As economies recover after a prolonged recession, more new projects are starting to emerge, with increased funding available to maintain and build infrastructure, and develop power and mining capabilities.
KPMG’s 2013 Global Construction Survey reflects the general positive mood of the industry. Over half of the respondents reported an increase in backlog of at least 5 percent for 2012-2013, which is an improvement on 2011-12. Fewer than one in seven believe their backlog will decline in 2013.
Engineering and construction companies in Asia Pacific experienced a difficult time between 2011 and 2012, when almost four in 10 suffered a backlog fall of at least 5 percent. These results were partly due to particularly difficult trading conditions in Australia. However, this appears to be a relatively short-lived phenomenon, and hopes are high for continued growth in 2012-13.
Interestingly, the smaller companies involved in the survey – those with a turnover of less than US$1 billion – forecast the largest rise in backlogs. These organizations tend to be more nimble and can staff up more quickly to meet fluctuating demand. Their larger colleagues, on the other hand, have shed positions in recent years and are a little reluctant to ramp up their resources, preferring to take a more cautious ‘wait-and-see’ approach.
Margins are not rising at the same rate as backlogs, although four out of five respondents foresee stable or higher margins for 2012-13. This is a positive sign for the industry and indicates a significantly better performance than in 2011-12. The renewed confidence within the Americas is demonstrated by increasingly large margin growth year-on-year between 2010 and 2013 – an indication of greater efficiency and cost management. Only a handful of executives from this region believe their businesses will see lower margins over the next 12 months.
The same small companies that have managed to increase their backlogs are not achieving similar success with margins. Three out of 10 respondents from this segment anticipate margins to be down by at least 2 percent in 2012-13. Having been particularly hard-hit by the recession, these firms may be prepared to price low in order to win new business. According to an executive from an Asia Pacific contractor: “We are in danger of carrying recession type behaviors into the growing market. We need to start saying “no” to contracts instead of “yes” and being very selective; not getting locked into discounting prices as we move into a rising market.”
Mid-to-large players (with US$1 billion-plus turnover) are enjoying more steady returns, with most benefiting from rising or static margins. Funding for large projects is still limited, so rather than take a big risk by employing a lot of new people, they have chosen to grow more steadily but also more profitably.
Looking forward, 23 percent of respondents are pessimistic over future prospects and foresee either static or falling turnover in 2013. However, 14 percent forecast revenue to grow by over 25 percent, with the average growth rate for the survey being 17 percent.
The most positive responses come from businesses in Central and South America and Africa, while Australia, the UK and the Middle East are the least hopeful. Such findings are largely consistent with the trading conditions in these regions, with high hopes for mining, oil and gas in certain parts of Africa and South America.
The industry’s largest players are the most optimistic about the next year, predicting revenue growth levels well above the sector average, and twice as high as the next tier down (those with annual turnover of US$1-5 billion). Having rationalized and reorganized since the recession, these companies feel they are well placed to capitalize on the economic upturn.
When asked about their thoughts on the longer-term outlook for the industry, the respondents are largely enthusiastic, although a majority (75 percent) believe they will have to wait between 2 and 5 years to see a real turnaround from the recession. Market conditions, though improving, have still not reached the levels of 6 or 8 years ago, and with finite private and public sector investment capital, companies are naturally cautious about prospects.
It is therefore not surprising that, of all the potential barriers to progress, the biggest concern is over budget deficits and public funding. Seventy-two percent view this as the number one worry, with private sector financing second and regulation in third place. One survey participant from the UK commented that: “Government debt is of major concern, since current levels leave little flexibility to provide a stimulus to the economy.”