Despite the fact that the construction industry has been in a slump for more than five years, new data released each month suggests that the industry is far from recovery. Notably, the ONS reported last week that construction production in the UK remained flat in May.
Even the biggest enterprises in the industry, let alone the many hundreds of smaller SMEs that have already folded and called in the administrators, would be expected to feel the frigid winds of recession in such a protected scenario.
A report released at the same time as the ONS numbers last week by market research company Plimsoll Publishing says they just might be.
According to the organisation, which has been publishing financial health surveys on a variety of sectors in the United Kingdom since 1987, 68 out of the 500 largest construction firms are in “danger.”
This goes beyond enterprises that are seeing sales or profitability fall compared to investment, or are witnessing an increase in total debts. Such enterprises would be termed by Plimsoll as ‘failing’. There must be no profit and considerable debt for a construction company to be classified as being in “danger,” the lowest of five categories the company uses to identify itself. A “strong” business, on the other hand, and a place among the top five, requires profit margins of at least 2 percent annually, “healthy cash piles” according to Plimsoll, and a lack of debt, as the majority of the 311 construction firms who made it into this category this time do.
No one knows who the 68 people in ‘danger’ are because Plimsoll does not want to risk losing business. But this is not a poll that whips up a frenzy on the basis of just a few stray crumbs, as Plimsoll’s senior analyst David Pattison says. Judging by historical track record, he argues, a Plimsoll study is one that should be paid some attention.
He says: “We tested this method of analysis on a study of 351 previously failed companies, including all the latest retail failures, and this showed 320 had a ‘caution’ or ‘danger’ rating up to two years prior to their demise. This demonstrates that our approach of analysis is capable of identifying the key characteristics of a failing business.”
But what is maybe less expected about this construction poll, with all the bad news there is about the business, is not how grim it is. In reality, when compared with other industries Plimsoll has researched in recent years, the 68 or 14 percent figure is rather moderate.
Plimsoll research of the 500 largest freight forwarding companies, IT resellers and marketing agencies revealed that, respectively, 123, 178, and an astounding 232 were in ‘danger’. As a result, a score of 68 can even seem encouraging.
According to Pattison, the scale of the market and, more specifically, the top 500 companies, is the primary cause of the stark disparity. Most of the top 500 construction companies, according to him are massive conglomerates. “In comparison, the top 500 recruitment companies, which we also surveyed, are still very, very small companies, so it is perhaps less surprising that 155 of them are in ‘danger’.”
While looking over the survey, he finds evidence that the outcome may be beneficial for the construction industry as a whole, despite this.
“We found that a lot of those larger companies have already gone through the pain of recession, and that is probably why they are in a good situation now,” he says. “After all, those 311 companies rated as ‘strong’ have a real commercial advantage and they are proof that that fundamental market is healthy.
Insisting that the recession is far from over, he is eager to state This is taking a lot longer than expected, he admits.
The “horrible decisions” they may have had to make, such as job layoffs, may have been terribly unpopular, but he argues the destiny of the “strong” 311 suggests they were the correct decisions in the end.
The cuts, he explains, “probably had to be made”. “They were necessary for the survival of the business.”