Our Great and Profitable Industry
It is wonderful to hear so many people say how much they enjoy working in the construction industry. For many people it is the satisfaction of being part of a team that creates a new building that is memorable and truly appreciated by the customer, or restoring an old building to its former glory. We are also a well paid industry, with the vast majority of craftsmen and managers earning significantly above the national average. Our sites are also significantly safer for people to work on than even 10 years ago.
However what is often overlooked is how profitable parts of the industry are and potentially how profitable our whole our industry could be! There are very few other industries that have such low start up costs and benefit from monthly valuations. These two factors facilitate companies achieving returns of 25% or more on shareholders’ funds, when making nett profit margins as low as 2%.
The positive cashflow companies are able to secure from contracting also allows rapid growth without resorting to outside funding. Construction companies often feature prominently in the Sunday Times fast track growth companies league table.
Low entry barriers inevitably lead to higher levels of competition, particularly during recessions, when supply exceeds demand and as an industry we have lost a number of good companies, whilst others struggle to break even, but surely with a relentless focus on delivering a good service for our customers and the implementation of good business practice, there is no reason why these companies cannot improve their nett margin by 1% per year and join the band of successful companies achieving 2% nett margins, and return on shareholders’ funds of 25%+ within as short a period as 2 years. Maintaining this level of profitability then requires an ongoing focus on people, delivery and best practice and sometimes this feels as challenging as climbing the mountain in the first place.
Looking to the longer term, I am very positive about our industry prospects, for 3 very simple reasons:
Government and wider society is increasingly recognising the need to invest in high quality infrastructure from houses and schools to power stations and transport systems.
- The loading of more and more risk onto contractors is allowing us to play the central role in the delivery of projects and move from being a commodity supplier to a provider of a value adding service. Very pleasingly, procurement routes are beginning to reflect this new pivotal role
- The relatively high remuneration we now pay will allow the industry to compete with other industries and professions for the best talent available
Companies who grasp these new challenges have every chance of achieving significantly more than 2% nett margins or 25% return on shareholder funds on a regular basis; provided of course that they abide by the old maxim of our industry “the best way of making money is to avoid the big loss making projects”.
But if making money is not the prime driver, we can all fall back on the satisfaction of creating something new and special for our customers like the Edward King Chapel at Cuddesdon, recently constructed by my company!
Mark Beard is the Chief Executive of Beard
A version of this article first appeared in Construction News on 20 November 2015All news