Although the year had started off with a lot of promise, the 2014 financial year proved to be a tough one for most construction companies, PwC partner Andries Rossouw said at the release of the ‘SA Construction’ report.

He said that, at the start of the year, construction companies had strong order books and their margins were recovering for the first time in five years; however, the lack of recovery in the economy counteracted this.

According to the report, the 2014 market capitalisation (cap) of heavy construction and building materials and fixtures companies saw mixed results, with ten companies reflecting an increase and five reflecting a decline.

In aggregate, for the 16 companies analysed, the market cap had decreased slightly to R67.4-billion as at June 30, 2014, compared with R68.1-billion as at June 30, 2013.

The market cap of the 16 companies decreased further after June 30 and, as at September 30, had declined to R66.3-billion, reflecting a 1.6% decline in market cap over the three-month period.

However, PwC said government’s National Development Plan and its continued commitment to the public infrastructure investment of R847-billion over the next three years were positive signals for future growth in the industry.

Meanwhile, the report showed that the total revenue of the construction companies studied increased by 9% to R172-billion year-on-year, mainly as a result of a R4.1-billion increase in Group Five’s revenue, and R1.5-billion and R1.3-billion increases in the revenues of Murray & Roberts and Aveng, respectively.

“These increases were largely the result of increased revenue from energy, oil and gas projects and a weaker rand partially offset by weaker demand from the mining sector,” PwC said.

Meanwhile, total operating costs increased by 9.4%, which was marginally above the reported revenue growth, therefore, resulting in a slightly lower profit margin.

The report showed that, for the heavy construction companies, staff costs, which increased 10% year-on-year, continued to represent a significant component of operating costs, constituting 28.3% of total operating costs.

“Retention of key skills to serve prospective contracts is one of the construction companies’ biggest investments in anticipation of the potential upswing. “Although tender activity has been very high according to a number of companies, there were limited tenders awarded. “Companies, therefore, have to decide whether they can continue carrying excess staff or whether they need to downsize,” Rossouw commented.

Meanwhile, PwC said common risks identified by construction companies included risks to the growth and expansion of the industry, industrial unrest, loss of key skills and expertise, health, safety and environmental sustainability, project execution, transformation, tender risks, credit risk management, and compliance with laws and regulations.

In addition, the construction industry also remained under pressure from the public and regulators to significantly improve its safety performance, with challenges prevailing across the industry.

There was also the added risk of noncompliance with the Construction Charter, and concerns around the retention of talent and skills shortages.

“Risk management is a vital component of effective management in the construction industry. Companies need to integrate risk and performance management and they need to evolve risk management to be more predictive in order to anticipate and plan for negative potential events,” Rossouw said.