Clouds gather above the building site

Budimex, Poland’s largest construction company, generated profits of around PLN 6 mln in Q1 this year – 85 pct less than a year earlier (PLN 33 mln) and a margin of 1.3 pct. According to Dariusz Blocher, the CEO of Budimex, this does not bode well for the future: “This year will be the most difficult in the last decade in many respects: in maintaining profitability and for revenues. And also due to the fact that several large tenders for energy and road projects have been annulled by the ordering party, despite the fact that we submitted the highest-scoring bids. That’s why we are focusing on improving the profitability of the work we are already carrying out as well as on signing fair and secure contracts,” he explains. Wojciech Trojanowski, a board member at Strabag, is of a similar opinion: “2019–2020 will be a very difficult time for the construction sector in Poland. Contracts that were negotiated and signed in 2016–2018 will get underway. So the sector will have to contend with the significant increase in costs over that time,” he predicts.

Bigger firms worse off

The largest companies do in fact have something very real to be afraid of. The road and rail contracts they have been awarded, worth hundreds of millions of złoty, have turned out to be something of a hot potato for them. These orders have ceased to be profitable as the costs of materials and labour rises and due to the fact that these contracts lack of any provision for this. “The work on these contracts naturally takes from two to even four years. The large majority of the payments for them are determined at the beginning of the design or construction phases. We are therefore taking on a very substantial risk with every long-term contract,” emphasises Dariusz Blocher. It is little wonder, then, that the profitability of the larger firms (with more than 250 employees) that tend to carry out such long-term contracts has been declining. According to research company Spectis, in 2018 the profitability for large companies was 0.9 pct compared to 2.8 pct in 2017.

Interestingly, the decline in margins among large companies was accompanied by increases in the margins of small and medium-sized firms. The profitability of those employing between 50 and 249 people increased from 4.3 pct to 7.1 pct over the period, and for those employing from 10 up to 49 people it was up from 7.9 pct to 11.4 pct. All in all, according to Spectis’ recent ‘Construction market in Poland 2019–2025’ report, the more than 1,200 medium and large construction companies covered by the survey generated a combined net profit of PLN 4.3 bln in 2018, which is a significant increase compared to 2017, when the figure only came to PLN 2.9 bln. The average profit margin for these firms was thus 3.7 pct last year. But the entire sector, including smaller companies, achieved a profitability of 6.1 pct. “Small- and medium-sized companies are making up for the results of the entire sector. This has been covering up some of the weaker results of the larger firms,” admits Bartłomiej Sosna. The margins are also dependent on the particular segment – for infrastructure construction they are around 2 pp. below those of general construction. Why are the smaller players doing better? First of all, they are not bound by unprofitable agreements for general contracting to the same extent. Secondly, big companies are fighting to be their subcontractors, which is allowing them to set their own prices.

“There is a shortfall of around 150,000 construction workers on our labour market and so finding the people to do the work is becoming increasingly difficult,” explains Leszek Gołąbiecki of Unibep

Contracts more secure

Are the contracts signed in H2 2018 more reasonable for general contractors than, say, two years ago? “They clearly are and this applies to all segments of the market we work in,” says Leszek Gołąbiecki, the CEO of Unibep. Importantly, companies are often becoming more selective about contracts and are sometimes even pulling out of them in public tenders they have already won. As a result, situations are arising in which other contractors involved in the tender end up being awarded the contract despite having submitted bids that were much more expensive than the original winner. Fortunately, there are still many contracts out there to go for, as the bull market continues across all sectors, from housing to warehouses and infrastructure. “The 2012–2013 period was therefore much worse. The market was slowing down then – contracts were being completed with negative margins and other projects were not on offer. Companies back then had their backs against the wall,” explains Bartłomiej Sosna. In his opinion, there will be no repetition of 2012–2013. “Remember that at that time there were large scale bankruptcies among the top five firms, such as Polimex and PBG. The larger companies do not face this danger at the moment. Those such as Budimex, Porr and Strabag may have problems with individual contracts, but not on the same scale as before. Constructors are currently winning single contracts at higher and more realistic prices, and these higher contracts are offsetting their losses to some extent,” points out Bartłomiej Sosna. Furthermore, they are much better prepared to deal with difficulties due to their current diversification of operations. Some are now also operating in other markets rather than just in Poland. And most of them are not only in road or rail construction but in several segments at the same time – including development, where the margins are certainly higher.



“This year will be the most difficult in of the last decade in many respects,” predicts Dariusz Blocher, the CEO of Budimex

New problems emerge

The losses incurred by companies from unprofitable contracts with insufficient leeway for cost adjustments are, however, becoming something of a burning issue for the construction sector today. “We estimate that the losses incurred by general contractors since January 2015 come to at least PLN 2.6 bln, of which PLN 1.6 bln is due to road contracts and PLN 1 bln to railway contracts,” reveals Dariusz Blocher. He adds that the failure to redress these losses could result not only in general contractors walking out on their contracts but even in the bankruptcy of entire construction groups. “Our view is that including provisions to cover these losses would be four times cheaper for the ordering party than the consequences of not indexing contracts in this way,” adds the head of Budimex. But this is not the only problem facing the sector. The CEO of Unibep feels that the labour shortages are a much bigger issue than rising material prices. “According to the estimates of a number of institutions and associations, there is a shortfall of around 150,000 construction workers on our labour market and so finding the people to do the work is becoming increasingly difficult. And this is because many of our own construction workers have left the country,” explains Leszek Gołąbiecki. Wojciech Trojanowski of Strabag points out that the shortage of construction workers is also something that marks out today’s situation from that of 2012–2013. “Indeed, we had the same issues with contracts back then, but we had the workers and so the cost of labour was not increasing. But today we have another element – the shortage of workers and their growing salaries. The situation today is worse in this respect,” admits Wojciech Trojanowski. The problem is also being exacerbated by the number of foreigners now preferring to work in the West rather than on Polish construction sites. “The labour shortages are a challenge the entire sector is going to have face for the next few years,” cautions Leszek Gołąbiecki.