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Top 100 Construction Companies 2020

16 Sep 20 As construction companies digest the implications of the Covid-19 pandemic, our latest study of the Top 100 UK construction firms shows that finances were weakening even before the outbreak began. Steve Menary reports

In their latest set of accounts, the total aggregate turnover recorded by the UK's Top 100 construction firms was £75.5bn. That's a 2.7% year-on-year increase. Overall, 70 of the Top 100 companies saw turnover increase in the past year, with revenue at the leading company, Balfour Beatty, nearly twice the size of second-placed Kier.

A year ago, only 66 of the Top 100 construction firms reported revenue growth, so this year's figures should be reassuring. But even before the pandemic struck, profitability was shrinking.

Those same 100 companies generated profits before tax of £734m, which is down 38% on the figure for the previous year. Given that these accounts cover periods before the virus outbreak caused the construction industry to grind to a halt, this is a major concern.

Turnover at three of the top 10 contractors fell back and three from this leading echelon also traded in the red. The biggest deficits came at Amey and Interserve (which only had 2018 accounts available at time of going to press).

Click here to view the full Top 100 Construction Companies 2020 table

Across the Top 100, a dozen companies made pre-tax losses in their latest available accounts and profits fell at 46 firms. In last year's Top 100, 48 companies either traded at a loss in the previous year or suffered from reduced profitability.

Contractors breaking into the Top 100 this year include TSL, which delivers turnkey capital projects for the food, pharmaceutical, logistics and hi-tech manufacturing sectors. TSL sprang into 82nd place on the table after an 81% leap in turnover in 2019 – the biggest rise in revenue of all the Top 100. Close on TSL's heels, however, is London-based Tide Construction which takes 94th place on the table after revenues rose by 79% to £166.9m last year.

Regional contractors Readie from Essex and Stepnell from Rugby also break into the Top 100 this year. A 46% leap in turnover in 2019 also produces a return for Byrne Group, which dropped out last year. But some contractors that dropped out this year will not be returning – insolvency continues to dog the sector. 

Cruden was ranked 75th in last year's Top 100 with revenues of £217.8m, while Clugston was 10 places lower after turning over £175.4m. Both companies have now gone and they are not the only members of the Top 100 to vanish. Fit-out specialist Styles & Wood was ranked 96th with annual revenue of £151.5m, while demolition contractor Masterton (no relation to Michael and Mona Masterton of Getjar) was 99th with turnover of £149.2m.

In the second quarter of this year insolvencies were stemmed significantly – by the outbreak of Covid-19, ironically – as the government introduced the furlough scheme, postponed VAT payments until March 2021 and the courts were suspended so winding up orders could not be issued.

With the outbreak, the industry entered a period of stasis, and some Top 100 contractors changed or prolonged reporting periods. Midas has extended its reporting period from April 2020 to October 2020 and Robertson extended its reporting period by three months to June 2020. Speller Metcalfe added six months to September 2019 and had not filed those accounts as The Construction Index went to press.

This is not to suggest that any of these particular companies are in danger, but management boards across the construction sector need more time to digest the implications of the virus and the range of government initiatives aimed at stabilising the economy.

Construction output is likely to fall by 20.6% this year according to forecasts by the Construction Products Association (CPA). Work resumed on many sites, but this was to complete existing schemes, not start new projects. Next year should bring a rebound but the outlook is poor.

The CPA's economics director Noble Francis says: "While next year we anticipate construction output rising 18.0% overall, it is worth noting that this is compared with a low base of activity in 2020 and will still be 6.4% lower than pre-coronavirus levels. The delivery of major infrastructure projects will be crucial to growth in 2021, with activity on site less affected by social distancing and major projects like HS2 driving significant growth for the sector."

Staff numbers are being cut at the leading contractors, which – so far – are still paying their supply chains broadly on time. According to Build UK, which represents leading main contractors, invoices were paid within an average of 36 days in the first half of this year. Main contractors paid 92% of invoices within 60 days and 75% within agreed terms. Murphy, Vinci and Morgan Sindall are the three most reliable prompt-payers with invoices settled in 25-27 days.

This will reassure supply chains and, for specialist subcontractors, the major contractors will be more attractive as potential clients than smaller players. Clugston, for example, went down with debts of £64m to its supply chain.

Specialist contractors continue to bear the brunt of the pain. In their latest accounts, profits fell at six of the top 20 specialist contractors and 11 of these companies saw their margins decline. Government figures for the 12 months to Q2 2020 also show that 59% of companies filing for insolvency were specialist contractors.

Insolvency professionals are already warning about a rise in pre-packaged insolvencies with companies looking to dodge debts to their supply chains by folding old, failing businesses without settling debts and starting up new unencumbered companies. These so-called 'phoenix firms' have been the bane of the industry in the past and the cause is usually lack of cash reserves.

An old adage familiar to all contractors is that cash is king, but the consequences of the lockdown meant that 35% of construction firms had less than three months' cash reserves this summer according to research by the Office of National Statistics.

The Business Impact of Coronavirus Survey covered 1,700 construction firms and was taken in early May, when 20% of respondents had stopped trading and 42% of staff were on furlough. One in 20 companies had less than a month's cash in reserve.

The CPA's Noble Francis adds: "What we don't know is what happens after the initial flurry of activity to complete halted projects, given the fall in demand and new orders since Covid-19."

Going forward, size – and cash – will matter more than ever. The industry's leading contractor, Balfour Beatty, had a cash pile of £320m at the end of March 2020. Preserving these financial foundations was the company's "number one consideration" according to chief executive Leo Quinn.

Revenue and profits fell at Morgan Sindall in the first half of this year, but net cash had grown by £32m to £146m by the end of June, and in future cash balances will surely be the best measure of a company's health.

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Kier has net debts and plans £100m of cost savings in the year to June 2021. Last year the group announced redundancies of 1,200 staff. In contrast, the UK arm of Irish contractor John Sisk has no debts and last December cash balances were £32.1m. While this was down from £45.9m a year earlier, Sisk was able to become the first contractor to reimburse pay cuts made in April, May and June as staff returned to work in July.

Before the lockdown, jobs were already being reduced at many leading contractors and more cuts seem likely once furlough ends and government incentives to retain staff fall away. Across the top 10 contractors, workforces shrank by 4% in their last available accounts, which were all posted before the pandemic struck. Outside of this elite group, Willmott Dixon, Sir Robert McAlpine, Esh and Wates all announced job cuts this summer as contractors try to predict how the current trading year will pan out.

Click here to view the full Top 100 Construction Companies 2020 table

ISG grew its workforce by nearly 10% in 2019, a year that produced record trading. The group is now the UK's second largest privately-owned contractor according to the Sunday Times Top Track 100 and was amongst the 25 most desirable companies to work for in a separate poll by the same newspaper. Now, like many main contractors, ISG is anticipating a fall in turnover.

Zoe Price, ISG's chief operating officer for UK construction, says: "We know that financially 2020 will look very different from our four successive years of record growth and profitability under private ownership, due to the impact of the Covid-19 global pandemic. 

"Productivity is the key challenge for the sector, with social distancing, labour and materials restrictions creating a uniquely complex environment for businesses within our industry and beyond. 

"Inevitably 2020 will see reduced turnover for most main contractors, directly related to productivity challenges from the Covid-19 pandemic. The consequence of declining output is reduced turnover, and this will impact our entire industry. Mitigating margin erosion will be a key challenge for the sector and we should expect to see increasing use of technological solutions and smarter methods and procedures to enhance operational efficiencies.

Price concludes: "It's also important that we all play a role in avoiding adversarial confrontations as we work through the productivity implications we face as we work within this new normal.  Covid-19 has seen the industry collaborate better than ever before – learning from this and maintaining the spirit will be key."

As admirable as those sentiments are, many specialist contractors will reserve judgement. 

The Specialist Engineering Contractors (SEC) group welcomed the introduction this summer of project bank accounts on the HS2 project (likely to cost in excess of £100bn) and is campaigning for this to be extended into other areas in order that the long-standing bugbear of retentions be addressed. 

Unless there is further action, there could, warns the SEC, be a cull the likes of which the industry has never seen before. 

"For years we've been saying we need collaboration and [main contractors] say they will do that but of course they haven't," observes SEC chief executive Rudi Klein. "If we don't resolve longstanding issues with money it's going to very, very, unpleasant out there.

"Every business needs two things: work and to be paid. You need security of cashflow or you are in dire straits and we know companies are in dire straits. People are buying work just to keep resources in play, but their costs are increasing with the need to comply with the new stringent requirements for health and safety.

"Companies with big cash piles will survive but they will be in the minority and the majority will find it very difficult to keep going. Unless we get much more certainty in pipelines and payment security there is going to be a spike in insolvencies like we have never seen."

Research by consultant Begbies Traynor found that the number of construction companies classified as being in financial distress rose by 9% in Q2 2020 on the same period a year earlier and 4% on the previous quarter. Julie Palmer, a partner at the firm, says: "The real level of corporate underperformance is being concealed by inaction on distressed businesses in the courts. With government initiatives to support businesses now winding down, we will start to see the true impact of coronavirus on the UK during the autumn."

Like the SEC, insolvency professionals are also warning of the dangers of companies buying work as contractors bid ever lower in an attempt to keep cash flowing.

Tender prices are forecast to fall this year by 4% in London and 3% across the regions according to consultant Arcadis, with further deflation of around 1% next year. But a return to suicide-bidding is being widely anticipated as the number of financially-distressed contractors rises in the autumn.

Some contractors report rivals pitching bids 20% below the competition simply to keep their operations going. Contractors with heavy debts or meagre cash balances could find themselves soon becoming 'zombie companies' – capable only of covering the interest on their debts and nothing more – if they adopt these desperate measures.

The only way such 'zombie' contractors can attempt to claw back money is through the courts, often by claiming against variations made by clients. The introduction of greater collaboration and open-book contracts was supposed to end this practice – but then the virus struck. 

"History is going to repeat itself," warns Rudi Klein. "It's very worrying. Disputes are going to break out everywhere in the industry."

Construction remains the only industry with its own specialist legal system. Unless the wider lessons from how society dealt with the virus are truly embraced, the Technology & Construction Court on Fetter Lane in the City of London could be one of the few areas connected to the industry that sees a rise in workload in the near term.

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