November 18, 2018

Construction sector growth cools

A new report based on the accounts of 1,708 construction companies has shown a slow-down in turnover growth across the sector over the last three years. The average number of employees also fell slightly over the same period, with more significant losses in the largest companies reviewed. The report was conducted by MHA, the UK-wide group of accountancy and business advisory firms and shows that the sector remains profitable, with increasing growth in pre-tax profits, a 40% increase in dividends and a 38.5% increase in retained profits.

  • Annual turnover growth has slowed from 7.6% to 6.7%
  • Average number of employees is down slightly from 125 to 123, the largest percentage decreases were in £200m+ turnover firms
  • Annual gross profit margin growth rate unchanged at 0.5%
  • Profit before tax has grown from 11.5% in to 17.1% over the last three years.

The report used company accounts information from 2015 to 2018 published by credit reporting agency Experian, for construction firms in England, Scotland and Wales with an annual turnover of between £5m and £227m.

Despite the slowdown in turnover growth, incomes rose 14.8% over the three-year period across all sizes of construction firms in the report. Average gross profit margins grew a total of 1% over the same period across all sizes of firms; smaller firms seeing a marginally higher rate of gross profit margin growth.

Most companies saw declining turnover growth over the three-year period. The only two groups bucking this trend were companies with turnovers of £5m-£10m and £100m-£150m. However, given inflationary pressures on labour and construction material costs, any real-term growth from comparatively low turnover increases will be limited.

MHA’s analysis of the Experian company data showed either very modest growth or slight reductions in executive salaries in the sector, with firms in the £10m-£150m turnover brackets showing a slight decline in senior pay in the most recent year of accounts. The largest salary rises were recorded in the £150m-£200m turnover bracket; the smallest and largest groups (turnover of £5m-£10m and over £200m) recorded small increases in directors’ remuneration.

One of the potentially more concerning indicators in the data for the industry was the decline in the number of employees. Whilst across the sector the headline numbers were fairly flat, with a decline of two employees from the average of 125, this masked more significant declines at the top end of the construction market. This could be a sign of greater business efficiency and leaner operations, possibly to the detriment of their subcontractors. 

Robert Dowling, Head of Construction and Real Estate at MHA, said: “Britain’s construction industry has traditionally been seen as a bell-weather for the wider economy, and there are some worrying trends in this report. Falling turnover growth coupled with flat or declining employment levels may well slow or even reverse the upward trend in profitability in the coming months.

“Whilst there remain some positive markers for the sector in the report, the prevailing sense is that the continuing uncertainty in the UK economy is affecting business confidence in the construction industry.”