Challenging market conditions for builders

INFRASTRUCTURE: Government funding should increase once Brexit is resolved

Building activity has fallen at the second-fastest rate since April 2009, according to the recent CIPS UK Construction Index. A steep drop in orders was registered together with a drop in employment due to low demand and reduced confidence caused by Brexit uncertainty and a weak outlook for the UK economy. However, despite challenging market conditions, the recent MHA UK Construction Report showed some positive highlights. The report analysed the operating and accounts data from 2,158 construction companies with operations across the UK, over the last 12 months. It showed nationally turnover increased by 5% on average with large gains being made by the smallest (£5-10 million) and largest companies (£200m+) with increases of 17% and 19% respectively. In Scotland, it is the mid-tiered companies (£100-150m) that have seen the largest growth at 17.5%. Scotland is following the national trend when it comes to gross profit margin, at an average of 17%. However, there are more significant fluctuations. The smallest companies (£5-10m) are following the national trend with a 1% reduction in gross profit margin to 23%. However, mid-tiered companies (£100-200m) are showing significantly different results to the national average. Firstly, their gross profit margin is much lower at 10% compared with 15% nationally. More importantly, the gross profit margin has improved significantly over the last year from 7% whereas nationally there is a 1% drop on 2018. The largest companies (£200m+) are showing very similar results to the national average with profits down £9m on the previous year with a 57% reduction. Scotland has shown a small growth (4%) in workforce size over the last year. UK-wide employee costs have accounted for 14% of turnover over the last three years. In Scotland, this figure jumps to 18% and has remained consistent over the last three years. This would suggest that as turnover has increased gradually over the last three years these increases have filtered down to employees through increased salaries. Since 2008, the industry has been relatively cautious regarding significant capital spend with any expenditure undertaken only as and when necessary. The results across the UK follow this trend once again with capital expenditure generally being lower than in both 2017 and 2018. As the threat of Brexit looms, companies may become more prudent over the last 12 months with capital expenditure spending taking place only on absolutely essential items. As we head into winter when the output in the construction sector tends to fall, it is concerning that building activity has already dropped and confidence is low. Government funding of infrastructure projects should increase once Brexit is resolved, giving a boost to the sector. Right now, businesses need economic clarity to enable them to make decisions on projects that have been put on hold or delayed due to Brexit.

Asthe threat of Brexit looms, companies may become more prudent

There has been a sharp drop in orders for construction firms.