to set up shop there. The US, however, offers the prospect of real work for hard currency - with the deregulated power sector looking particularly attractive.

The country analysis also confirms how far UK civils contractors lag behind consultants in developing international opportunities. There are 10 times as many UK consultants working in China than contractors, nearly eight times as many in India and six times the number in the US.

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