Keith Cooper asks how scaffolding specialists have managed to protect their profits, despite the headwinds of recent years
From the outside, scaffolding firms seem as susceptible as any other construction specialist to the many challenges of recent years. The pandemic, huge hikes in the cost of materials and the chronic shortage of labour have been unhappily joined by spiralling inflation and rising fuel costs, putting the squeeze on everyone’s profit margins.
But despite all these pressures, scaffolding firms as a whole have weathered the economic storms rather well. Since 2018, the median profit margin of the 10 largest scaffolding firms, as analysed in the annual CN Specialist Index, has topped 6.4 per cent in every year except 2021, the year reflecting the financials of the pandemic impact, when it fell to 1.8 per cent. Last year, scaffolding specialists in the index rebounded to a median 6.7 per cent profit margin compared with 3.4 per cent for all specialists.
The latest analysis of the sector, by AMA Research in 2022, also found that the access equipment market recovered surprisingly quickly from the pandemic-induced lull, growing by 11 per cent in 2021 after a sharp decline of 13 per cent in 2020.
So just how do scaffolding firms do it? How are they maintaining these margins as others struggle to recover? And are such profit margins likely to survive the anticipated economic downturn?
Without any irony, some firms attribute their healthy margins to the pandemic that floored the economy in 2020. “It forced scaffolding firms to trade more sensibly, take fewer risks and focus on cash controls and cash conservation,” says Trad Group chief executive Des Moore. “It was an essential lesson to survive and develop a more robust business and that lesson has not been forgotten.”
This focus helped scaffolding firms maintain “acceptable and sustainable” margins when material costs and wages increased significantly, Moore adds. Trad’s pre-tax margin hit 18.4 per cent in the year to 31 August 2021.
“Not only does diversity of workload reduce risk from a revenue point of view, but it means we can continue to grow”
Billy Jones, Millcroft
Billy Jones, managing director of Greenwich-based Millcroft, says the post-pandemic period was a “really important time” to rebuild his firm’s pipeline. “Although construction never really stopped during COVID-19, it was slow for the industry to get back on track last year,” he says. “We came together as a team and put our efforts into bidding for frameworks, which resulted in us being chosen for a number of prestigious HS2 rail projects, as well as other work in the commercial, utilities and heritage sectors.” The payoff for this concentrated effort is a “very healthy” pipeline of orders for the next 12 months, Jones says.
Millcroft’s latest financial results show that it turned over £10.98m in the year to 31 December 2021 and posted a pre-tax profit of £1.67m, giving it a pre-tax margin of 15.2 per cent. During 2020 its margin fell into negative territory at -2.4 per cent.
Jones says the diversity of Millcroft’s workload also plays a “huge role” in keeping its business healthy. “Not only does it reduce risk from a revenue point of view, but it means we can continue to grow,” he says. “Our experience in a number of different niches, including rail, utilities and heritage, means we can cater for almost any job.”
Scaffolding Association chief executive Rob Candy says firms operate differently during a slowdown. “Like all businesses in the current climate, scaffolding companies are having to analyse everything they do and spend,” he says. “During a period of growth, the cost of fuel and materials is perhaps less important,” he says. “When you have so much work in front of you, you can buy more kit and increase the workforce required to complete that work.”
MG Scaffolding managing director Carl Fallon agrees that his business now has to be run “tighter” as core costs have risen and clients have bored down on price. “You have to have your finger on the pulse. It isn’t all sunshine and flowers,” he adds. “Clients are looking for cheaper deals and we sometimes have to accept smaller profit margins on projects. But I prefer to get something as opposed to nothing.”
Fallon adds that his firm now makes more efficient use of its fleet to save on fuel costs, has better security to prevent equipment being stolen, and ensures scaffolders turn up on time and stay on site.
Candy says some firms maintain profit margins by becoming “leaner”. With wages one of the biggest overheads, this means cutting staff and being more selective about the work they take on. “Before the pandemic, one of our members took on jobs some distance from their yard. Now, they’ll only take on closer jobs to cut down on fuel costs,” Candy says. Another firm declined work that would have required them to buy an extra £200,000 of kit. “Why would they do that if there’s other work around? They would have done that before, but not now.”
According to Candy, firms can afford to be selective as the pool of good scaffolding contractors is limited. “They have more flexibility and freedom for taking on work than they would perhaps have in a flooded market. There is more work than there are companies with the capability to meet demand.”
This capacity to be picky about work seems key to scaffolding firms maintaining their profit margins, ensuring a healthy workflow, and keeping clients on board. Jones says clients are always looking for the best price in the relevant market. “This price is driven by the labour and material rates that have seen significant rises over the last two years in particular,” he adds.
Trad’s Moore says contractor clients are aware of the labour shortages themselves, making them less likely to push hard on price. “They understand that scaffolding firms are restricted in what projects they can efficiently service,” he adds.
As a result of this shift, scaffolding firms are avoiding overcommitting themselves, he says. Such practices would force them to recruit costly labour of questionable quality from agencies, eroding profit margins and even putting them at risk of losing money on projects.
“By closely monitoring the market and communicating across the business, we have foreseen and adapted quickly to any disruption”
Ryan Payne, JMAC scaffolding
Stockton-on-Tees-based JMAC Scaffolding says that safe working practices are also key to winning business. “Safety is one of the biggest benefits that good scaffolding firms will continue to offer every industry,” says operations director Ryan Payne. “It gives all contractors and subcontractors the peace of mind they need on any site to carry out their duties effectively.”
The government’s pledge to ensure that billions of pounds is pumped into national infrastructure projects, homebuilding and the remediation of unsafe cladding means the ability to be picky looks likely to continue.
The energy, telecoms and warehousing sectors will also drive growth in the access equipment industry, according to AMA Research’s 2022 report. Post-Grenfell remediation in particular is likely be a “significant driver of demand” as much of it has been held up by tussles over liability for costs, the report adds.
Despite promising signs of the sector’s willingness to adapt to market conditions and the rosy prospect of future work, there are a number of looming threats to scaffolding firms’ profit margins. The first comes from the demand of major infrastructure projects and their drain on already limited labour. This has already reduced some firms’ capacity to take on new work.
Candy says this drain is one of the drawbacks of such “welcome” projects. “Hinkley Point is now above ground and requires a significant number of scaffolders,” he says. “Some firms are now having to turn down work because their staff are leaving to work there and on other major projects. I know of one business in Scotland that lost 10 per cent of its workforce to an oil rig.”
Less immediate but ultimately inevitable will be the drain on the UK’s supply of scaffolders once the Ukraine war is over. “The next challenge will be rebuilding Ukraine,” Candy says. “This will mean further loss of labour in the UK, to exacerbate the significant number that left following Brexit and during COVID.”
The rise in the cost of living is also a threat to the workforce, according to MG’s Fallon. “Scaffolders might be earning £1,000 a week but if a bill comes in for an extra £100 a week they will look to recover that,” he says.
The final threat is the widely predicted recession expected to vice the economy this year. “We can’t become too self-assured as the country tackles a recession,” says Jones. “We must concentrate on outstanding delivery every day to get through whatever is to come, because we are only as good as the last thing we delivered.”
Moore says firms should be preparing for an economic downturn now if they want to hold onto their accustomed profit margins. “You have got to continuously look at your structure and overheads,” he adds. “You should always be downturn-ready. If there was a recession tomorrow, what would you do? What you would do tomorrow, you should be doing today.”
Charles Stratford, business development manager for scaffolding at Peri, a major supplier of system scaffolding, attributes the industry’s resilience to its ability to adapt and benefit from public works programmes. “Given the current economic situation, we are seeing less investment in the construction of new high-rise buildings,” he adds. “The building safety crisis following Grenfell has given the scaffolding industry a new area of focus.”
Peri posted an 8.9 per cent margin in the year to 31 December 2021, having maintained a healthy 8.2 per cent the year before.
Stratford says that system, or modular, scaffolds will be particularly beneficial for cladding remediation projects as chronic labour shortages continue. “With system scaffolding you can have a different blend of skills in gangs. They can include less skilled labour to get the product from A to B.” He adds that residents might favour the sight outside their windows of totally steel system scaffolds over conventional tubes and combustible timber boards. The barrier many firms face in switching from traditional to system methods is the latter’s relatively high cost. “But when you invest in system scaffolding you are investing in efficiency as labour and other costs are significantly reduced,” Stratford adds.
JMAC has invested in system scaffolding to retain profit as clients postpone or cancel projects and increasingly look for ways to reduce spend. “By closely monitoring the market and communicating across the business, we have foreseen and adapted quickly to any disruption,” Payne says.
The use of system scaffolding is expected to increase as workforce struggles continue, according to the AMA Research report.