Challenges ahead for the construction industry

Analysis of the financial performance of Europe’s biggest construction and house building companies has revealed that the UK has just one listing within the European Top 10, with Balfour Beatty listed sixth. The infrastructure group leads the UK market ahead of companies such as Carillion and Laing O'Rourke, the UK’s second and third largest construction companies, which were listed in 12th and 15th positions in the European Top 100.

The ‘European Powers of Construction 2009’, a report from Deloitte, the business advisory firm, presents an annual ranking of the 100 largest European construction companies by revenue, and offers insights into a challenging economic environment for the industry.

2009 has been marked by recession and the construction sector has been one of the hardest hit. Government spending has assisted the prevention of a more serious downturn in the sector to date, but with a significant fall in private sector demand and predicted Government cut backs in their capital budgets to come, trading during the recession is tough and will remain competitive in 2010 and beyond.

The full effects of the recession have probably not been reflected in the listing below as order backlog was high at the start of the downturn and, with the exception of the house building sector, the industry lags other sectors. Overall, 45 companies reported construction growth during the year, compared to 75 companies for the same period last year. Negative growth in the year was dominated by companies specialising in the house building sector.

Despite only having one company in the top 10, the UK continues to dominate the top 100 survey, accounting for 27 of the top 100 places (compared to 28 in 2007).

Leaders of the pack

French company VINCI continues to lead the pack – topping the 100 largest European construction companies with FY08 construction revenues of over €30bn (compared to €26bn in FY07). France dominates the top 10 in terms of construction revenue, with three companies listed, followed by Germany which has two. No other country has more than one company in the top 10.

However, sector activity is diverse and when the same companies are ranked by total income the Spanish companies come more to the fore. The impact of this trend sees four Spanish construction companies leap into the top 10, including ACS Group, Grupo Ferrovial and Acciona, pushing Balfour Beatty to 11th. Other companies such as Grupo Isolux-Corsán of Spain; ENKA Insaat ve Sanayi of Turkey; and Interserve in the UK, climb significantly in the ranking by engaging in a wide range of activity in addition to construction.

Jack Kelly, infrastructure partner at Deloitte, said: “It is evident in the financial figures that the recession has not yet fully affected the construction sector. By contrast, house builders have been hit earlier in the recessionary cycle. Lower levels of growth have been achieved since the slowdown in the housing market, which began to take effect during 2007 and have become even more noticeable throughout 2008. House builders are historically the first to be affected by an economic downturn and this time is no exception.

“Cost containment measures are key as well as effective working capital management. One fear for the industry is that less work will lead to pricing pressures which could lead to unrealistic pricing in the market which would prove ultimately unsustainable.”

As a result of the economic downturn, Deloitte expects that construction sector growth in the UK will be largely dependent upon new public sector work and infrastructure spending.
Key areas raised in the report include:

• If working capital management was key for success prior to the recession it is now critical. More frequent and more intense reviews are required by the very highest level of management. Maintaining strong corporate governance with respect to bidding and contract valuation is crucial;
• Cost reduction measures are as important, however in an industry that is dependent on the skills of its workforce, it is costs other than payroll that should be reviewed first;
• There is an ongoing struggle in the PPP/PFI market between the positive effects of increased public sector commitment and spending, versus the negative effects of the financial crisis and the unavailability of credit. Overall the increase in public spending has protected the sector.

Top 10 UK construction firms

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Notes to Editors:

About the Report

The full report, ‘European Powers of Construction 2009’ is available to download from www.deloitte.co.uk/epoc2009 as of Monday 30 November. Hard copies are available on request.

About Deloitte

In this press release references to Deloitte are references to Deloitte LLP, which is among the country's leading professional services firms. Deloitte LLP is the United Kingdom member firm of Deloitte Touche Tohmatsu (‘DTT’), a Swiss Verein, whose member firms are legally separate and independent entities. Please see www.deloitte.co.uk\about for a detailed description of the legal structure of DTT and its member firms. The information contained in this press release is correct at the time of going to press.

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