Thursday, July 14, 2016

The Rock n’ Roll Lives of General Contractors: A Mini-Financial Analysis



In an effort to model the steps in a preliminary economic analysis of an industry and highlight the role of the general contractor in design and construction we describe below the economic characteristics of the general contracting industry:

On any given project of considerable size the flow of money to the general contractor will dwarf the design costs of the project. This has implications for the design fee structure negotiated which are usually ranges between 5-10% of total construction costs. From the Engineering News Record database we learn the top two international general contracting firms by revenue are France’s Vinci and Spain’s ACS Group with annual revenue of 53.7 bil. (in CDN$ 2011) and 55.9 bil. (in CDN$ 2012) respectively. These are massive companies grown through acquisition which glean most of their revenue through infrastructure projects but as one can see they are much bigger than even some of the world’s largest construction projects.

Moving toward more regional players for contrast, Edmonton’s PLC Construction and Calgary’s Graham Construction are two of the biggest companies in the province with revenue of $8 bil. and $2 bil. in 2014 respectively. For comparison, removing oil and gas projects, the top four infrastructure projects currently under construction in Alberta are the Valley Line LRT in Edmonton at $3.2 bil., the StoneGate Landing development in Calgary at $3.0 bil. and the Anthony Henday Drive Expansion in Edmonton at $1.8 bill. Falling just outside the top ten, the next architectural development down the list Calgary’s new airport concourse at $1.4 bil. As one can see, even a billion dollar company can be exposed to risks associated with a project representing a significant portion its annual revenue. After-tax profit margin is estimated to be in the single digits. Ultimately for these companies, controlling construction costs is central to giving gross profit margins the space to cover company overhead. 

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