CN Specialists Index 2023

The combined revenue figure from our seven specialisms is promising. But the mood darkens when you look at profits and margins

The latest annual Construction News Specialists Index depicts a strong overall revenue performance from the top 10 contractors in seven sectors: concrete, demolition, envelope, ground engineering, mechanical and electrical (M&E), scaffolding, and steel. But the headline figures conceal a more complex picture.

Based on the most recent published accounts for 70 contractors, primarily covering the year ending 31 December 2022, the 2023 index shows that aggregate revenue hit a record £9.89bn, with all specialisms seeing increases in turnover. The 2023 total is 20 per cent higher than 2022’s index and 25 per cent higher than 2021’s, when firms were hit hardest by the pandemic. However, ground engineering was the only category in which all 10 companies posted higher revenue than last year’s index.

Mixed margins

The average margin of 3 per cent across all specialisms is slightly lower than 2022’s 3.1 per cent, and is slim by pre-pandemic standards – in 2019, the combined average margin was 4.2 per cent and in 2018 it was 6.7 per cent.

The median pre-tax margin for steel remains the same, while concrete, demolition, ground engineering and M&E all broadened their margins.

However, envelope and scaffolding each saw a decrease since last year, with the former tumbling into negative territory. Construction Products Association head of research Rebecca Larkin says: “Metals and timber – used extensively in these specialisms – were the materials and products displaying the highest rates of price inflation in 2022 and passing on increases of more than 50 per cent might have been difficult to justify, so there may have been some absorbing of costs.

“They are both specialisms in a stream of cladding and remediation work that has become high-profile and fraught with the potential for litigation issues, which has resulted in considerably higher insurance premiums.”

Scaffolding’s 5 per cent is the best margin performance in this year’s index. But the biggest surge comes in the concrete sector – the worst-performing specialism last year – with the top 10 concrete specialists seeing their combined median margin bounce back from just 1.1 per cent in 2022 to 3.9 per cent this year (the same figure as demolition and ground engineering).

Profit variations

While aggregate turnover has grown, pre-tax profit fell by 8 per cent across all specialisms, though the total of £168.4m is still 22 per cent higher than in the dark days of the 2021 index.

The top 10 M&E firms returned a total pre-tax loss of £13.8m. This comes as no surprise to Kelly Boorman, head of construction at analyst RSM. “I would say the M&E sector has been hit hardest by contract delays,” she says. “Material prices and access to labour are also factors, but the biggest factor is prolongation on contracts. As M&E teams are always [one of] the last on site, when a job goes horribly wrong with delays, they’re the ones who have to try to make up for lost time. So it’s hard for them to project-manage the time of mobilisation.”

Concrete specialists have increased their aggregate pre-tax profit but it is almost half of the £60.2m seen in the previous two years. Despite rising demand in 2022, supply costs increased and bit into profit.

The demolition sector saw a 90 per cent profit increase over last year and ground engineering’s profit rose by 42 per cent, ahead of steel at 30 per cent. The 10 firms in the scaffolding index have seen a combined profit decrease of 5 per cent.

Boorman says the steel specialists’ overall pre-tax profit of £78.95m reflects a return to stability after two years of profit erosion due to the high energy prices arising from the Russian invasion of Ukraine.

Envelope is the worst-performing sector, with a total pre-tax loss of £21.1m. Boorman describes “major issues” in the time and money envelope firms are spending to meet cladding remediation requirements, while they also wait for the full extent of secondary legislation to come through from the Building Safety Act.

Some main contractors have openly stated that they intend to claw back cladding remediation costs from their supply chain. “That will probably start to filter through [to envelope specialists’ bottom line] in 2024,” she predicts.

Under pressure

Specialists are hardly immune from the financial problems affecting the construction sector. Michael J Lonsdale (seventh in last year’s M&E index and 77th in the CN100 2023 list of top contractors) called in administrators in October. And in the same month, CN reported that Vistry has asked its subcontractors for a 10 per cent cut in prices agreed under existing contracts.

Larkin remarks that clients and main contractors are likely to explore ways of bringing costs down, “so we may see wider pressure for specialist and subcontractor price cuts... For all [specialisms], a key theme will be how the supply chain deals with lingering elevated cost”.

Material inflation is lower but damage remains from the 35 per cent increase in prices seen since the end of 2021. “So although on the materials side we’re not likely to see price rises of the scale seen over the past two years, prices are still elevated and will need to be factored in by specialists when dealing with pricing for main contractors and clients,” she adds.

Boorman and Larkin each expect to see specialists focus on margin protection. “This will be key during the current period of low economic growth and as activity drops in sectors that have previously been buoyant, namely housing and industrial,” Larkin observes. “Oil prices have begun to rise again in recent months, which means further pressure on energy and fuel costs is likely to follow next year.”