Despite the economic headwinds affecting the industry, total turnover and profit rose in most sectors last year. But is it too soon to celebrate?
Given the troubles afflicting the construction supply chain in recent years, the latest CN Specialists Index makes for relatively cheerful reading. Total turnover rose in five and pre-tax profit increased in six of the seven specialisms from last year’s index. And in this year’s brand-new fit-out category, only two of the firms saw lower profit and revenue compared with their previous financial years.
Aggregate revenue reached £13.32bn for the 80 firms in this year’s index, which mostly reported their 2023 performances. This 35 per cent increase from last year’s total of £9.89bn is skewed by the fact that fit-out (£2.17bn) is included for the first time. But even if this category is ignored, total turnover across the seven other specialisms rose by 13 per cent.
Ground engineering led the way in turnover growth with a 26 per cent year-on-year increase. It was followed by mechanical and electrical (M&E) with a 21 per cent increase, and scaffolding with 18 per cent. Demolition revenue grew by 14 per cent, and concrete rose by 7 per cent. Steel turnover increased by 1.6 per cent but envelope revenue fell by 0.7 per cent compared with last year’s index.
Aggregate profit more than doubled in this year’s index, rising from £168.5m in 2023 to £410m the following year. Removing fit-out from the equation, the 70 remaining firms still saw their total pre-tax profit rise by 98 per cent. Concrete and M&E (recovering from an aggregate loss last year) and recorded the fastest profit growth at 591 and 474 per cent respectively. At the other end of the scale, envelope remained unprofitable despite its turnover growth, with a 202 per cent year-on-year fall compared with the 10 firms in the 2023 index.
Between these extremes came profit growth in ground engineering (70 per cent), demolition (51 per cent) and scaffolding (24 per cent). Steel specialists saw their pre-tax profits grow by 14 per cent.
Rebecca Larkin, head of construction research at the Construction Products Association (CPA), tells Construction News that the figures are “decent” given that 2023 was a year “laced with uncertainty”.
She says that stubborn inflation made for tough trading conditions amid slowdowns in the housebuilding and industrial sectors. “Given that construction insolvencies were also at a level last seen in the global financial crisis, the headline figures clearly belie a variation in how the supply chain has managed risk and dealt with the challenges still present,” she adds.
Specialists were not immune from the effects of inflation on material prices. Larkin describes “volatile” price movements in timber and steel over the past three years. But Brendan Sharkey, construction partner at accountancy firm MHA, thinks specialists have generally weathered the inflation surge, although he says timber prices rose steadily last year.
Combined margins in concrete and demolition were thinner than last year’s index. Larkin says those areas are the most likely to be affected by a slowdown in housebuilding, industrial and large commercial projects.
“A reduced pool of potential projects is then likely to lead to lower-price bids, aiming to keep revenue flowing at the expense of margins,” Larkin adds. As well as the decrease in work, Sharkey says “pricing pressures” bore down on margins in concrete and demolition.
The ground engineering, envelope, scaffolding and steel sectors saw margins broaden. Sharkey says the last three of these specialisms participate in increasingly popular cut-and-carve refurbishment projects. Larkin says that envelope, scaffolding and steel specialists have also benefited from “strong demand that can’t really be put off – envelope [did well] due to the ongoing and growing pipeline of remediation work and scaffolding because… as long as a project is going ahead, the scaffolding will be required to enable other elements of the work.”
Fit-out has seen consistently strong growth in the past few years “even when other areas of construction have faltered”, says Larkin. She adds that office refurbishments are growing in scope and value “to benefit from strong demand for high-quality space and [to] meet corporate energy-efficiency priorities”. Sharkey agrees, noting that cut-and-carve main contractors will require extensive fit-out works. Buildings that are energy-inefficient will have to be knocked down or refurbished, he says, adding: “The latter gets more support for environmental reasons.”
But the collapse of fit-out giant ISG in September caused alarm in a supply chain “that has had a torrid few years”, says Iain McIlwee, chief executive of trade body the Finishes & Interiors Sector. “A corporate failure of this size makes a big dent and sends out a stark warning,” he adds.
Last December, in its review of 2023, the Building Cost Information Service said specialists were “potentially at more risk” of insolvency because they lack the means to diversify. And in September this year, consultancy Gardiner & Theobald warned in its Q3 Market Update of “ongoing price pressures” in the M&E supply chain.
Sharkey is still optimistic. “I think the construction industry will do well [next year], particularly those firms with a clear specialism,” he says. Larkin adds that material prices fell by 2 per cent in the first six months of 2024, “which at least signals a turning point from a couple of years of rapid inflation”.
But the first half of the year “was particularly weak across most construction sectors”, she adds. “It will be interesting to see whether specialists reacted to lower work volumes coming into the year by focusing on protecting revenue through winning bids or protecting margin at a time of high supply chain risk. As new orders start to come through in the second half of the year, that should hopefully firm up a recovery, but the full positive impact is only likely to be felt in 2025.”
