Building blocks

The Construction Company in and out of Recession
November 22, 1996

For those who work in the construction industry, whether in contracting or consulting, the recession of the early 1990s has not been enjoyable. Staff in all firms have suffered redundancies, massive change and uncertainty. But has the industry learned anything from the recession?

This book is the third in a series examining the strategic behaviour of large construction firms, and has been based on published data and interviews with senior executives of 20 major firms. It will provide useful background to those interested in how the industry operates and how it coped with the difficulties encountered between 1987 and 1994.

The authors start by giving details of the economic background to the construction industry, followed by the changing economic circumstances affecting the various sectors of the market such as public sector works, private works, infrastructure, housing and office developments. The dominant effect of the South-east on the market is highlighted, and then a detailed analysis is carried out of the effects of the recession-hit companies moving into territory previously held by smaller contractors.

The main body of the book addresses the contractors' strategies for tackling the effects of the recession, looking in turn at capital structure, profits, dividends and markets. The statistics and the approaches adopted by the firms make fascinating reading. The survey and review shows how freely many contractors had used the cash flow generated from general contracting to invest in non-core activities, such as housing, development and the acquisition of mineral companies. The subsequent collapse of housing and development then took many (but not all) by surprise; a stark reminder was that during the recession there was a 33 per cent drop in tender prices, and the need to "write down" many assets. Companies kept paying dividends and often survived as they were only because banks and shareholders did not feel they could do anything other than support them. All this sustained the over-capacity that still exists today. One telling comment was: "If you don't win work, you go out of business - if you win work at a loss, you go out of business, but it takes longer."

As many are now coming to realise, the approaches to housebuilding and Europe have provided lessons: some contractors were able to use housebuilding to their advantage (easy to control the workload); many were not. Those which ignored Europe during the boom are now looking again. Above all, the firms interviewed felt that the recession allowed restructuring to be carried out and efficiencies pushed through; many of the decisions that needed to be taken were difficult, involving the loss of staff, sales of assets to raise cash, and the admission of mistakes. The effect of all this has been a change in the management view of their major resource, staff, and a reduction in graduate intake and training.

The book draws to a close with a review of the surveys carried out in 1986 and 1993, and a conclusion that contractors' concerns relate primarily to over-capacity and uncertainty of government approach to the industry. The authors then carry out a detailed analysis of corporate planning theory and practice, and their view is that these theories only really work effectively in a stable economic climate. It would seem that many problems stemmed from inappropriate use of cash flow in diversification.

Construction firms may have leaner and fitter management now, but some consider that financially, firms are thinner and weaker; there is still some way to go before construction firms are in balance with work available.

Tony Forbat, is a partner, project management department, Fuller Peiser.

The Construction Company in and out of Recession

Author - Patricia M. Hillebrand, Jacqueline Cannon and Peter Lansley
ISBN - 0 333 61770 3
Publisher - Macmillan
Price - £45.00
Pages - 185

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