Don't get taken in. Profit Margins in Construction are NOT Wafer Thin

Have you seen the recent spat in the UK between the chairman of the National Infrastructure Commission, Lord Adonis, and some of the executives at leading project and contracting companies, and reported yesterday in The Telegraph (pictured alongside)?

This follows a series of reports in the industry press in the recent few months about the "wafer thin" margins worrying companies in the construction and capex projects industry.

As you might guess from my headline. I don't buy it.

Take a look at these numbers, and tell me just where the industry is suffering...

These are from the latest published accounts from Mace, Laing O'Rourke, NG Bailey & Arcadis. A project manager, a main contractor, a specialist subcontractor, and a professional service provider.

I have deliberately avoided using the more common profit measure of return-on-sales (profit divided by sales), because it is a pure distraction.

Serious investors, and the UK Government's Office of National Statistics, use return on capital employed to look at the profitability of a company, not return-on-sales. This measures how much profit they make compared to the amount of money that has to be tied up in running the organisation.

According to the UK Office for National Statistics most recent Statistical bulletin: Profitability of UK companies, the average return on capital across the whole of the UK economy for 2016 was 12.3%. 2 out of my 4 samples in the table bettered this by a good margin. And the numbers in my table are not directly comparable with the ONS's 12.3%, because they don't use exactly the same calculation. This means that Laing O'Rourke is probably average or higher than the industry average in reality.

Arcadis's balance sheet is still dominated by the significant acquisitions and mergers in the past decade, and the significant debt it has (certainly compared to most companies in the sector), making it a bit of a special case.

Mace is an interesting example, because 2016 was seen as a very bad year due to the impact of just one or two bad contracts. If you look back to 2015, their return-on-capital employed was 53%.

That is more than Apple made.

Viewed this way, construction and project management doesnt look such a bad business to be in does it?

This post is based on a longer post on my website, where I look in more detail at Mace's accounts.  I also explain the "modified" return on sales that is shown in the profits table above. Basically I strip out the 'accidental' turnover on the project - ie everything the company buys or subcontracts, so that I can focus on the value-added by the core underlying service they provide.

To read the full article, >> CLICK HERE <<.

Ian Heptinstall is an independent coach and advisor on improving capex projects.

If you are interested in how you can manage projects and project portfolios without insisting on "100% certain commitments", read Ian's report "The 2 Changes that will Transform the Performance of your Capex Projects".