Smaller construction companies hit hardest as work volumes fall

New report shows dividend and director pay increases despite falling profits

With Brexit creating huge uncertainty in the construction sector, smaller companies in Hertfordshire and North London are struggling to cope, according to new research from accountancy firm MHA MacIntyre Hudson.

Financial performance across the sector is very mixed, with only larger companies showing growth in the last year. Those with a turnover of over £10m have been able to increase their gross profits in challenging conditions, but smaller companies have lagged behind, with the smallest (turnover of less than £5 million) recording a year-on-year fall of almost 50 per cent.

Despite a substantial decline in sales and gross profit, companies with a turnover of less than £5m paid their directors three times as much on average compared to last year. These companies also paid out substantial dividends, indicating that their owners either don’t have the confidence to leave their profits in the business, or they see no reason to further invest in it.

Larger companies also increased payouts to shareholders. Dividends across the sector increased by £47m for the current year, exceeding the total paid out for the previous two years combined.

The stronger financial performance of larger companies has enabled them to recruit, but headcount at smaller firms remains steady, leaving many poorly equipped to take on new projects. Capital expenditure has also been relatively modest among smaller companies over the last three years, whereas larger companies are investing in plant and equipment, and improving working capital.

All companies, except the £100m plus group, have increased their short term borrowings. This could indicate that for the smallest companies (turnover less than £5 million), borrowings have been increased to support dividends and director remuneration.

Brendan Sharkey, head of construction and real estate at MHA MacIntyre Hudson, said: “The sector desperately needs a shot in the arm from government, and a good start would be fast tracking a major infrastructure project like Heathrow’s new runway or providing full support for Crossrail 2. This would have huge knock on effects on the entire construction sector and instill confidence in other players to invest. Without decisive action, small companies in particular are going to find the year ahead very hard.

“Strong risk management is more important than ever. Companies must ensure contracts are properly costed and fully understood, and entered into with clients who they can rely on to pay their bills. Just one poor contract can spell the end for a smaller firm, especially if, as our research indicates, they’ve reduced their balance sheets in favour of paying higher dividends or directors’ pay.

“Ironically, some of the larger firms are now in a position to be more nimble than smaller firms, as they have cash to invest and the resources to take on new projects. The marketplace is continuously changing and it’s likely that trading conditions will become more difficult. Companies must thoroughly appraise their business to ensure they make the most of available opportunities, and avoid potential pitfalls of taking on too much risk or overcommitting themselves.”

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