Survival of the fittest

The SmartCompany Dun & Bradstreet Industry Growth List for the construction industry reveals companies are suffering from cancelled projects and higher competition, but strong players have survived and they are eyeing a recovery. To see the full list click here.

Projects worth several billion dollars have either been abandoned or cancelled altogether due to the credit crisis, leaving stranded companies looking for more work.

But the Government has worked hard to revitalise the sector by boosting the First Home Owner’s Grant and has pumped billions into infrastructure projects.

Suddenly, construction companies have been thrown a lifeline.

Diversification is also helping many firms survive the slump; some of those companies that focussed on industry sectors that were too narrow are battling or have already failed.

The average revenue of the companies on the list comes in at $212 million for the 2008 year, a massive decline from the previous year’s $377 million. But the average growth rate comes in at 344.2%, up from last year’s average of 65%.

Jim Barrett, associate director of construction and infrastructure at the Australian Industry Group, says the industry is surprisingly resilient, but warns the construction sector lags in its response to the overall economy.

“Because order books are at historically high levels, at the moment contractors are doing okay. It’s their forward order books that are at risk, because work is just not coming to the market. Right now we should be looking at bidding for the end of 2010 and 2011, and that work is a bit slow.”

Barrett also says that businesses that have diversified their offerings, rather than carve out a specific niche, have done particularly well and have spread the damage.

“I think diversification is something that has occurred naturally over the past 15 years. Most of the major contractors have maintenance and service business, so this has happened in a natural way. Not to say damage hasn’t occurred, it certainly has, but these companies that have diversified are doing okay now.”

“In terms of pressure points, however, prices are going to become a lot sharper for bids. When major projects come along, there is more competition in the market and therefore good price competition, because companies will have resources they want to put to work.

Barrett says the industry has been affected by the drop off in private spending, which is why business reacted very warmly to the Government’s infrastructure package announced in the Federal Budget. Until then, he says, companies have to do their best to survive.

“It’s about the pace of the recovery, and also that we don’t have any major drop off. I guess the hope is that the stimulus package work that is geared towards major projects will start to come in at the right time. After private companies shelved a lot of expansion projects, that public work is welcome. It’s coming, we know that, but in the meantime we have to survive so we don’t fall off the edge.”

Fighting for crumbs

Shane Strong, business development manager of Taylor Construction Group, which came in at 29th on the list, agrees with Barrett and says surviving the downturn takes no more than a little initiative.

The company, which focusses on commercial construction including retail, office buildings, industrial buildings, aged care facilities, schools, community facilities and commercial fit-outs, has achieved its most successful financial year during 2008-09.

It recorded about $85 million in revenue, up from last year’s $55.8 million. Strong says the company has only begun to feel the effects of the downturn since February, due to projects being held over.

But it hasn’t been easy. He says the company has “had to work harder” in order to gain the same amount of work, with more companies competing for projects which are almost always under $10 million, as larger projects have been cancelled.

“We needed to get a few more projects than usual, but we also found it tougher to get them across the line. Even getting on tender lists was a challenge, they ask you more about financials and so on. There were 50 people expressing interest in a project when before there were 10.”

“The bigger tier two companies were looking at smaller projects which they weren’t previously doing, because they were looking for work anywhere. It just made it more challenging.”

Stone says the company worked around this by leveraging relationships with clients. Promoting Taylor Construction’s reputation, he says, was sometimes the only way to get work along with finding ways to cut costs.

“Some of these people said projects were over budget, or the feasibility of the projects was too low. But we’ve been able to work with clients in saving them money, looking at saving money through different construction techniques, making things more efficient, which will let us keep projects.”

But despite the troubles, Strong says an industry recovery is in sight.

“I think possibly in the next 12 to 18 months people will start to have more confidence, but then again I think in the next 12 to 18 months a lot more companies will die off. I don’t wish it on anyone, but they’re doing silly things just to keep work such as reducing their margins, and they can’t sustain that.”

“I think certainly the rest of this year and next year are going to be challenges, and matching or increasing what we did last year will be hard. But we’ll just have to keep going, and we are picking up new work here and there. It’s not all bad.”

Diversify or die

But some groups aren’t as positive. Malcolm Hoye, general manager of refurbishment and fit-out group Uniport Australia, which reached number eight on the list, says the construction industry has a long way to go before a recovery appears.

“Everyone is indicating Christmas is when it’ll pick up, and I tend to think that won’t hit something until next year. Speaking to associates in the larger construction groups, they’re usually booking stuff now for next year but they aren’t.”

“Economy wise things should pick up by the end of the year, but I think it’ll take much longer for the construction industry. Of course, I’d love to be wrong.”

Uniport hasn’t fared as well as some. The company’s revenue jumped 299% from $4 million in 2006-07 to $17 million during 2007-08, but Hoye says growth has been flat this year despite a company goal of beating that figure by “a few percentage points”.

“We had quite a few good contracts in place that sheltered us until February, but then around March the money went on hold. We had a lot of work with governments, but obviously they are watching the dollars, and funding for universities was affected, which affects us.”