UK construction profit warnings soar in first half of 2018

UK listed construction and materials companies issued six profit warnings in the first half of 2018, double the number in the same period last year, according to EY’s latest Profit Warnings report.

Half way through 2018, the sector has almost matched the seven warnings issued in 2017 overall among listed companies.

Bad weather has been blamed for a sluggish start to the year, but just one of the six warnings so far this year cited that as a factor, while four cited delayed contracts and uncertainty dragging on demand.

Ian Marson, Construction Leader at EY, said the results drew attention to the sector’s "long-standing structural weaknesses".

Problem contracts were a major factor said Marson, who called for more choosiness and better risk management at bidding stage.

"With the outlook in question, it feels like a good time to take stock and think about how construction companies can improve resilience and meet the challenges that lie ahead," he said.

Official figures show the construction industry contracting by 0.8% in the cold first quarter, but rebounding strongly in May.

The IHS Market Purchasing Managers’ Index (PMI) reading for June maintains the comeback theme with a reading of 53.1, the highest reading since November 2017.

"We’ll need a few more months of data to know if this represents a trend and it’s important to note that outside of residential construction, parts of the sector are growing, but at a relatively moderate pace," Marson said.

EY said construction companies are carrying significant overhead in anticipation of bidding and winning new work but this has been slow to materialise, especially from the public sector.

According to the Infrastructure and Projects Authority, 18 new projects joined the Government’s Major Project Portfolio in the year to April 2018, the lowest number since the IPA started publishing its annual report 6 years ago and 50% fewer than the previous year.

"Problem contracts are by far the most common reason for contractor profit warnings," Marson said, "and so it’s vital that companies bid selectively for contracts, concentrating on their strengths rather than just seeking to build turnover.

"They also need to apply strong risk management disciplines at the bidding stage to ensure they only take on the right contracts at the right price – and that they ensure that problems are identified and managed quickly."

Image by Maxmaltsev/Dreamstime

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