Competition in the Construction Industry

13 Mar 2018

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Select one construction firm and explain the nature of competition in its specific market sector and discuss how it may be advised to secure contracts for future work.

Laing O’Rourke is the United Kingdom’s largest privately owned construction firm; it operates internationally across a variety of different sectors within the construction industry. Formerly known as R. O’Rourke & Son until its takeover of Laing Construction in 2001, Laing O’Rourke is one of the leading construction firms in the UK. The firm has a strong standing in sectors including, building, transport, power, water and utilities, mining, oil and gas. (Laing O’Rourke, 2014). This firm operates heavily in the private sector, with investments from large scale hotel operators, for example the Atlantis hotel, The Palm, Dubai; to football stadium developments, such as the recent expansion of the Etihad Stadium in Manchester. (Prior, 2014).

Laing O’Rourke also engages in a substantial amount of work in the public sector, (Laing O’Rourke, 2014) however over recent years the borders between the private sector and public sector have been blurred to a point where often only a specification is given by the public sector client and the financing, design, build and maintenance is taken on by the private sector firm (Myers, 2013). This method’s popularity has soared over the last 20 years mainly due to the dwindling amount of capital readily available to the public sector and also to the public sectors keenness to utilise as much of the firm’s specialist expertise and experience. This method of public sector and private sector partnership (Myers, 2013) is known as a Private Finance Initiative (PFI) and is often used for projects such as schools, infrastructure, and hospitals. All types of developments which Laing O’Rourke has recently undertaken. The contracts run for roughly 25 – 30 years (Myers, 2013) and so capitalises on the strengths of both sectors; the specifications and requirements coming from the public sector client, and the development and maintenance aspects being handled by the private sector firm. Because the private sector firm has had to invest its own assets into the PFI project, the public sector client pays an annual charge to the private sector firm or can allow the firm to retain any profits made from the operation (Myers, 2013). This method legally ties the contractor to the project and thus greatly increases the likelihood of the firm delivering a high quality product. As they are responsible for the maintenance and running costs, (Myers, 2013) it is in the firms best interests to create a product which will not require a great deal of additional financial input to maintain.

Laing O’Rourke operates across most aspects of what Myers (2013) considers to be the broad definition of the construction industry. This ranges from suppliers of basic materials to the providers of services such as transportation and demolition (Myers, 2013).

Laing O’Rourke as a whole are capable of operating across such an expanse of sectors in the construction industry through the use of subsidiary companies. These are firms or departments which Laing O’Rourke has either created within the firm itself or purchased and brought under the Laing O’Rourke umbrella and allows for an entire construction project to be completed using only one large contractor, themselves, instead of having to hire in sub-contractors and other professionals. This has a number of advantages as it means that from day one there can be excellent communication between everyone involved and consistency with aspects such as quality, pricing, budget and time management (Laing O’Rourke, 2014). Most small firms specialise in a certain aspect of construction, such as building or civil engineering (Ive & Gruneberg, 2000) but not usually a multitude of aspects. Laing O’Rourke is a major firm which owns different subsidiary companies within sub-industries which are of particularly good use to the parent company. The firm currently owns a total of 17 subsidiaries (FAME, 2014).

An example of this practise would be that if Laing O’Rourke were to purchase or develop a steel fabrication firm and bring it under its control then all the steel work could be sourced from that arm of the company and sent to site at internal reduced costs instead of paying a higher price for an independent firm to provide the resources. This allows for a substantial reduction in overall cost and lead time during the construction process and would no doubt have the potential to have a positive environmental effect.

Laing O’Rourke have taken this practise a step further and have delved into the mining industry. They are responsible for some construction materials from their initial removal from the ground all the way up to their installation on site. Laing O’Rourke have been mining materials such as coal, iron ore, zinc, bauxite, alumina, diamond, and copper for over 40 years in Australia (Laing O’Rourke, 2014).

Since Laing O’Rourke acquired Crown House Technologies and Barclay Mowlem in 2004 and 2006 respectively (Laing O’Rourke, 2014), they have completed some of the most recognisable and both culturally and economically significant building projects in the world. The firm was responsible for the construction works for the half a billion pound regeneration project known as Liverpool One, in Liverpool in 2008 to mark the city’s celebration as the European capital of culture. The project has been hailed as a great success, improved the local economy and transformed the image of the city almost in its entirety. (Laing O’Rourke, 2014).

The size and range of Laing O’Rourke’s operations position the firm in a sector of the market which can be described as an oligopoly. Cooke (1996) wrote that “Oligopolistic industries are characterised by a small number of firms accounting for a large proportion (or all) of total output.” Laing O’Rourke is one of a relatively small number of firms that is responsible for a very large proportion of all construction work. This raises an interesting point as the industry is in fact dominated by a large number of small firms (Cooke, 1996). This is mainly due to the construction industry being location specific. The resources and materials for a project may all come from static factories, but the actual construction activity itself must always take place on the site itself, such is the nature of construction (Cooke, 1996). This is even the case where an entire building may be produced using prefabricated components, the actual coming together of the parts will happen on site. This is where a firm like Laing O’Rourke will utilise the smaller, more location specific firms to aid in their efforts. These smaller firms operate in an area of the market which could be described more as monopolistic competition, even bordering on perfect competition in places. Cooke (1996) describes monopolistic competition as:

“Monopolistic competition exists when a large number of firms are operating in a particular market but, unlike perfect competition, each producer offers the customer a slightly differentiated product… or when firms offering a similar product are located in different geographical areas”

This oligopolistic competition at the top end of the construction industry has meant that the top 50 construction firms in the UK, sometimes even the top 10, are usually the same familiar names, granted they regularly overtake one another year to year as the market can often be volatile and firms can easily lose out financially if a project has not gone well. This was touched on earlier where most of the construction work carried out on a whole is actually by a small amount of large firms.

Construction can be a very lucrative business even on a small scale. Therefore the amount of money passing through the accounts of a firm the size of Laing O’Rourke is phenomenal. This section will look into some aspects of the firm’s accounts, which are readily available to the public as the firm is a limited company.

Parker (1999) states that all company balance sheets are built up from three main categories; assets, liabilities and shareholders’ funds. “Assets can be defined as rights or other access to future economic benefits controlled by a company as a result of past transactions or other events.” Current assets are assets which are to not be put back into the firm. This includes mainly cash, debtors and stocks (Parker, 1999). In contrast, fixed assets are assets which are to be used in the continued operations and growth of the firm.

The total assets can be found by combining the fixed and current assets.

The net assets can be found by subtracting the current liabilities from the total assets.

Table 1. below shows the total assets and net assets for the years 2012 and 2013.

Table 1. Balance Sheet – Laing O’Rourke

 

2013

2012

Total Assets

£255,100,000 + £929,700,000 =

£1,184,800,000

£250,300,000 + £970,000,000 =

£1,220,300,000

Net Assets

£1,184,800,000 - £865,400,000 =

£319,400,000

£1,220,300,000 - £914,400,000 =

£305,900,000

Source: FAME, 2014

It can be seen that the total assets have dropped from 2012 to 2013, however the fixed assets actually grew by £4.7 million and the current assets dropped by £40.3 million. This shows that more money was allocated to be put back into the company in 2013 than it was in 2012. The net assets show a growth of nearly £15 million.

Below; Table 2 shows similar look into another large construction firm Carillion.

Table 2. Balance Sheet – Carillion

 

2013

2012

Total Assets

£1,952,900,000 + £1,683,200,000 = £3,636,100,000

£2,026,500,000 + £1,834,800,000 = £3,861,300,000

Net Assets

£3,636,100,000 - £1,661,600,000 = £1,974,500,000

£3,861,300,000 - £1,688,400,000 = £2,172,900,000

Source: FAME, 2014

This data shows a drop in fixed assets of about £73 million and also a drop of about £150 million current assets from 2012 to 2013, which shows that fewer assets were allocated in both sectors, so it is possible that the firm did not perform as well in 2013 as 2012. The net assets also show a drop over the time period. This is in contrast to Laing O’Rourke, who actually increased its overall assets. This does not mean though that Carillion have less assets than Laing O’Rourke, on the contrary, Carillion, even though the firm did not increase its assets over the year, do however still have about 6 times the amount of Laing O’Rourke.

Gross profit can be found by deducting the turnover from the cost of sales.

Profit margin ratio can be found by dividing the net profit before tax by the turnover and multiplying the answer by 100.

Return on capital employed can be found by dividing the profit before tax by the capital employed and multiplying the answer by 100, as is shown in the table (3) below.

Table 3. Profit and loss account - Laing O’Rourke

 

2013

2012

Turnover

£1,640,100,000

£1,622,400,000

Cost of sales

£1,473,000,000

£1,448,700,000

Gross Profit

£1,640,100,000 - £1,473,000,000 = £167,100,000

£1,622,400,000 - £1,448,700,000 = £173,700,000

Net profit before tax

£21,500,000

£27,400,000

Profit Margin

1.31

1.69

Return on capital employed

6.73

8.96

Source: FAME, 2014

Table 4. Profit and loss account - Carillion

 

2013

2012

Turnover

£3,332,600,000

£3,666,200,000

Cost of sales

£2,984,600,000

£3,279,400,000

Gross Profit

£3,332,600,000 - £2,984,600,000 = £348,000,000

£3,666,200,000 - £3,279,400,000 = £386,800,000

Net profit before tax

£110,600,000

£179,500,000

Profit Margin

3.32

4.90

Return on capital employed

5.60

8.26

Source: FAME, 2014

These figures clearly show us that in both firms the gross profit figures have fallen. Also the profit margin and return on capital gained has fallen in both cases. Both firms did however make a profit over both years and the figures show that Carillion’s profit margins and return on capital gained are significantly higher than those of Laing O’Rourke.

Current ratio can be found by dividing the current assets by the current liabilities.

Acid test ratio can be found by subtracting stock from the current assets and dividing the answer by the current liabilities.

Also the efficiency ratio can be found by dividing turnover by the current assets.

Table 5. Solvency & efficiency – Laing O’Rourke

 

2013

2012

Current Assets

£929,700,000

£970,700,000

Current liabilities

£865,400,000

£914,400,000

Current ratio

1.07

1.06

Acid test ratio

0.92

0.87

Efficiency ratio

1.76

1.97

Source: FAME, 2014

Table 6. Solvency & efficiency - Carillion

 

2013

2012

Current Assets

£1,683,200,000

£1,834,800,000

Current liabilities

£3,636,100,000

£3,861,300,000

Current ratio

1.01

1.09

Acid test ratio

0.98

1.05

Efficiency ratio

1.98

2.00

Source: FAME, 2014

These figures show that both Laing O’Rourke and Carillion’s current ratio and acid test ratios are hovering around the 1:1 mark, but both firms display a reasonably high efficiency ratio.

Laing O’Rourke are at the forefront of the construction industry with new ideas and methods with regards to reducing their impact on the environment. Their current methods include cutting carbon, eliminating waste, sourcing responsibly, and implementing a stringent environment policy that should see their impact on the environment be reduced significantly. Their greatest priority though is to eliminate all accidents through their ‘Mission Zero’ policy. This policy aims to eliminate all accidents resulting in the loss of one or more shifts by 2015 and to eliminate all accidents of any severity by 2020 (Laing O’Rourke, 2014). These efforts should go a long way to improving their performance along with eliminating the bad practices often associated with the industry.

To provide success in the future the firm could aim to eliminate waste from their productions entirely and endeavour to not just become carbon neutral, but to become a ‘carbon negative’ firm that will actually help reverse the effects that the industry has on the environment. Also a continued development and implementation of Building Information Management (BIM) into their projects of all sizes up and down their supply line would further increase their effectiveness and efficiency as a firm (www.bim.construction.com, 2014).

References

Word Count 2002

Business Economics & Management for Construction (UBIL6Y-20-1) Page 1 of 9



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