20 October 2021

Stacking up off-site timber construction financials

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Dr Mila Duncheva analyses the effects of Covid-19 on economic sustainability.

 

Speculation abounds about the negative impact of the pandemic on the construction industry, such as challenges created in the supply chain and managing labour on site.

 

Others have seen the brighter side thanks to off-site construction, with suggestions that building in the factory is the only viable option for the continuous growth of the construction sector, as it provides a more socially distanced environment with fewer changes in the number of people and trades involved day-to-day than traditional on-site construction.

 

This is all well and good, but if the numbers don’t stack up, the social distance-friendly working conditions won’t be enough to convince off-site sceptics – and the opportunity to enhance environmental and social sustainability by building off-site with timber will be missed too. Construction output contracted by 40% at the start of the pandemic and looking at the economic sustainability of off-site construction is more pressing than ever. We need to bust the myth that off-site construction is not financially viable.

 

Off-site timber economic sustainability: Scotland

The Increasing Offsite Housing Construction in Scotland project – funded by the Scottish Government More Homes Division, Scottish Enterprise and the Construction Scotland Innovation Centre – mapped the capacity and productivity of 15 off-site timber manufacturers in Scotland and also investigated the publicly available financial metrics of 31 off-site product manufacturers in Scotland. The project concluded that, in 2018, the off-site sector in Scotland had an estimated £275m turnover and 1,686 employees with projections to reach £317m turnover with 1,724 employees by 2023.

 

Most interesting were the results from the business model analysis, which used the available financial records of nine of these businesses who had consistently submitted full financial accounts for four years. All of the nine businesses produced off-site timber products – the predominant material used in off-site manufacturing in Scotland. The businesses outperformed the average statistics for the construction industry regarding:

  • profit
  • debtor and creditor payments

 

Among these, the profitability of construction businesses is often the main sticking point in conversations about the financial viability of off-site construction in the boom-and-bust property cycles. The mean performance of the businesses in the latest available financial year analysed, 2018, can be assessed using three key performance indicators:

  • Gross profit – the ratio of the difference between sales and the cost of goods sold to total revenue expressed as a percentage.
  • Profit margin – the ratio of profit (loss) before tax to total revenue expressed as a percentage.
  • Return on Capital Employed (ROCE) – the comparison of net operating profit (loss) to capital employed expressed as a percentage.

 

The Scottish off-site manufacturers sample outperformed the available benchmark data for the UK-wide construction and manufacturing businesses in all three indicators. The results were quite close for the gross margin. Yet for the profit margin, which takes into account not only the difference between sales and the cost of goods, but also subtractions for interests paid such as bank loans and leases before tax, the Scottish off-site manufacturers were nearly twice as profitable as the average UK construction businesses. Some may argue that these numbers are less important than ROCE, which measures the profits you earn relevant to investments. Even here, Scottish off-site manufacturers were nearly 7% ahead of the average UK manufacturing business.

 

Multi-material off-site economic sustainability: UK

The positive financial performance picture does not stop at Hadrian’s Wall. A quick analysis of the publicly available financial records of 13 UK businesses working in off-site construction, who won or were commended in the Offsite Awards 2020, revealed their combined annual turnover for the financial year ending in 2019 was £6.9bn and they employed 25,586 people in total. The sample included business who worked with all three main material types:

  • precast concrete
  • timber
  • light gauge steel.

 

This analysis does not hold the same scientific rigour as the one for Scotland, but it is useful to paint a picture of the UK off-site sector’s financial performance. The results build the case for the financial viability of off-site manufacturing in the UK – the UK sample outperformed both the Scottish off-site businesses and the available UK construction and manufacturing benchmarks by more than twice according to profit margins and ROCE indicators, and by more than 7% according to the gross margin indicator.

 

What next?

The construction industry is facing unforeseen economic sustainability challenges alongside other UK industries, but was hit particularly hard by the pandemic, resulting in twice as big of a reduction in GDP contribution than the UK average. The economic sustainability of businesses depends on their ability to continue operations. Others have already made the case for the socially distanced working conditions more easily available in off-site manufacturing facilities compared to on-site construction. The financial profitability analysis of off-site construction businesses in Scotland and across the UK shows that off-site construction can provide more economically sustainable business models than the construction and manufacturing industry benchmarks. This should be included as a consideration by businesses in their post-Covid-19 recovery plans to enable sustainable growth.

 

About the author

Dr Mila Duncheva, Lecturer in Architectural Technology, Centre for Offsite Construction + Innovative Structures, Edinburgh Napier University.

 

Special thanks to: Edyta Hoszko and Professor Robert Hairstans, Edinburgh Napier University.

 

This is an extract from the Timber 2021 Industry Yearbook. Download the full article, which includes further reading and images, here