CN Specialists Index 2022: from the frying pan to the fire

Most specialist contractors have seen an improvement in their fortunes as the industry has moved on from the pandemic, but the picture may be about to worsen

Things were getting better for the UK’s top specialists before Russia’s invasion of Ukraine, the 2022 Construction News Specialists Index reveals. Emerging from the pandemic, turnover and profit margins were recovering close to levels seen before lockdowns rocked the economy.

“The cost inflation [has] yet to be figured into published accounts and the economic slowdown that’s materialising now; it leaves the sector at quite a risk”

Rebecca Larkin, Construction Products Association

CN’s annual analysis of seven sectors – concrete, demolition, envelope, ground engineering, M&E, scaffolding and steel – uses contractors’ latest published accounts, which mostly cover the 2021 calendar year. During the period, aggregate revenue across the 70 tracked firms recovered to £8.23bn – up on the £7.93bn recorded in last year’s index, when the impact of COVID-19 on the sector was notable. But turnover has remained £500m below the level in the 2020 index, and – aside from 2021 – was the lowest since 2016’s £7.94bn total.

Construction Products Association senior economist Rebecca Larkin says “2021 was really a year of two halves”.

“In the first half, everything was on that upwards trend coming out of lockdown and with a backlog of new orders, but in the second half, we began to see cost inflation coming through and some uncertainty over project starts,” she says.

Margins improve but are still thin

Despite the historically low revenue total, median pre-tax margins across five of the seven specialisms were up, with most equalling – or falling just short of – those recorded in the 2020 index.

But margins in the concrete and steel sectors fell to 1.15 per cent (from 3.7 per cent) and 4.5 per cent (from 4.65 per cent) respectively. “The commercial construction sector has been the laggard in terms of output and recovery, and I think that’s been highlighted most strongly in the performance of concrete contractors,” Larkin adds.

Margins remained tight by historical levels, with all specialisms’ margins smaller than those achieved in 2019 and 2018. The median pre-tax margin in 2022’s index rose to 2.9 per cent from last year’s 2.6 per cent, almost recovering to the 3.4 per cent seen in the 2020 index.

Scaffolding was the best-performing sector for margin in this year’s index, at 6.6 per cent, while concrete was the worst. “Scaffold is a remarkable business to be in from the point of view of consistent margins,” says Simon Rawlinson, head of strategic research and insight at Arcadis. “It’s been one of the most vocal sectors around inflationary pressures and 2021 was the year of skyrocketing costs of timber. I think what its results tell us is the scaffold sector is very good at being able to pass its inflation through to clients.

“You don’t get the impression that people redesign or value-engineer scaffold when they get a high bid back, but they do when they get an issue with structural design, for example.”

Since last year’s index was published, just one of the 70 companies featured, O’Keefe, has gone into administration – something Rawlinson says highlights the continued resilience of specialists.

Fall in inflation

On an aggregate basis, six of the seven specialisms were profitable in this year’s index, equalling last year's performance, when only mechanical and electrical firms made a cumulative loss. This year, envelope contractors made an overall loss, while M&E edged back into the black.

Ben Harwood, head of asset recovery at consultancy Naismiths, says he expects a drop in the rate of inflation in the year ahead, which would help specialists. Nevertheless, he warns companies to avoid fixed-price contracts if they can, to avoid getting stung by rising costs. “Stay away from them because if you’re entering into a fixed-price contract now, it’s likely to bite you within the next 12 months if things continue the way they are. Avoiding them should bring more stable, future growth to all of the specialisms and enable companies to survive longer,” Harwood says. “We’ve had a fortunate 13 years of low inflation. That’s now changed, and companies have got to change with the times.”

Larkin agrees, adding: “Construction sticks out as an industry with very low margins and there are some potential future issues that might arise from these, such as the cost inflation – yet to be figured into published accounts – and the economic slowdown that’s materialising now; it leaves the sector at quite a risk.

“Although 2021’s margins were already quite squeezed, there is so much more still to come and we’re yet to see the full effect of that. I would expect to see a lot more falls in turnover and margins in next year’s edition.”

Note: Data in this year’s index gathered by Ian Weinfass, Tiya Thomas-Alexander and Keith Cooper from accounts filed prior to 24 October 2022