News Article

Sector Analysis

Construction industry surprisingly upbeat despite recession, KPMG´s global construction survey reveals

By CreditMan Monday, November 16, 2009

Despite the deepest recession in sixty years, the global construction industry is surprisingly upbeat and positive about its future prospects, according to KPMG's 2009 KPMG's global construction survey.

The report entitled "Navigating the storm - charting the path to recovery" reveals that almost two thirds (64 percent) of respondents expect to either increase or at least maintain profit levels by mid-2010, despite falling demand and commercial and residential building work inevitably suffering as funding has dried up in the wake of the financial crisis.

Fiona McDermott, UK head of building and construction comments:
"Given the intensity of the economic crisis, the construction industry so far appears to have weathered the economic storm, with around half of respondents reporting order books and profit rates at similar or greater levels than a year ago."

"However, many companies are living off the profits of contracts secured before the recession, and whether such performance can be maintained is dependent upon a number of factors, not least a general economic recovery. Although the sector appears to be in fairly good shape at the moment, we have to ask ourselves: Will 2010 be the year that the industry feels the pain already experienced by other sectors of the economy? "

The survey reveals that 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 have still managed to avoid any job cuts and few have felt the need for salary reductions or freezes, or shorter working hours.

Fiona McDermott comments:
"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."

The future for the industry promises huge government stimulus packages with the potential to reinvigorate the infrastructure market, but how much money will be made available and where it will find its way to is a matter of much debate in the boardrooms of engineering and construction companies around the globe.

Indeed, only 12 percent of global respondents believe that the proposed government stimulus packages will bring a significant increase in opportunities over the next 24 months. Although contractors in Asia Pacific had the most confidence in government packages with 82 percent expecting a moderate or significant increase in opportunities over the next 24 months, 43 percent of respondents from Europe, Middle East and Africa believe that such stimuli will have no demonstrable impact in that timeframe. In contrast American respondents tended towards the middle, with 73 percent expecting some impact by mid-2011.

The survey also reveals that the sector continues to embrace risk management, with almost three quarters of respondents devoting more time and resources to this critical activity, 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 management - which received less attention during the boom - has become a bigger concern, with some companies linking cash flow performance with rewards.

Construction companies also 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.

Finally, in looking at two specific financial reporting issues, more than 80 percent of survey respondents suggested that the transition to International Financial Reporting Standards (IFRS) has had or would have either positive or neutral impact for the industry. In stark contrast, the majority of respondents felt that proposed changes in revenue recognition would have a negative impact for the industry, feeling that the new standards would reduce understanding of their company's results, degrade the ability to forecast revenues and profits or that the existing model accurately reflects the revenue recognition process.