KPMG warns of financial problems affecting construction companies

Out-Law News | 23 Sep 2014 | 4:19 pm | 1 min. read

Some of the largest UK construction companies are attempting to operate with too little cash in the bank, KPMG has warned.

Falling profit margins within the sector are leading to cash levels falling at some construction businesses with only the sale of some assets helping to support cash balances, it said. KPMG said the current trends are "unsustainable", with its research revealing that the average margin companies were operating at in the sector in 2013 was 1.2%.

"Construction contractors have been struggling with some of the most difficult market conditions ever encountered and even now – with all evidence pointing to sustained recovery – the industry faces real profitability challenges," Richard Threlfall, the UK head of infrastructure, building and construction for KPMG said. "Current margin and cash levels are unsustainable. With subcontractor rate increases and labour market shortages largely outside of contractors’ control, it is critical they continue to focus on improving their own efficiency."

However, in a 'Construction Barometer' report, KPMG said that a rise in the number of orders that construction companies are seeing should help the financial health of the industry improve over time.

"The 2013 order books are up on previous years, and ... the committed and planned spend in the sector over the coming years is significant, with some £45 billion anticipated in 2016 in infrastructure alone," the report said. "Ultimately, it will be the composition of these orders, both in the margin they deliver and their timing, that will drive change to the bottom line."

However, KPMG said it expected construction companies would face at least another year of "difficult trading" before "the growing demand in infrastructure" manifests itself in increased profit margins and improvements to "the bottom line".

"With good forward planning, strong businesses should be investing now in their supply chain and technology to take advantage of the £45 billion a year tidal wave of future work," Threlfall said.