Heath check – Why it’s about more than showing a profit

As Carillion has shown, posting large profits isn’t necessarily the best measure of success. Just months after doing just that, they closed their doors, the impact of which is still being felt in the industry. So if profits or even revenues aren’t the best measure of success, what is? What will give clients and subcontractors a sense of a company’s financial stability? What will ensure it can meet its project deadlines and financial obligations into the future?

Top 10 don’t set a great example

One might expect the biggest industry players to demonstrate what success looks like. But with pre-tax profit margins averaging just 0.9% and three of the top ten posting considerable losses, it’ doesn’t inspire much confidence in the industry. The losses posted were actually larger than previous years and to top it off those who did post a profit shouldn’t be bragging about it because even those figures are lower than previous years.

Despite industry hopes, the downward trend is continuing. Five years ago profit margins were 2.9% and already then that was considered low. In the past when a recession hit the strategy of big players was to increase their turnover and reduce margins and in time profitability would be restored – usually within 2-3 years. But several years down the line this hasn’t happened proving that was perhaps not the best strategy.

Niche is paying dividends

Maybe the big players should be looking at those companies who despite the current economic climate are doing well and start to rethink their strategies. Smaller contractors in the £300 – £500m turnover bracket are finding success particularly in niche areas of specialisation.

Rather than chasing high profile projects and turnover, smaller contractors are being more selective of what they take on – specifically with regards to maintaining target profit margins. A few have reportedly walked away from tenders, choosing instead to focus on projects they are more confident will secure their future.

For companies in this group the average pre-tax profits are around 5%. Niche specialists are doing even better with margins around 7%. They are reportedly achieving this through managing their workforce and risk more effectively.

It will take a great deal of effort to mimic this success, and it is encouraging to see tier one contractors now focusing on achieving stronger balance sheets. But will this be enough?