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M&E contracting industry performance: the AMA Research report31 August 2011 A new report from AMA Research, reviewing the UK market for mechanical and electrical (M&E) contracting, reveals that while growth had been strong in the years leading up to 2008, the impact of the global economic recession on this market was not initially as severe as in other sectors of the construction industry. However, the market has continued to decline during 2010 and early 2011 showing few signs of an immediate upturn, according to the researcher.
Recent key trends have seen a consolidation among contractors, which has led to a number of the major players increasing in size over the past few years. This growth in strategic acquisitions is also in response to the growing focus on integrated services within the sector, with contractors widening the traditional range of services they have to offer.
Competition within the sector has increased as a result of weaker demand as fewer projects are being tendered. At the same time, raw material - and consequently product prices - have risen significantly, with a large proportion of the increases being passed on by manufacturers and distributors.
As a result, most M&E contractors have seen profit margins eroded substantially in recent years. The current outlook for the market over the medium term is for a return to growth by the end of 2013, underpinned by a recovery in the private commercial construction sectors and a renewed focus on carbon reduction, operational efficiencies and renewable energy solutions.
AMA Research estimates the market for M&E contracting to be valued at around £14.9bn in 2011, a decline of 17% since its peak in 2008. The market experienced strong growth between 2005 and 2008 driven by an increase in construction output, growing levels of outsourcing and a continuing move towards more efficient building services provision.
Not surprisingly, the value of the market fell in 2009 due to difficult trading conditions and the impact of the general economic downturn on the wider construction industry, although the market was not initially as severely affected as other sectors within the industry, due to its reliance on public sector work and limited involvement in the domestic housing sector.
It is estimated that the market may reach £15.6bn by the end of 2015, though this is still significantly below the levels seen in 2008, when it was worth nearly £18bn.
According to AMA's findings, the market continued to be sustained by work in the transport and leisure sectors in connection with the 2012 Olympics, as well as ongoing work in the health and education sectors throughout 2010 and 2011. However, as a result of a reduction of new projects being tendered, competition increased substantially, negatively affecting prices. This, in combination with weak demand generally, led to a continued decline in value terms within the market.
Competition is fierce among contractors, with reports of businesses submitting tenders at, or even below, cost price in order to secure work or retain clients. Profit margins, which were already under pressure during the early part of the review period, have declined further over the past few years.
AMA says a key area of growth in recent years has been installations aimed at improving energy efficiency and reducing carbon emissions, driven largely by legislation and regulation, but also given impetus by the long-term cost savings that can be made by installing such systems. This trend, combined with a requirement for higher levels of cost control has seen growth of installations of integrated systems, which provide greater control and measurement of energy usage.
The market for M&E contracting in the UK is heavily dependent on the performance of the construction market in general. With non-domestic construction output set to remain static or decline further during the remainder of 2011 and into 2012, AMA believes prospects for growth in the immediate future to be bleak.
A further decline is expected in 2012 as Olympics related projects in the transport and leisure sectors are completed and the impact of the public sector spending cuts, particularly in the health and education sectors, start to take effect.
Indeed, both consumer and business confidence looks to remain low in the near future with no significant upswing in demand in either the retail or offices sectors expected during 2012. Energy and fuel price increases, coupled with wage freezes have led to a fall in disposable income.
AMA forecasts a recovery in the market from 2013, with growth stimulated by recovery in the private commercial construction sectors. Growth is also likely to be fuelled by a number of government initiatives around construction and energy management coming into effect in 2013.
The fact that businesses within both the public and private sectors urgently need to find cost savings has led to demand for more energy efficient heating, lighting and ventilation systems. This type of work will also be stimulated by legislation and guidelines around carbon reduction and renewable energy sources and, as a result, energy management is a key area of focus for M&E contractors.
For more information about AMA Research and the availability of its report on the M&E contracting sector, click here.
Les Hunt
Editor
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