It’s tough out there: majors cut back as output shrinks
The further round of restructuring and cost-cutting announced by contractors Kier, Balfour Beatty and Morgan Sindall – coinciding with last week’s official statistics showing a further drop in construction output – highlight how tough the construction market is outside the south-east, says consultant PriceWaterhouseCoopers.
“If there’s a trend with these announcements, it’s looking at taking out overheads from regional structures, and it symobolises how tough things are away from London,” PwC’s engineering and construction leader Jonathan Hook told CM.
“Rather than cut into the teams delivering on projects, the only thing to do is look at overheads in the organisational structure,” he added.
Kier’s relatively upbeat interim management statement this week included the acknowledgement that “today’s trading environment remains difficult with little sign of improvement in the UK construction market. In light of this, we are conducting a further review of our construction operations to ensure we remain as efficient as possible.”
Its announcement follows the news that Morgan Sindall is to merge six regional divisions into four, with the loss of 60 jobs, while Balfour Beatty has also closed six operating companies in order to reshape four regional hubs, a move it hopes will deliver a £30m saving.
The UK’s largest contractor has also pulled back from the fit-out market, and is currently reviewing its exposure to social housing contracts and European rail work.
Kier’s work in education, such as essa academy in Bolton, has helped its results, but many contractors continue to struggle as construction output falls
But Phil Westerman, head of assurance and audit for construction at accountant Grant Thornton, warned that the wave of restructuring could be perceived negatively in the eyes of clients.
“From a commercial level, people will think, do we want to award tenders to people who’re suffering? Restructuring can be risky. It’s a human nature reaction – ‘can we trust the group to deliver the project if we give it to them? Will it be the same people, the same company?’ It will potentially be in peoples’ minds.”
However, PwC’s Hook took a more sympathetic view. “I think most clients recognise how tough things are, and would expect other organisations to adjust their cost base accordingly.”
UK contractors are having to cope with the dramatic and continuing shrinkage in their markets over the past four years. The Q3 statistics from the Office of National Statistics show that construction output fell for the fifth consecutive quarter, and is now at its lowest level since the second quarter of 1999.
Overall, it was 2.6 % lower than in the preceding quarter and 11.3 % lower than one year ago. Public housing was down by 18.7% compared to Q3 2011, and public non-housing by 19.7%. The private sector, far from off-setting these falls, was itself down by 17.4%.
PwC’s Jonathan Hook predicted that current conditions would prevail for at least another 12 months. “I don’t think we’ll get any growth in output for another year, and when we do it will be driven by government stimulus and guarantees [rather than the private sector].”