The FINANCIAL — Despite the deepest recession in 60 years, the construction industry is surprisingly positive about its future prospects, according to KPMG International’s 2009 Global Construction Survey. Almost two thirds (64 percent) expect to either increase or at least maintain profit levels by mid-2010.
To date, the sector appears to have weathered the economic storm, with around half of respondents reporting order books and profit rates at similar or greater levels than 12 months ago. After a number of years of under-capacity, some balance seems to have been restored.
However, as longer-term projects wind down for some contractors, much may rest on the impact of the proposed government stimulus packages. Here, substantial uncertainty prevails, with only a small minority of respondents believing that these will bring significant opportunities.
Keeping a firm grip on talent
Workforce rationalization has been surprisingly limited, with most contractors choosing to retain their best people. In the face of funding constraints and project cancellations, more than a third of respondents have still managed to avoid any job cuts…and few have felt the need for salary reductions or freezes, or shorter working hours.
After years of struggling to attract good candidates, the industry is clearly loath to now let them go. This marks a change of direction from previous recessions, when many employers made deep workforce cuts, only to suffer again once the upturn arrived. However, there is still a question mark over how effectively the industry is nurturing future talent.
Risk management has arrived
The sector continues to embrace risk management, with almost three quarters of respondents devoting more time and resources to this critical activity. Having invested heavily in project risk management over several years, engineering and construction companies appear to be embedding such an approach, with greater due diligence on bid opportunities and more focus on cash flow, compliance and safety risks.
By placing a big emphasis upon bid evaluation risk, contractors have been able to reduce their exposure to cost volatility and avoid an increase in the proportion of high-risk contracts. Cash managemen
t – which received less attention during the boom – has become a bigger concern, with some companies linking cash flow performance with rewards.
Competing in a tougher environment
Construction companies recognize the need to adopt sustainable policies and maintain strong health, safety and environmental programs. However, in this sector, being green – along with being safe – is rather seen as a minimum requirement to meet customer demands, and is more about efficiency than environmentalism.
Respondents have invested in both sustainability and safety, yet some are still struggling to measure the return on this outlay. The responses also demonstrate a great deal of concern about the impact of proposed changes to revenue recognition. The industry as a whole has been lobbying against such changes, fearing that they could create volatile earnings flows, as revenue would only be recognized once a project was completed. This may not only impact the views of analysts and investors; it could also make it hard to satisfy ongoing debt repayments. There’s far less worry about International Financial Reporting Standards (IFRS). Only a small minority feels that conversion to this new body of standards will have a negative impact upon their business – either now or in the future.
Key Statistics
· 64 percent expect profits to rise or stay level by mid 2010—Having completed longer-term backlog projects, many executives expect new bid opportunities to arise as a result of pent-up demand from before the credit crisis.
· 73 percent are devoting more resources to risk management—Some companies are focusing on due diligence, checking the credentials and financial stability of clients; others are carrying out more in-depth analyses of performance risks on mega-projects.
· 53 percent of respondents say their backlog has either gone up or stayed level in the past 12 months—The length of most construction projects means that many contractors may still be working off backlog contracts secured before the financial crisis.
· Only 15 percent believe that the proposed government stimulus packages will bring a significant increase in opportunities—While the majority expects some kind of positive impact from government initiatives, there is skepticism that these efforts will significantly affect the industry in the next 12 months. Respondents in Asia Pacific exhibited higher levels of optimism than counterparts in the Americas or Europe, Middle East and Africa.
· 35 percent of respondents have made no staff cuts—While many respondents have made some form of cuts, the overall industry response appears to have been measured, with the recent war for talent fresh in the minds of top management.
· Only 28 percent believe a sustainable approach broadens their range of potential bids—Respondents felt that sustainability is a “must-have”, not a competitive differentiator. Further, they report that customers are still more concerned about the commercial (i.e., efficiency, profitability, etc.) than the green benefits.
· 63 percent feel that proposed revenue recognition changes would make it harder to understand results, and impair forecasting—Most respondents feel that existing revenue recognition standards are more aligned with the nature of construction work.
All survey responses were gathered through face-to-face interviews in mid-2009 with
108 senior leaders—many of them Chief Executive Officers— from leading engineering and construction companies in 30 countries around the world.
The interviews were carried out by senior representatives from KPMG member firms specializing in the Engineering & Construction industry, with the questions reflecting current and ongoing concerns expressed by the clients of KPMG member firms.
Respondent companies’ turnover ranged from less than US$250 million to more than US$5 billion, with a mix of operations from global through regional to purely domestic.
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