CN Specialists Index 2021: resilient firms march on

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The first look at the pandemic’s impact on specialist contractors shows an expected financial hit, but also signs of resilience. This will be needed, as businesses are already dealing with major new challenges.

The latest accounts from the UK’s top specialists across seven sectors show how clearly the industry was affected by the pandemic. The suspension of activity on many sites during the first lockdown gave way to a return to work, albeit often with lower output due to social distancing and other disruption. Contractors also struggled with delays to project starts.

All of this conspired to drag down revenue in five of our seven sectors, which cover concrete, demolition, envelope, ground engineering, M&E, scaffolding and steel. Across the 70 firms analysed, almost two-thirds saw their revenue fall.

-0.2%

Percentage-point decrease of the median margin across 70 firms analysed

The widespread impact on turnover may not be a surprise. But Construction News’s analysis finds the falls were not uniform, with some sectors hit harder than others. In addition, the impact on profitability appears to be less severe than perhaps first feared. The industry’s specialists have displayed a remarkable financial resilience. But, as they dust themselves off following a tumultuous year, many are already facing fresh challenges.

Preparing for a difficult year

Going into 2020, many contractors were hoping for work to pick up following the decisive 2019 general election result, but were wary of the potential negative impact from the UK’s exit from the EU. GKR Scaffolding strategy director Helen Gawor says the company reduced its revenue targets in preparation: “We were expecting it to be a difficult year, but we didn’t realise just how difficult.”

As reported in last year’s index, specialists had been building cash reserves going into 2020, which provided some cushion when revenue fell due to the pandemic.

The scaffolding and building envelope sectors were hardest hit, with median revenue falls of 23 per cent and 13 per cent respectively.

Lower revenue led to a predictable hit on profitability, as contractors found it harder to cover their fixed costs. Every one of the seven sectors reported a decline in median pre-tax margins.

55%

of firms analysed increased liquidity

Ground engineering suffered the steepest decline, with the median margin dropping 1.9 percentage points, swinging from 1.6 per cent in last year’s index to -0.3 per cent. Along with the biggest decline, it was also the only sector to report a negative median margin. This reflected the relatively higher fixed costs for the specialists due to the value of plant and machinery they lease.

The smallest declines in profitability were in the envelope and steel sectors, each of which reported 0.2 percentage-point falls in median profit margins.

More encouragingly, liquidity broadly increased, with 55 per cent of firms across the 70 we analysed ending their latest financial years with more cash in the bank. Prompt payment by clients, the government’s furlough scheme and a general tightening-up of cash management are all factors that have been cited for boosting cash levels and strengthening balance sheets.

That liquidity could provide a vital cushion to firms as they navigate the recovery.

Turbulent recovery

Managing director of groundworks specialist O’Brien Contractors, Peter O’Brien, says the rebound from the first lockdown has not been consistently strong. There was a worrying dearth of new work in late 2020.
“From September 2020, new projects, or new enquiries, were not coming online at all,” he says. Enquiries have picked up in 2021, he adds, but notes that it takes time for an enquiry to turn into a live project.

Materials crisis

The recovery in 2021 has come with new challenges around material and labour availability. When the pandemic first hit in spring 2020, one of the consequences was a halt in production at material suppliers. Like the contractors they supply, they resumed production as lockdowns eased and work restarted. But there was a problem: a construction site can be re-mobilised in a fortnight or less, but it takes longer to restart production facilities and get them up to full capacity.

As construction booted back up, material stockpiles were run down and suppliers had to play catch-up. This scenario was playing out in construction markets around the world, leaving UK buyers competing with those in China, the US and other countries for globally traded materials, such as timber and plastics.

“In a way, we were expecting it to be a difficult year, but we didn’t realise just how difficult”

Helen Gawor, GKR Scaffolding

Material shortages and the resulting inflation has plagued 2021. “Material price increases seem to happen on a weekly basis,” O’Brien comments. As of September 2021, construction material prices were up by more than 23 per cent year on year. This has created a serious challenge for an industry just getting back on its feet after the blow of COVID-19.

Firms that have had to completely reconsider how they work on site due to social distancing are now having to reassess how they procure for jobs as well. Skanska Rashleigh Weatherfoil managing director Adam McDonald says: “Having conversations from the get-go in terms of the design cycle has been vital to identify where we might need to pre-buy to get the right materials or look for alternative materials where possible.”

Adding to the operational challenge has been the difficulty in securing workers. Byrne Bros managing director Alastair Smyth says: “With migration back to Eastern Europe, there’s less people in that pool, so competition’s been quite hard.”

In August 2021, there were 43,000 vacancies in the sector – the highest number since records began in 2001.

New opportunities

Skanska RW’s McDonald expects the market to remain “turbulent” into next year. But he adds that new opportunities are emerging.

Careys managing director Bjorn Bigley agrees and highlights the growing demand for ‘gigafactories’ to manufacture batteries for electric vehicles. He says the term was relatively unheard of 18 months ago, but now a number of schemes are advancing with construction contracts in the hundreds of millions.

In addition, the industry is seeing progress in decarbonisation as the drive to reach net-zero accelerates. Byrne Bros’ Smyth says that while there are no zero-carbon concrete options yet, products are emerging that reduce the amount of embodied carbon by 60 per cent. “Those are game-changing levels,” he says.

23%

Year on year rise in material prices

The direct disruption from the pandemic may have receded, but its effects linger on. Longer lead times and higher costs for materials, which have dogged the industry since the initial halt in production in spring 2020, are expected to persist well into 2022. Specialist contractors will need to work closely with the supply chain to manage this short-term pressure, while also addressing the longer-term challenges of training and recruiting more people to combat labour shortages, and decarbonising their operations.

What the industry’s largest specialists have demonstrated in an exceptionally difficult period is remarkable resilience. GKR’s Gawor says: “It’s very difficult out there at the moment, but if there’s one thing we do know it’s that the vast majority of businesses in our sector are very resilient.”

Having overcome what we hope is the worst of the pandemic, they must now rise to the new challenges.

All data in this year’s index comes from company accounts filed prior to 22 October 2021

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