The groundworks contractors market was estimated to be worth around £4.22bn in 2012, approximately 35% below the pre-recession peak of £6.48bn achieved in 2008. The market size is open to discussion as definition of ‘groundworks’ includes a wide range of projects and products. Groundworks contractors undertake a wide variety of products and services which can be split into 3 broad categories – groundworks & treatments, substructure and hard landscaping/finishing.
The chart indicates that the groundworks contractors market peaked in 2008 at around £6.5bn, subsequently declining by 38% to around £4.02bn in 2011. Most significant decline was experienced 2008-09 with the impact of the dramatic reversal within the housebuilding market from late 2008 onwards. The sector experienced further decline of around 20% in 2009-11, partially due to a downturn in both domestic and non-domestic construction new orders but also because of increased competition between contractors which led to pressure on tender prices. Initial estimates for 2012 indicate that there has been some element of growth as housing starts have begun to recover and there appears to be an easing of pressure on tender prices.
During the last 2-3 years, the market has experienced a period of rationalisation as larger construction organisations have either closed, divested or restructured specialist groundworks divisions – a reversal of the trend up to 2008 when independent groundwork specialists were being acquired by larger contractors. Material price volatility in 2011-12 has also put further pressure on contractors margins – particularly fluctuations in steel and oil costs. Further rationalisation of the market may occur as larger national general contractors may re-enter the sector through acquisition as work volumes pick up momentum.
Material pricing is likely to remain volatile into the longer-term – pressure on operating margins for the majority of contractors is likely to increase rather than ease into the medium-term.
As with many sub-contracted activities, the industry has become used to more “competitive pricing” – particularly for tenders over the last 2-3 years – and it is unlikely that this pressure will ease significantly in the short-term. Main contractors are now used to driving best value at all levels of the contract and this is unlikely to change in future years. Inevitably, pressure on margins will be maintained even though the market is expected to begin to show good growth from 2013 onwards, which may result in further rationalisation of the sector.
Overall, the groundworks contractors market is likely to be one of the first construction sectors to benefit from the anticipated recovery, with growth for the market likely to be ahead of any growth in construction output.
Outlook into 2013 remains mixed with the market currently forecast to improve by around 4-5% based on steady continued recovery in housebuilding and slight improvement in private sector commercial new orders into H2 2012. The groundworks contractors market is currently forecast to achieve good annual rates of growth 2013-16 of typically around 6-8% with market value forecast to reach around £6.3bn by 2016.