Despite the slow pace of economic recovery to date, many leading engineering and construction (E&C) companies have a somewhat bullish outlook for 2011.
Having repositioned their businesses during the downturn with sustainable models better suited to manage risk and expand into new markets and services, these firms are leaner, stronger, and more strategic, a recent study from KPMG International has found.
Optimism and Repositioning
Findings from the "KPMG 2010 Global Construction Survey, Adapting to an Uncertain Environment," indicate the lingering economic downturn and associated constraints have generated a growing movement among E&C companies to create stronger, more resilient business models that can weather change and manage risk. Seventy-seven percent of respondents said they have in place sophisticated systems to effectively manage risk.
Another outcome of the opportunity to redefine their businesses is that many of the global players are creating new integrated services offerings or expanding overseas to increase market opportunities.
“The willingness of contractors to move into new markets, and possibly to evolve their value proposition, could be the difference between thriving and merely surviving,” says Geno Armstrong, international sector lead for KPMG’s Engineering and Construction practice. “With margins unlikely to rise for traditional business, such a repositioning could be vital.”
Close to half of respondents forecast rising backlogs in 2011 from pent-up demand; expansion into new services, such as power; or moving into additional geographies, such as the Middle East, Asia, Australia, Africa and India. Asia Pacific demonstrated the most promising outlook in backlogs in 2011 with 21% of respondents confident of a significant increase.
Other findings include indications that few companies expect to lay off workers in 2011, while 31% said they will likely hire more direct labor in that period.
Margins have taken a cut over the last year, as most respondents said they had to reduce prices. However, the impact has been lessened due to cost-cutting measures. Looking ahead, more than 30% said they are bidding on new projects with lower margins but that factor is offset by the sentiment that backlogs are predicted to rise.
Meanwhile, government stimulus initiatives around the world have had varying levels of success, with more than 35% of respondents from Asia Pacific stating that stimulus efforts have had a significant impact. In contrast, the majority of respondents from EMEA and the Americas said the stimulus did not improve market opportunities.
Improved Risk and Compliance Measures
With risk management an even higher priority in the new environment, most respondents said they continue to improve efforts with new programs to train employees, analyse the bidding and planning process, and develop a more formal risk process.
With signs of economic improvement on the horizon, E&C companies are looking at ways of funding their geographic expansion and new offerings. Credit is still tight with 47% saying that financing is still very difficult to obtain. Many respondents – mostly those outside the US – consider public-private partnerships (PPPs) to be a good bet for the industry if there is government backing.
“The global E&C industry’s optimism and notable progress on making major improvements to become leaner and focused provides a strong foundation for the years to come," says Armstrong. “The future is far from certain but continuing to invest in risk management, expanding into new areas and building a skilled staff are critical steps that can help weather any change.”
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