Construction firms in North London and Hertfordshire have seen their turnover grow by nearly 7% over the past year, according to a new research. A deeper look into the financials shows, however, that the picture across companies is mixed, with in particular the larger firms driving growth, while little improvement is visible among the smaller players. Smaller construction firms are expected to face a tougher 2017.
The study, conducted by MHA MacIntyre Hudson – an accounting and consulting firm with over 550 staff in 14 offices across the UK – analysed the financial performance of 73 construction firms in North London and Hertfordshire (H&NL) based on their latest published accounts, with the aim of unravelling trends in the sector.
Over the past three years, the firms taken under scrutiny have booked a steady increase in total turnover, gross profit and employees. Turnover has grown 23.1% (7.7% per annum) – gross profit increased however by ‘only’ 14.4%, showing that companies have had to take a step back in their margins. Growth has been lifted by companies with a turnover of £25 million or more, those with revenues below the threshold have enjoyed little improvement.
In terms of gross profit, 80% of the constructions firms assessed are in the range £10 million to £100 million and they have seen a clear fall in gross profit. “The companies either side of this range have seen improvements. This is particularly impressive for the larger companies”, says Brendan Sharkey, the Head of Construction and Real Estate at MHA MacIntyre Hudson.
The total number of professionals employed by the 73 construction firms has risen from 11,543 to 12,394 (7.4% increase) in 12 months. The real growth in employment is with companies with a turnover greater than £25 million. The smaller companies have cut back, according to Sharkey because they may have ramped up the use of subcontractors or simply to mitigate for falling turnover.
The overall profit before tax for the construction sector in H&NL has decreased significantly in the past year, despite “reasonable financial conditions for the period under review” says Sharkey, dropping from £81 million to £68 million, a fall of 16%. One main reason for the fall in pre-tax profits was increased labour costs. Now, with Brexit’s impact kicking in, costs of materials are rising, especially imported materials that are already around 15% more expensive due to the fall in the value of the pound.
Aside from the £100 million and above turnover companies, every other turnover category had a decrease, on average, in profit before tax. The result marks a reversal on last year’s trend: the 2015 report by MHA MacIntyre Hudson’s annual research series found that growth in profitability had been achieved by the smaller companies.
The outlook for 2017
Looking ahead, Sharkey highlights that next year will be tougher than 2016, particularly for the smaller construction firms in North London and Hertfordshire. “Costs, especially labour and raw materials, are going up, and while turnover has been growing, it’s been at the expense of profit margins.”
The Senior Partner of MHA MacIntyre Hudson advises construction firms in the region to take a “long, cold look at costs”, in order to trim any fat where it doesn’t compromise quality of delivery.
According to a report from Big Four firm KPMG, the construction industry is – globally – struggling with adapting to the rapid changes in the technological landscape, as well as with embedding technology potential into planning, operations and execution.