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Construction continues to grow but contractors' profits seep away

8 Nov 17 With costs going up but tender prices static, contractors’ profit margins are in decline once again

The effects of the fall in the value of the pound following the EU referendum are still pervasive, with 92% of main contractors, 85% of heavy side manufacturers and all light side manufacturers reporting a rise in raw materials costs in the third quarter of 2017. In spite of this, only a small proportion of contractors are increasing tender prices to compensate and, as a result, 31% of main contractors reported a fall in margins, the worst balance in five years.

The Construction Products Association’s construction trade survey for Q3 shows that the industry has extended its run of growth to 18 quarters, however, despite rising costs and diverging performance across sectors.

The survey of main contractors, SME builders, civil engineering contractors, product manufacturers and specialist contractors found that the construction supply chain reported increases in sales, output and workloads in the third quarter of 2017, driven by increased demand in private housing, repair and maintenance and infrastructure.

Net balances for enquiries and expected product sales for the year ahead were described by survey compilers as “muted”; contractors’ order books were sustained by work in only housing and repair & maintenance. New orders were down in commercial, industrial and public non-housing construction, which together generally account for a third of construction output.

Key survey findings include:

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  • 40% of main building contractors, on balance, reported that construction output rose in the third quarter of 2017 compared with a year ago
  • 20% of specialist contractors reported a rise in output during Q3
  • A net balance of 24% of civil engineering contractors reported an increase in workloads during Q3
  • On balance, 21% of SME contractors reported increased workloads in Q3 compared to three months earlier
  • Main contractors reported higher orders in private housing and both housing and non-housing R&M
  • 13% of civil engineering firms reported an increase in new orders in Q3, on balance
  • 26% of SMEs but no specialist contractors reported an increase in enquiries in Q3, on balance
  • Overall costs increased for 82% of civil engineering contractors, whilst 92% of main contractors, 85% of heavy side manufacturers and all light side manufacturers reported raw materials costs rose in Q3.

Commenting on the survey, Rebecca Larkin, senior economist at the Construction Products Association (CPA), said: “This 18th consecutive quarter of growth reported by the industry stands in contrast to the construction recession in preliminary GDP data from the ONS. There is a clear division in fortunes across sectors, however, with weakness in the commercial and industrial sectors offset by strength in new build private housing, a sector where demand and confidence remain supported by the Help to Buy equity loan.   

“In common with the wider economy, the construction industry continues to experience cost inflation, particularly for raw materials. A clear consequence of the supply chain trying to absorb these higher costs is the fall in contractors’ profit margins since the start of the year. Combined with a smaller pipeline of upcoming work in some key sectors, the survey’s more mixed view on near-term industry prospects is not surprising.”

Build UK chief executive Suzannah Nichol said: “The latest construction trade survey result highlights the industry’s continued growth, contrary to ONS’s statistics, with both contractors and specialist contractors reporting a rise in output during Q3. However, a lack of required skills remains a concern, with labour availability issues continuing to impact on contractors’ business performance. Build UK believes industry needs to recruit, train and retain a skilled workforce and we are working with members, government and other key stakeholders to ensure that this remains a key priority.”

CECA director of external affairs Marie-Claude Hemming said: “It is good news that our members see growth in infrastructure, to the benefit of businesses and communities across the country. However, uncertainty continues to act as a drag on the ability of the construction industry more generally to boost the economy. Ahead of the autumn budget, we are calling on the UK government to commit to the projects outlined in the national infrastructure delivery plan to secure the foundations of a strong economy, drive productivity, and deliver post-Brexit growth.”

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