A row over construction companies’ “indefensible margins” has broken out between the industry and the head of the body overseeing Britain’s infrastructure strategy. Lord Adonis, chairman of the National Infrastructure Commission, has attacked the profits large engineering and construction businesses make on public contracts.
The former transport secretary was speaking in reaction to industry publication Construction News’s annual ranking of the performance of the sector’s largest 100 firms. It showed the 10 biggest groups in the sector made an average pre-tax profit margin of negative 0.5pc as losses from problem projects hit their performance.
“I’m not worried in the slightest about the reduction in margins for major and extremely well-resourced contractors,” Lord Adonis said, speaking to Construction News. “I think it’s a sign that the public sector is getting a good deal at last. Indefensible margins have been cut down to size, I’m not concerned at all. “[Contractors] are still making a very good return from the public purse and it’s the job of the public sector, on massive projects like HS2 and Crossrail, to get value for money.”
However, contractors have hit back, warning that current profit levels are not tenable as the sector faces a series of woes including a chronic skills shortage, which is driving up wages, exchange rates increasing the cost of imported materials, and clients demanding price cuts. According to the survey, the 10 biggest companies in the sector - including Balfour Beatty, Carillion and Kier - had combined annual revenues of £31.9bn but together made a pre-tax loss of £52.9m. Mace, one of the biggest companies in the sector and which has worked on some of the most high profile projects in the UK including HS2, the London Olympics and The Shard, has already warned about the situation.
Mark Reynolds, chief executive of Mace, said: “Lord Adonis’s comments today aren’t helpful. The construction industry is facing a perfect storm of higher material costs, labour shortages, low productivity and unsustainable margins which means not enough investment being made in innovation. "If the Government is serious about the Industrial Strategy, construction companies need to have adequate funds to invest in an industry to meet our future needs. Our owners, clients and suppliers need to work together to create a new way of delivering projects to achieve better value and create a world leading construction industry.”
Dennis Hone, finance director, has previously warned: “The construction sector – and the UK in particular – has been under pressure for some years. "Construction as a whole – which is vital to the well-being, productivity, and the growth of the economy – is currently not generating a sustainable level of profits.” Balfour Beatty chief executive Leo Quinn has warned of the 'unsustainable' situation the industry faces Leo Quinn, chief executive of Balfour Beatty, has echoed the sentiment, warning that "quite simply, this situation is no longer sustainable". He added: "The important thing for all of us is that the industry has the right returns to enable it to invest in the workforce of the future and the innovation needed to deliver the infrastructure that will drive long-term economic growth for the UK”.
The National Infrastructure Commission was established to transform the way major projects such as road and rail are delivered in the UK. It is intended to give expert impartial advice on the country’s infrastructure needs that transcends politics, which can mean controversial but necessary projects being delayed to avoid ministers having to make unpopular decisions. A prime example of this is the long delayed third runway in the South East. A recommendation on where this should be located was pushed back until after an election, and MPs are not expected to vote on the Airports Commission’s preferred option of expansion at Heathrow until this winter.